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Cerulli- Asia Pacific Edge, April 2011

Distribution in China has long been dominated by the banks. They remain exceptionally powerful, but a gradual erosion of their dominance may be on its way with the emergence of a wider range of distribution channels.

According to Cerulli Associates data, local banks account for over 76% of mutual fund distribution in China: 61.9% custodians, 14.7% non-custodians. Direct sales and securities companies make up the remainder.

However, the term ‘banking distribution’ covers a multitude of methods. While a large part of it is retail, increasingly the big domestic banks are seeking to boost their private banking and wealth management capabilities. This is going to have a major impact on mutual fund distribution, and qualifies as a channel in its own right.

Take ICBC Private Banking, for example. In March 2008 it established a distinct private banking business; it has since set up 10 branches covering the wealthiest areas of Mainland China. The bank now serves 20,000 private banking clients – four times as many as before the new division’s formal launch – with assets of over RMB350 billion at the end of 2010, up 40% on the previous year.

Bank of China, too, has developed a distinct offering for private banking clients, which it defines as those with over RMB8 million in assets. It now has a committee for private banking product assessment, a distinct ‘risk match flow’ system to evaluate and monitor wealth management clients’ risk tolerance, and combines a number of the broader bank’s abilities – retail banking products, credit lines, professional advisory, taxation services – into a single platform. It runs a resource database of investment products from third parties for its private clients, while also offering a range of its own products, from asset management, insurance and trust services to personalized investment advisory services in areas such as art, antiques and real estate.

Outside of the big four banks, the focus on wealth management has if anything been even greater as banks have identified it as an opportunity to build scale. Bank of Communications, for example, had already segregated wealth management from other areas of banking, revamped its distribution channels, built a new product line and trained a generation of qualified financial planners by the end of 2007. By then it had 200 VIP service centres; by mid-2008 its De Li Bao line of wealth management products already had 59 offers in place with over RMB24.8 billion between them. Last year it began staff exchanges and secondments in wealth management with its major shareholder, HSBC. And its most recent interim report, for the year to June 30 2010, showed an 85.65% increase in consulting commission income – chiefly wealth management – to RMB1.565 billion.

So wealth management is not especially new in China, but it is quickly gathering momentum. All told, industry sources believe that more than 20 domestic and international banks are believed to have opened private banking businesses in mainland China in 2009 and 2010.

Segmentation within these divisions is becoming more sophisticated too. ICBC’s unit, for example, considers there to be five client categories: private entrepreneurs, corporate top management, professional investors, celebrities and rich housewives. Private entrepreneurs, who account for 60% of that client base, are a distinctly Chinese phenomenon in private banking: usually first generation wealth, expecting an integrated solution for their companies and their individual wealth (the two are often indistinguishable), and only just beginning to think about wealth diversification, protection and inheritance.

Naturally not all of the wealth within this segment goes exclusively to mutual fund providers; instead they might include direct equities or fixed income, discretionary accounts and property, among other things. But there are natural synergies. Bank of Communications, for example, which has set such great store by its wealth management expansion, has an asset management joint venture with Schroders which suits the private wealth channel.

It’s also worth considering the role that insurance will play as a method of distribution, and here the obvious candidate to look at is Ping An. More than any other financial institution in China, this one seeks to be a full service group rather than just an insurer, and aims to have three ‘legs’ of equal strength: insurance, banking and investment. The whole model at Ping An is about cross-selling, and it continues to develop traction: in the first half of 2010 61.9% of credit cards, 13.6% of property and casualty insurance premium income, 17.7% of annuity entrusted assets and 6% of assets under investment management came from cross-selling from a different part of the institution. First year regular premiums, police fees and deposits from bancassurance grew 552% to RMB665 million for the half. Bancassurance is also big business at the much bigger China Life.

This obviously has major ramifications for investment product sales, including mutual funds. If Ping An’s investment arm continues to grow, then the potential for cross-selling product from that division to the insurance network is enormous.

While Ping An is a stand-out, and its main peers (China Life, PICC, CIIH, China Pacific and Ming An) have not yet embraced the cross-selling model to the same extent, there’s no question that the insurance industry does represent a strong potential distribution channel for asset managers. China Life alone has 124 million long-term policies in place – a vast force to sell to. (It has an equally vast force to do the selling: 736,000 agents, alongside 42,700 account managers and financial advisors in its bancassurance business.) As investors in China, they become more powerful by the day: according to research group Z-Ben, China’s insurers now manage more than RMB5 trillion between them in total assets, and as they have gradually been permitted to invest more assets outside of money markets, they have become of increasing interest to fund managers. It is likely that they will soon be permitted to take greater exposure to overseas markets.

Certainly, fund managers are taking notice of these potential distribution segments. In a recent survey, 44% of respondents said they wanted to spend most effort cultivating the wealth management and private banking channel in 2011, with 31% concentrating on insurance companies.

One big question for them, though, is the degree to which these groups will sell third party product. All the new wealth management enterprises talk about being open architecture, but it is a little early to say how much that is happening in practice, and how much there is a concentration on home-grown product. For insurance, it’s further still away. Managers at this stage report a somewhat fragmented approach to the use of third party product: some good intentions, with evolving practice.

It will be interesting to see how the new fund management law, when it comes, affects these distribution channels, and access to them. While the new law is mainly being looked to to add clarity to the private funds area, it is also likely to clarify rules on distribution. This may make life easier for managers working out how to fit into the needs of wealth managers and insurers.

Tied into this is the theme of the increasingly international nature of the Chinese currency, and the appetite for Chinese investors to put their money overseas. Generally the China Banking Regulatory Commission only allows domestic commercial banks to invest in offshore stocks and structured products, but not commercially derived products, and there are limitations on stock investments; this means that for the fledgling private banking units of domestic banks it is tricky to deploy assets globally. However, many of the bigger banks do have QDII accreditation through their asset management arms, allowing them to offer some offshore investment services, and this area is expected to grow after a rather slow start. Logically, a more internationally minded Chinese client base ought to be an opportunity for international managers.

Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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