How to thrive in China private banking

Euromoney, February 2012

It’s widely acknowledged that China is becoming more international. Its currency is becoming more international. Its banks and resources companies are becoming more international. But when it comes to private banking advice, the preference is still overwhelmingly local.

Only one international bank makes an appearance in the China section of our private banking awards – and that’s HSBC, which, despite over a century of history in China, manages just fifth place in overall private banking services (a decline of one place from last year). Beyond that, the locals have an absolute stranglehold on local private banking services – and a pretty tight-knit group of them too: ICBC, China Merchants Bank and Bank of China split the awards between them, with a glimpse of Bank of Communications at fourth in overall private banking services.

To find out why local is still considered best, Euromoney sought out the views of private banking leaders in these institutions about what clients need, and how banks are delivering it to them.

Partly it’s about the sheer scale of the market: these banks are best placed to capitalise on the pace of expansion of China’s wealthy. “Recent years have witnessed an astonishing surge in the number of high net worth individuals in China,” says Zhang Qi, general manager of ICBC Private Banking. This has happened alongside a booming private economy, an increasingly active and sophisticated capital market, more IPOs – particularly in the GEM and SEM market, which is where new high net worth wealth is created and realised – and more circulation of previously locked-up stocks, which again has created an avenue for new wealth creation. “At the same time, HNWIs have an increasingly intense demand for private wealth management,” says Qi.

But what do they want? Their aspirations are in some sense straightforward. “The priority of most private banking clients is to invest to make more money to become richer,” says Feiqi Mei, general manager for private banking at Bank of China. “The mission of the Chinese private banking industry can be concluded as follows: firstly, to help clients protect their wealth through beating CPI; secondly, to help clients become richer; thirdly, to help clients enjoy their lives better.”

The demographics of China’s new wealthy are well-known. “The majority of China’s HNWIs are first generation wealth creators,” says Qi. But they’re not a homogenous group: differing in region, industry, professional background and age, “clients’ awareness of wealth management, their financial needs and risk preferences are also significantly disparate,” Qi says. The biggest chunk – 70% – of ICBC’s private banking client base is private entrepreneurs, but there are also corporate executives, professional investors, celebrities and housewives, Qi says. They bring different needs. Entrepreneurs, still creating wealth, are more concerned about liquidity, and want an integrated solution combining investment and financing; professional investors have greater risk tolerance and are more likely to try new products. Housewives, Qi says, focus on wealth preservation and safety. Generally, though, it’s fair to say that the expectations and demands of the wealthy in China shifted in 2011 as they did worldwide. “They are more sensitive to risks and more inclined to use financial services that offer comprehensive asset management solutions,” says Qi. “Preserving and managing wealth have become the main concern under massive inflation.”

For all of the opportunity, China’s private banking industry is still, says Qi, “in its infancy”. That’s hardly a surprise: ICBC Private Banking received the first private banking business licence issued by the China Banking Regulatory Commission – yet has only been in operation since March 2008. (ICBC is also the first chair of the new Private Banking Joint Conference, established by the China Banking Association in September.) Nevertheless, the pitch from a Chinese bank sounds remarkably like a western one. Qi speaks of “emphasizing the importance of understanding before advising”, which sounds an awful lot like something a Swiss bank might say.

In a new industry, product development is at a premium, which brings some risks with it. “The tempo of product innovation is speeding,” says Mei. “The demand for alternative investments such as artworks, collectibles and luxury goods is becoming stronger and stronger. High risk and high returns – including sunshine PE funds – are more and more popular.” And the increasingly cross-border nature of Chinese individual business interests also creates a spur for development in offshore wealth management products.

This ‘sunshine PE’ line is somewhat unique to China’s private equity industry (which in itself is rather different to most of the rest of the word, typically involving the buying and selling of securities rather than the buyouts and exits generally associated with the term in the west). It refers to a three-level model involving a trust company, a bank and a fund to create a platform so a PE fund can manage assets legitimately in China; other private equity funds beyond this ‘sunshine’ definition still operate within a grey area. There are 700-800 of these funds in China, most of them launched since 2007 and 318 in 2010 alone.

They are clearly one of the mainstays of product development at Bank of China, which has a team of personnel developing portfolios like this. Another is what Mei calls asset pool products.

The pace of product development in Chinese wealth management is causing some alarm. According to Chinese business publication Caixin, there were about 9,000 wealth management products offered to Chinese investors in the first half of 2011, turning over RMB8 trillion between January and June; many of them offer very high yields, often 10% or more, but concerns are growing in China that some providers are simply rolling over one product to pay out another, which sounds little more than a ponzi scheme.

China’s top private banks are at pains to point out the efforts they make in product development, selection of counterparties and underlying managers, and insist they put only appropriate funds to clients. But perhaps because of concerns in the product space, there is already an imperative to make sure that private banking services are not just about pushing product, but on advice. Granted, it’s one thing to say this and another to make it happen, but it is at least being widely said in China. “The pattern of client services will shift from product sales to tailor-made financial planning, and evolve to professional asset management,” says Mei.

ICBC includes asset management and advisory businesses, but has also established a third party service platforms based around the open architecture principle, something we’re likely to see more and more of in domestic Chinese private banking. Where once clients tended to crowd into whatever the theme of the moment was – at one stage money market funds, at another, domestic equities – these days banks do report use of a wide range of investment products: in ICBC’s case including fixed income, equity capital markets, private equity, overseas investment, foreign exchange, gold and commodities. That’s been good for business; ICBC PB’s total assets under management were RMB425.4 billion in September 2011, almost six times larger than when the business was launched just over three years ago.

Further growth will continue along the open architecture line. “In the future, the bank is going to enrich the product line and further the cooperation with excellent third-party institutions at home and abroad,” Qi says.

It’s already clear that specialisms are developing in the industry. In our survey, three different banks won the top spot for serving super affluent, high net worth, and ultra high net worth. Interestingly, clients don’t necessarily see the same distinctions as the banks themselves do; ICBC describes itself as dedicated to offering services to clients with financial assets above RMB8 million, yet the category in which it won is super-affluent, defined as US$500,000 to US$1 million – the top end of which is only RMB6.3 million.

Gradually, more and more western concepts of private banking are finding their way into the Chinese mainstream, after a fashion. Mei at Bank of China says that “family office services are becoming more and more important for Chinese private banking institutions,” and has tailored his operation accordingly. “We not only take care of clients’ wealth protection and appreciation, but also care about their health and family concerns such as kids’ education and life quality,” he says.

This is perhaps distinct from the traditional Swiss understanding of the family office, which often involves a separate legal vehicle in the manner of a corporation to manage family wealth, rather than simply a private banking service that pays attention to the broader needs of a client’s family. For her part, Qi says that “actually there is no real sense of family office services in the Chinese market,” but she does expect that they will become a key approach of Chinese private banks as the market matures.

All private banks in China have a close eye on the internationalization of the RMB, and see in it an opportunity. “The increasingly international RMB will promote the development of offshore business of Chinese private banking,” says Mei. “Demand for offshore products and services is very strong. We need to improve our ability to help clients manage their asset abroad.” Mei speaks of “investment immigration” in terms of this changing service need, whether around overseas IPO, trust arrangements for foreign assets, or integration in the planning of strategy at home and overseas.

ICBC has launched an RMB credit fund in Hong Kong for its private banking clients, and expects offshore RMB bonds and the long-awaited RQFII program – which will allow Chinese financial firms to establish RMB-denominated funds in Hong Kong to invest on the mainland – to bring further innovation and demand. “The number of clients from abroad who use RMB keeps growing,” she says. “All these [developments] yield an expanded customer base for Chinese private banking.”