How far China’s banks have reconfigured themselves after more than a decade of banking reforms gained greater clarity in September when Agricultural Bank of China (ABC) announced it had opened a private banking head office in Shanghai. The office opened auspiciously on September 29. Its bid to gain market share in a field where sophisticated financial know-how is required has been viewed by some of its more sympathetic supporters as a crucial step to a genuine transformation of the ethics and values animating the bank.
The idea that a bank originally designed to cater to peasants and farmers is gunning to serve the rich is no less than a major break with the past, no matter at what angle and through which prism you view it. And of course, some may argue that pampering to the wealthy may not be such a good idea in view of the widening inequality in the country.
ABC explains that the private banking initiative has been part of its plans to diversify the business operations after going public in July. The private banking head office aims to attract well-off individuals in 12 major cities across the country.
China is mostly uncharted territory for Western private bankers and is a tough nut to crack in view of the wall of regulations facing outsiders. Local banks, mainly the so-called Big Four – ICBC, Bank of China, Bank of Communications and China Construction Bank – continue to hold the competitive advantage. These banks have been successful in cornering sizeable chunks of the nascent industry. All four are building their private banking franchise across the country, establishing plush and cushy banking centres that cater to China’s burgeoning population of millionaires.
The intensifying competition is evident in the massive billboards across China’s urban space, something unimaginable 20 years ago, when banks, grounded in an ideology of classless egalitarianism, were shy to make a distinction between the services they provide to clients. Such reservations dissipated, in the wake of Deng Xiaoping’s surprise visit to the Shenzhen Special Economic Zone where he praised market forces and declared “To get rich is glorious”.
Private banking in China chiefly targets customers with financial assets of at least 8 million renminbi (US$1.1 million). There are an estimated 500,000 Chinese who own that much. Plenty of them have built their wealth without the help of private bankers. Considering the relative immature state of China’s financial markets, a fair number of the millionaires are adrift in a sea of misgivings, uncertain how to preserve their wealth for the next generation.
Products and consultaton
The first bank to appreciate the dire needs of China’s growing army of millionaires for professional advice was China Merchants Bank (CMB). The bank pioneered private banking when its established in 2007 what is now considered the first genuine private banking operation in the country, offering investment advice to wealthy clients. It has become one of the fastest growing private banking institutions in mainland China.
Chen: Hiring senior private bankers is quite difficult
The growth of private banking in China is creating a tight labour market for relationship managers and the shortage of skilled professionals could hamper the growth of private banking. Chen Kunde, director for wealth management at CMB, says formal private banking services were introduced only four years ago and as a result, there has not been time to develop a large pool of talent in China. “Hiring senior private bankers is quite difficult,” he laments.
This is the reason why in the initial stage of their private banking operation build-up, CMB relied mostly on its internal staff. This year, however, the bank embarked on a major recruitment drive to hire talent from outside. CMB is looking for candidates who are at least 35 years old and have over ten years’ experience in banking and investment, explains Chen. “We have actually raised our requirements for relationship managers. They do not have to have private banking experience but if they have been relationship managers in corporate banking, then they should do well in our bank.”
CMB’s commercial banking focus makes it private banking franchise very much a branch-oriented operation, where most of the clients are entrepreneurs. Chen says their private banking centres in Beijing, Shanghai and Shenzhen have experienced significant improvements in the past three years. “We have been able to serve the customers and attract more assets under management (AUM).” Asked whether CMB’s private banking can be better characterized as product-driven or consultation-driven, Chen declares that both sides are important. “If we were only using products, we would not have an edge over the competition.”
CMB has been proactive in developing products and introducing innovation. “I think we are the most creative in this market. We were the first to launch the private equity (PE) fund and the wine trust investment. And we have made efforts to establish an industry standard in alternative investments, including the Private Fund over Trust platform.”
Chen believes there is tremendous opportunity for private banking in China but that foreign-funded banks cannot match domestic banks in the ability to establish close personal relationships with customers. “You have to take the cultural background into consideration.”
Foreign determination
Meanwhile, foreign banks are all waiting in the wings, hoping the regulators will soon allow them to operate unhampered across the country. If it takes a while before foreign banks constitute a threat to local banks, it won’t be for want of trying. One foreign bank that had set up a private banking franchise in China, closed it after three years.
There is no doubting the foreign banks’ determination to capture the offshore component of private banking. Earlier this year Swiss banking giant UBS AG said that it expected private-banking revenue from China to at least double yearly, in light of the swelling ranks of wealthy clients in China and the relaxed rules on the sale of investment products to mainland Chinese investors.
Citi Private Bank announced in April the appointment of Rudolf Hitsch as its global market manager for China to be responsible for its off-shore China private banking franchise. Fluent in Mandarin, Hitsch has gained admiration as an accomplished China-focussed banker. His appointment was considered a major coup for a bank considering the challenge of finding someone who both understood the Chinese market well and had gained the confidence of a slew of Chinese billionaires with whom he has worked in the past. Before Citi, Hitsch worked at Goldman Sachs running a team of bankers concentrating on developing and covering clients for Goldman’s wealth management business in China.
Most foreign-owned private banks that feel confident about their future direction in China have by now set up a representative office in Shanghai – or are planning to do so in the near future.
They are looking far on the horizon, particularly 2020 when Shanghai is to achieve the status of an international financial centre with the potential to rival the major wealth management centre in the region of the stature like Hong Kong and Singapore.
This is one reason that goaded EFG Bank, the private banking subsidiary of EFG International that is headquartered in Zurich and has an international network, to establish a Shanghai representative office. While the new office cannot undertake any wealth management business at present, it hopes to use the branch for market research in order to help it identify the particular needs of its rich people in the country. And how different the needs are of high net worth individuals (HNWIs) in China compared to their peers outside China!
Propensity for property
A survey done by Merrill Lynch/ CapGemini illustrates that Chinese HNWIs’ love affair with real estate is intense: allocations made to real estate in 2009 accounted for around 40% of their portfolio, ranking them the highest in Asia in 2009. This enthusiasm for real estate blossomed in 2008 and 2009 owing to the government economic stimuli programme that encouraged banks to ease lending rules. 2010 could be an altogether different story with government’s renewed determination to cool the property market.
Boutique private bank Pictet has warned that a real estate bubble is well under way. The bank points to a chief barometer of how inflated the property bubble has become – the ratio of average price to annual income. This ratio presently stands at an over 10-year high in China overall, and in excess of 17 years in Beijing and Shanghai. By comparison, property is regarded as expensive in Europe if the ratio climbs above 4 years.
The averages in Asian countries range between 5 and 7 years. The bank pointed out the absence of a property tax and flexible mortgage conditions have tended to encourage speculative investment in property. “As a result, a structural imbalance has developed between real demand – basically demand for entry-level housing – and the supply of property, often concentrated at the top end of the market which is highly profitable for property developers.
According to Pictet, the imbalance further fuels the upward pressure on property prices as households in the upper quartile are estimated to number over 50 million, eight times higher than property production. Furthermore, the price/income ratio in this particular segment, at 6.5 years, is one-third lower than the nationwide average. It is difficult to counterargue the Chinese appetite for solid property assets.
Powerful dynamics underpin the current property boom.
As the Merrill Lynch/CapGemini study points out, urbanization and rapid economic growth in the country is resulting in a significant shift of the population from rural to urban areas thus fuelling domestic demand. The survey establishes that wealthy Chinese investors have expressed a marked preference to put their wealth to work in equities rather than fixed income. China’s booming stock market has made billionaires of its entrepreneurs and that is likely to continue in the coming years.
Gold, jewelry and gems as well as art are starting to assume greater importance as tangible investments. India and China, for instance, account for more than a third of gold demand. China is now also the third largest fine art market in the world with a share of about 17% the world market.
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