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China’s wealth managers eye expansion to compete globally
Buttressed by China’s ever-expanding economy, Chinese wealth managers and private banks are adopting unique expansion strategies to secure a slice of the action
Derrick Hong 16 Aug 2018

China's startling economic rise over the last few decades has spawned amazing new enterprises and heralded the onset of Chinese entrepreneurs who have accumulated massive wealth. The China story not only gave rise to millions of High Net Worth Individuals (HNWIs), but also incubated China's private banking and wealth management industry, which has evolved over the past decade and is now at a market size of over 22 trillion dollars.

At a global level, the private banking industry has centuries of history. However, the first Chinese private bank dates back to 2007, when Bank of China set up its private banking department. As of 2017, three Chinese banks, China Merchants Bank, ICBC and Bank of China, were placed in the league table showing the top 25 private banks across the globe, according to a report from Scorpio.

"The private banking business is still in its early days and has yet to reach its upper limit," says a head of the private banking department of a state-owned private bank in an interview with The Asset. "There is not much competition in the private banking space," he adds.

Chinese banks comprise the major component of the wealth management industry in China, and are ready to compete with international banks in many aspects. But the business models of Chinese private banks and wealth managers differ from models observed internationally.

One key feature that distinguishes Chinese private banks and wealth managers is that they often act as both wealth advisors and product providers simultaneously, whereas traditional private wealth managers focus primarily on advisory and transaction services.

For instance, the private banking department of ICBC also owns an asset management license which allows it to offer wealth management products to its clients. On the other hand, insurance and asset management companies also own wealth management entities or have teams that perform these functions.

Other Chinese private banks have a "manager-of-manager model", where they appoint third-party asset managers to create products/solutions for their clients and/or to manage their investment portfolios. This multi-manager model allows the private banks to offer a comprehensive product suite that covers various markets, asset classes and durations.

The other major differentiating characteristic of China's wealth management industry is the active participation of corporates, which are normally serviced by corporate and institutional banking departments. In most Chinese banks, wealth management products (e.g. structured deposits and structured investment products) are not only distributed to retail clients but also to corporate clients.

In the more sophisticated financial markets, like Hong Kong and Singapore, the treasury and cash management solutions for corporates are mostly provided by transaction banks and asset managers.

Aside from tapping growing wealth in the domestic market, Chinese wealth managers are also expanding globally. This trend is in line with the flourishing of overseas listed Chinese companies that have created massive offshore wealth over the past decade. UBS estimates that the growth of Chinese offshore wealth has been twice as fast as the region as a whole since 2012.

China Merchants Bank (CMB) grew its overseas private banking business through its wholly-owned subsidiary Wing Lung Bank, CMB International and CMB Hong Kong branch. ICBC has launched its private banking business in 21 jurisdictions. On top of traditional players, third-party wealth managers, such as Noah Wealth Management, are also extending their overseas network, thanks to their private equity investment capability.

"Many of our customers originated from the mainland and secured a permanent address in Hong Kong or became chairman of a Hong Kong-listed company. Their business could still be based in the mainland," says a CEO of a Hong Kong-based Chinese private bank in an interview with The Asset.

"Our expansion now is based on China, especially those individuals of senior management level or founders of the TMT (technology, media and telecommunications) companies," he adds.

However, when compared with well-established global players, Chinese wealth managers still lack knowledge of overseas products and are less flexible due to strict onshore regulations. A large part of the offshore wealth of Chinese HNWIs, as a result, is still managed by global banks and wealth managers.

"Chinese banks are not familiar with overseas financial products. For products like precious metal, we cannot do trading onshore," a Chinese HNWI and CEO at a large UK-based technology company tells The Asset.

He insists, "My main consideration is whether they can manage the money well."

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