Foreign banks retooling products for the new Chinese rich

Some offshore institutions are struggling to find the best way to generate profits from China's wealth management sector, Xie Yu reports from Shanghai

The swelling wealth in China is attracting foreign financial institutions in a proverbial gold rush, but experts suggest it's wise to look before leaping.

The term "private banking" was brought to China by foreign banks in about 2006. Seven years later, the market has grown significantly, but foreign institutions still struggle to find the best way to generate profits here, according to Jimmy Leung, head of banking and capital markets at PwC China.

"Based on their account books, almost no foreign branch is making money in the China market in the private banking segment," he said.

Each year, dozens of reports come in from many different consultancies, all claiming that China's wealth has broken a new record and that opportunities for wealth management abound.

According to a report issued by McKinsey & Co in late November, by 2015, the nation will boast more than 1.9 million high-net-worth families (with investable assets of more than $1 million). And total investable assets are projected to hit 58 trillion yuan ($9.5 trillion).

But according to the report, only a very small percentage of the high-net-worth families (HNWFs) or individuals (HNWIs) will create profitable opportunities for the foreign private banks.

"The majority of the HNWFs, based on the $1 million assets threshold, are actually mass affluence. They are not the traditional target clients of foreign private banking," Leung said.

Mass affluence, according to Leung, refers to the affluent middle class that has emerged in China in recent years. They make good pay, own homes and cars and show a willingness to buy financial instruments such as bonds, securities or derivatives for wealth generation.

But that is not the traditional stronghold of foreign private banking.

"They (foreign banks) are, let's say, quite strong in financial instruments innovation in overseas market. But it is a totally different story in China," Leung said.

Because China's market is at its initial stage of financial innovation, the authorities are taking a conservative approach to financial instruments innovation.

A highly structured derivative product with an expected return rate of 15 percent sold in the United States would never get approved here, Leung explained.

"We are dealing with, mostly, first-generation HNWIs. They are self-starters, having made fortunes with their own hands in the past decade, and are more than capable of making financial decisions themselves," said James Xi, general manager of a third-party wealth management institution based in Shanghai.

Many HNWIs seek to shift the management of their money to banks, "but I do not think a lot of them are used to paying consultants. We just don't have that custom in China", he added.

Moreover, foreign banks have fewer client resources, compared with Chinese players who have been operating in the market for dozens of years, with State-owned backgrounds and widespread branches.

In September, three Chinese banks - Industrial and Commercial Bank of China Ltd, China Merchants Bank Co Ltd and Industrial Bank Co Ltd- reported profits from the private banking sector.

China Minsheng Bank Corp said in its semi-annual report that personal banking clients had increased to 12,300 by this June. Assets under management grew to 172.8 billion yuan, up 35 percent from the end of 2012.

A way out

But the foreign players seem undaunted. Banks including UBS AG, Citibank and Standard Chartered Plc said they have no intention of leaving China.

On the contrary, many are reshaping their market strategy, with a revaluation of their own advantages.

"For foreign banks, the way out is to focus on premium clients and offshore business," according to Leung.

"Our target clients are high-net-worth individuals with assets above $2 million and ultra HNWIs (with assets above $50 million). And the latter are more important to our strategy," said Simon Jin, president of UBS (China) Ltd.

"Wealth management has been the core business of UBS. We have been optimistic about the Chinese market and are actively investing here," he added.

The Swiss banking giant began providing wealth management services to the China market six years ago, mainly through the UBS Securities platform.

With a locally incorporated, wholly foreign-owned bank set up in Beijing in 2012, it was able to increase its onshore business in China and diversify product offerings including structured deposits, QDII products and lending solutions for wealth management clients.

"Our services and strengths are different from other banks," Jin said, stressing that rather than selling wealth management products, UBS is provides "client-centric advice" and integrated services leveraging its investment banking and asset management capabilities.

UBS Wealth Management handles 210 billion Swiss francs ($234 billion) worth of invested assets in the Asia-Pacific region. As for the China market, Jin said it is "still in the initial stages".

"We are at the expansion stage now, and we will grow very fast in the next few years," he said, adding that UBS plans to open more branches in China.

HNWIs in China tend to use private banking services mainly for financial products investment, and consultancy services are less important to them, Citibank said in an e-mail to China Daily.

Some high-net-worth individuals don't even know that more premier private banking exists above VIP personal banking services. It will bring opportunities for Citi to develop more clients in this sector through professional assets management services, the bank said.

Treasury investment, including wine and fine art, which requires strong expertise and experience, is a traditional strength of foreign private banks, Leung said.

Non-monetary investments, such as buying mines in Australia or buying rubber plantations in Southeast Asia, also are better conducted by foreign banks, which are experienced in succession plans, privacy protection and security, as well.

"Rich people in China are keen to increase their wealth through investment," Xi said.

"Worth noting," he added, "is their awareness and willingness to invest overseas, which has surged in recent years, with more people sending children abroad for education, and emigrating."

China's economy has been booming for years, but its growth is slowing down.

On the other hand, the trend for the Chinese yuan to appreciate against the US dollar makes overseas assets more attractive to China's wealthy, he added.

In this regard, foreign banks, with global networks and long experience in global assets allocation, have an edge.

Meanwhile, as China pushes for financial reform and gradually loosens control over capital accounts, offshore investment will become even more popular, Xi said.

The People's Bank of China said in a guideline in early December that it will permit businesses and individuals to open offshore accounts in the China (Shanghai) Pilot Free Trade Zone, a significant step toward liberalizing strict controls over capital accounts and easing inflationary pressure on the nation's mounting foreign exchange reserves.

"It could offer great opportunities for us to expand our services, and we are closely following the details," said UBS' Jin.

Often, people with such needs for wealth management already have opened accounts abroad, Leung said.

Thus, parent banking organizations make money from Chinese clients but not necessarily the Chinese branches, he noted.

Some foreign banks are lowering their thresholds for opening private accounts in China as a way to foster more prospective big clients.

Standard Chartered has integrated its private banking department into a wealth management department in China from this year, and lowered the threshold for private banking from $1 million to $500,000.

It makes sense to develop new clients from the emerging new rich, Leung said.

But the core strength of foreign banks is offshore business. Based on the current situation, they can operate it offshore as well, with a coordinated team based in China, he said.

Contact the writer at xieyu@chinadaily.com.cn