by Cathy Chan and Alfred Liu (Bloomberg)
It’s hard to put numbers on the vast private banking opportunity in China, but here are some: $29 trillion in household wealth and $15 trillion in the asset management industry. Perhaps the most crucial number right now is the more than $1 trillion packaged by local Chinese money managers into principal-guaranteed investment products, which are the focus of a government crackdown.
That intervention has given global banks a reason to reevaluate onshore China, a market that none of them has come close to conquering. What has long looked like a slam-dunk opportunity—the second-biggest pool of ultrarich people in the world—also comes with cumbersome regulations and strong competition from homemade financial brands. But Francois Monnet, head of private banking North Asia at Credit Suisse Group AG, is betting it’s still better to arrive early to the party than late.
“Going onshore is a necessity for foreign banks in the next five to 10 years, and it has to start when the market opens up, which is pretty much now,” Monnet says.
Credit Suisse is working on a business plan that involves targeting rich Chinese entrepreneurs as the bank’s onshore client base and, later, forming partnerships with local banks and insurers. It would be following UBS Group AG, which has doubled its wealth management head count in China in the past two years and is still hiring. Most other big names in private banking are managing Chinese money from Hong Kong and Singapore.
The collective fortunes of China’s uber-rich grew a staggering 65 percent, or $177 billion, last year, according to the Bloomberg Billionaires Index, a ranking of the world’s 500 wealthiest people. The money is showing up all over the world, in condos in Sydney and Vancouver and art auctions in London. But capital controls keep the vast majority within the mainland’s borders, where a wealth management industry unlike any other has sprung up to grab a slice of the bounty.
China’s rich tend to be business owners from their 40s to their 60s who use multiple financial institutions as investment “supermarkets,” Boston Consulting Group and Fuzhou, China-based Industrial Bank Co. wrote in a December report. The most popular item on the shelves, wealth management products, typically provide a fixed rate of return, a set maturity date, and either an explicit or implicit guarantee from whoever raised the money. Proceeds end up in everything from corporate bonds to property to loans and, sometimes, in a layer cake of other products.
“China’s wealth management products are ones the foreign banks could hardly approve because of risk and compliance concerns,” says Joe Ngai, managing partner of greater China at McKinsey & Co. “The biggest problem foreign banks have is they don’t have a value proposition. There are a lot of products they can’t do.”
Enter the regulators. Since they pledged to ban banks from selling wealth management products with guaranteed yields or principal late last year, the breakneck pace of growth in that product line has gone into reverse. Officials are also opening China up to global finance brands, committing in April to allow foreign companies to own majority stakes in their securities, fund management, futures, and insurance joint ventures.
“The handicap for foreign banks’ wealth business is getting smaller,” Ngai says. “When the market starts to become rational, when the rules of the Chinese wealth management business come closer to the international market, when the yuan is more liberalized with more products, the foreign banks will be more competitive in that scenario.”
Credit Suisse—which gets about two-thirds of its Asia-Pacific revenue from wealth management and investment banking—is looking to build its onshore Chinese business from scratch, with a focus on marketing asset-allocation services and structured products without the guarantees of wealth management products. If successful, that would pit Credit Suisse head-to-head against UBS, which has broken ranks with most global peers in the amount of capital it’s committed onshore.
UBS Group Chief Executive Officer Sergio Ermotti made waves in early 2016 when he pledged to double the number of staff in China over five years, adding 600 people across wealth management, investment banking, equities, fixed income, and asset management.
“China is a great opportunity, like it has been for the last 20 years,” Ermotti said at the time, a reference to how tantalizing yet elusive the market has been for non-Chinese banks.
Some two and a half years later, UBS is ahead of schedule: It has 170 people working in wealth management in China and expects to meet its overall hiring target by the end of 2018.
UBS’s local bank got a private-funds license last year. This means that rather than sell mutual funds to the mass market, it can tailor Chinese investment funds to local wealthy individuals for the first time through its wholly owned asset management company. In December the Swiss lender also unveiled a partnership with Qianhai Financial Holdings Co. that’s aimed at winning affluent young customers in a high-tech commercial zone just inside the southern Chinese border.
UBS reported in July that net new money in the Asia-Pacific region grew 2.3 percent in the second quarter, vs. a 0.1 percent drop across all regions, without providing a China breakdown.
Still, the barriers to entry haven’t all disappeared. Recruiting experienced staff is difficult. So is marketing yourself against banks operating on a completely different scale: Bank of China Ltd. has 288,000 staff spread across the nation.
“We’re not trying to compete with the local banks,” says Amy Lo, greater China head of wealth management at UBS. “We want to be the dominant international player in the market, but we don’t need to be the biggest local player in terms of number of people and branches. That’s not our strategy.”
An obvious tactic for foreign banks is to market their access to global investment products, especially given how badly Chinese equities have done since their $5 trillion crash in 2015.
But money managers still can’t move funds out of China without obtaining an investment quota from the government, one of the nation’s safeguards against destabilizing capital outflows. Quota limits under the main outbound investment program were frozen for three years through April of this year. They totaled $103.2 billion as of July 30, enough to buy just 0.3 percent of the U.S. stock market.
That helps explain why most global banks, including Morgan Stanley, JPMorgan Chase & Co., and Citigroup Inc., are focusing for now on serving wealthy Chinese outside the mainland’s borders. Goldman Sachs Group Inc., too, has yet to make a major foray onshore; its Chinese joint-venture partner shut down an asset management business last year.
“You have to be patient, flexible, and diversified to crack the onshore China market. There is enormous potential once you have established an infrastructure, but it takes time,” Lo says. “The recent policy enhancements are a positive development that will help new entrants coming into the market.”
Chan is an investment banking and private equity reporter and Liu is a finance reporter at Bloomberg News in Hong Kong.