Why can't private banks break China?

European banks trying to break into China are biting off more than they can chew.

When private bankers think of China they might see millions and millions of smiling Mao Zedongs — in green and pink and mustard yellow, on vast piles of renminbi banknotes. Private banking was legalised in China in 2006, and foreign players including HSBC, Citibank, BNP Paribas and Deutsche Bank quickly rushed in to service the country’s wealthy. The population of rich Chinese is, after all, growing rapidly, and each new Chinese millionaire is a potential client.

I had hoped to share impressive figures on just how many millionaires there are in China, but none of the statistics agree. Some reports say there are 562,000 high net worths (those with investible assets of over $1 m); others place it as high as $1.3 m.
Among the higher estimates, a 2012 Wealth Insight report finds that China’s 1.3 million HNWs own combined assets of $4.3 trn but only 17 per cent of this wealth is professionally managed — exciting news indeed for wealth managers hoping to get their hands on the remaining 83 per cent. Then again, you’d be feeling even more optimistic if you’d read a 2012 Accenture report, which said that only 7 per cent of this $4.3 trillion is under management.

On the one hand, this shows that everyone agrees that there’s plenty of unmanaged money on the mainland. On the other, a data shortage like this should be an early indication that setting up in China isn’t as easy as it sounds.
When it comes to talking about their business, many private bankers can rival the Communist Party in terms of secrecy and suspicion. It was a struggle to find people to go on record, some wouldn’t talk to me at all, and it took four emails with one PR to clarify if one bank was or wasn’t offering private banking services in China

One reason for this caginess could be that many banks haven’t performed as well as they’d hoped. "If I hear one more private bank saying they will go into China and break even in three years I’ll kill myself!" said one exasperated industry insider, who believes banks should expect to wait at least ten years to break even. "Everyone will say it’s changing, and that they’ve picked up clients, but they may have picked up five, or even ten clients — and that’s out of a potential pool of tens of thousands."

An early hurdle for private banks entering China was the financial crisis. ‘Some of the foreign players scaled back their presence in China, especially during the financial crisis, because some of the private banks suffered during the crisis, and that’s when the Chinese banks took the window of opportunity to rapidly grow their private banking business in China,’ says Jennifer Zeng, a partner at consulting group Bain.

‘That trend since then has been continuing: Chinese banks have a majority share of onshore private banking.’ Bain estimates that while 45 per cent of wealthy Chinese use private banks and other wealth-management institutions, 85 per cent of them are choosing to instruct local banks.
Chinese banks have some natural advantages when it comes to onshore banking in China. They are subject to fewer legal restrictions than foreign banks and so can offer a greater range of products, and because of their much larger retail presence they are better placed to identify newly rich clients ready to graduate from high street to private banks.

Foreign banks, however, aren’t helping their cause. Many don’t have a Chinese name and haven’t adapted their brand to the Chinese market: ‘Why should a Chinese HNW care about some bank’s Swiss heritage?’ asked one interviewee. Private banks have mistakenly followed the example of luxury fashion brands, which have successfully played up to their European heritage by not translating their names, but he says that ‘this might work for UHNWs, who speak some English, but not for HNWs’.

He believes private banks have been slow to grasp that China’s newly wealthy aren’t necessarily cosmopolitan, international families. A millionaire in today’s China could equally be a butcher in a mid-tier city, but one who’s built up a local business empire. He may speak no English, and may barely travel — except perhaps to Hong Kong for shopping or Macau for gambling weekends — and may have little exposure to, or interest in, Western financial brands.

But foreign banks suffer from more than an image problem. As you can imagine, banking a Communist country’s super-rich can throw up plenty of complications. First, many potential clients may not have made their money legally — government officials with modest salaries and enormous bank accounts come to mind. (According to Bloomberg last year, the 70 wealthiest members of China’s legislature were worth $90 billion; the combined worth of those in all three branches of the American government was $7.5 bn, by contrast.)

Secondly, many of the products that a private bank might usually want to offer are illegal. There are still restrictions on moving currency out of China, but many HNWs want to do precisely this — and bankers are always quick to point out that this doesn’t have to be for nefarious reasons, but simply as a means of risk diversification.

There are legal ways of moving assets abroad, such as through floating a company in Hong Kong or by having overseas contracts or businesses, and less legal ones: The Economist quoted research suggesting that $430 billion was transferred out of China in 2011 through mis-invoicing. One of the reasons gambling in Macau is so popular, I was told, is that it’s another way to bring money offshore.

Last year a banker at Standard Chartered was detained from March to May after one of his clients fled China having stolen $50 million. It’s not only private bankers who can face severe penalties: ‘Here’s one important thing to bear in mind: any investment adviser that is advising clients on taking money outside of China is not acting in the best interest of that client, because that’s not correct,’ an industry expert told me.
The private bankers I spoke to in Hong Kong, who handle offshore Chinese wealth, were all adamant that anti-money-laundering checks ensured that they never handled black-market money — but equally they believed there was plenty swilling around.

According to Bain's 2011 private banking report, the number of HNWs looking to invest abroad has increased rapidly. Investment immigration — where Chinese HNWs invest abroad in order to gain residency overseas — is a well-trodden path, with 60 per cent of HNWs polled saying they had either completed investment immigration, applied for it or are still completing their application.

Hong Kong is believed to house half of China’s offshore wealth, so Hong Kong-based China teams in all the major private banks are competing for this money. With their international networks, wide range of products and expertise, Western private banks have the upper hand in Hong Kong — but even this may not last long.
‘I’ve seen more and more Chinese banks setting up private banking operations in Hong Kong, and there’s increasing interest in them, too,’ says Marie-Louise Jungels, head of Continuum Capital, an external private bank in Hong Kong which helps HNWs consolidate their financial affairs. ‘I don’t think Chinese banks are quite on the same level — they will be mainly deposit takers for now and I don’t think their platforms are as sophisticated yet. But, if they’re determined, this can change very fast, as with everything China does at the moment.’
China, indeed, is taking the fight overseas. In 2008, the Bank of China opened its first private bank abroad, setting up an office in Switzerland, and China Merchant Bank, China Construction Bank, the Agricultural Bank of China and the Industrial and Commercial Bank of China have all started private banking operations overseas too.

When I asked one industry source how he saw China’s wealth management landscape developing in the next ten years, he answered that the pace of change defied predictions. ‘I don’t think you can look at China in that timeframe. If you look at the country over the last three years, it’s a very different country now,’ he said. ‘You can have a directional ten-year goal, or series of goals, but I don’t think that’s time well spent. You’re not going to get it right.’

Instead of the Chairman Mao portrait found on Chinese banknotes, I thought of a piece of revolutionary memorabilia I have at home — a Mao alarm clock my mum picked up in China in the Seventies. The mechanism’s broken, so when it’s wound up the seconds speed up and slow down at random, and the little model of Mao waves its Red Book arrhythmically until, suddenly, the tinny alarm goes off and the whole thing shakes. Private bankers wide-eyed at the vast opportunities offered by China should remember that an alarm can go off at any moment.

This story first appeared on Spear's.

China's Spring Festival. Photograph: Getty Images

Sophie McBain is a freelance writer based in Cairo. She was previously an assistant editor at the New Statesman.

ILONA WELLMANN/MILLENNIUM IMAGES, UK
Show Hide image

How the internet has democratised pornography

With people now free to circumvent the big studios, different bodies, tastes and even pubic hair styles are being represented online.

Our opinions and tastes are influenced by the media we consume: that much is obvious. But although it’s easy to have that conversation if the medium we are discussing is “safe for work”, pornography carries so much stigma that we only engage with it on simple terms. Porn is either “good” or “bad”: a magical tool for ­empowerment or a destructive influence on society. Many “pro-porn” campaigners shy away from nuanced critique, fearing it could lead to censorship. “Anti-porn” campaigners, convinced that porn is harmful by definition, need look no further than the mainstream tube sites – essentially, aggregators of clips from elsewhere – to gather examples that will back them up.

When we talk about the influence of porn, the emphasis is usually on a particular type of video – hardcore sex scenes featuring mostly slim, pubic-hairless women and faceless men: porn made for men about women. This kind of porn is credited with everything from the pornification of pop music to changing what we actually do in bed. Last year the UK government released a policy note that suggested porn was responsible for a rise in the number of young people trying anal sex. Although the original researcher, Cicely Marston, pointed out that there was no clear link between the two, the note prompted a broad debate about the impact of porn. But in doing so, we have already lost – by accepting a definition of “porn” shaped less by our desires than by the dominant players in the industry.

On the day you read this, one single site, PornHub, will get somewhere between four and five million visits from within the UK. Millions more will visit YouPorn, Tube8, Redtube or similar sites. It’s clear that they’re influential. Perhaps less clear is that they are not unbiased aggregators: they don’t just reflect our tastes, they shape what we think and how we live. We can see this even in simple editorial decisions such as categorisation: PornHub offers 14 categories by default, including anal, threesome and milf (“mum I’d like to f***”), and then “For Women” as a separate category. So standard is it for mainstream sites to assume their audience is straight and male that “point of view” porn has become synonymous with “top-down view of a man getting a blow job”. Tropes that have entered everyday life – such as shaved pubic hair – abound here.

Alongside categories and tags, tube sites also decide what you see at the top of their results and on the home page. Hence the videos you see at the top tend towards escalation to get clicks: biggest gang bang ever. Dirtiest slut. Horniest milf. To find porn that doesn’t fit this mould you must go out of your way to search for it. Few people do, of course, so the clickbait gets promoted more frequently, and this in turn shapes what we click on next time. Is it any wonder we’ve ended up with such a narrow definition of porn? In reality, the front page of PornHub reflects our desires about as accurately as the Daily Mail “sidebar of shame” reflects Kim Kardashian.

Perhaps what we need is more competition? All the sites I have mentioned are owned by the same company – MindGeek. Besides porn tube sites, MindGeek has a stake in other adult websites and production companies: Brazzers, Digital Playground, Twistys, PornMD and many more. Even tube sites not owned by MindGeek, such as Xhamster, usually follow the same model: lots of free content, plus algorithms that chase page views aggressively, so tending towards hardcore clickbait.

Because porn is increasingly defined by these sites, steps taken to tackle its spread often end up doing the opposite of what was intended. For instance, the British government’s Digital Economy Bill aims to reduce the influence of porn on young people by forcing porn sites to age-verify users, but will in fact hand more power to large companies. The big players have the resources to implement age verification easily, and even to use legislation as a way to expand further into the market. MindGeek is already developing age-verification software that can be licensed to other websites; so it’s likely that, when the bill’s rules come in, small porn producers will either go out of business or be compelled to license software from the big players.

There are glimmers of hope for the ethical porn consumer. Tube sites may dominate search results, but the internet has also helped revolutionise porn production. Aspiring producers and performers no longer need a contract with a studio – all that’s required is a camera and a platform to distribute their work. That platform might be their own website, a dedicated cam site, or even something as simple as Snapchat.

This democratisation of porn has had positive effects. There’s more diversity of body shape, sexual taste and even pubic hair style on a cam site than on the home page of PornHub. Pleasure takes a more central role, too: one of the most popular “games” on the webcam site Chaturbate is for performers to hook up sex toys to the website, with users paying to try to give them an orgasm. Crucially, without a studio, performers can set their own boundaries.

Kelly Pierce, a performer who now works mostly on cam, told me that one of the main benefits of working independently is a sense of security. “As long as you put time in you know you are going to make money doing it,” she said. “You don’t spend your time searching for shoots, but actually working towards monetary gain.” She also has more freedom in her work: “You have nobody to answer to but yourself, and obviously your fans. Sometimes politics comes into play when you work for others than yourself.”

Cam sites are also big business, and the next logical step in the trickle-down of power is for performers to have their own distribution platforms. Unfortunately, no matter how well-meaning your indie porn project, the “Adult” label makes it most likely you’ll fail. Mainstream payment providers won’t work with adult businesses, and specialist providers take a huge cut of revenue. Major ad networks avoid porn, so the only advertising option is to sign up to an “adult” network, which is probably owned by a large porn company and will fill your site with bouncing-boob gifs and hot milfs “in your area”: exactly the kind of thing you’re trying to fight against. Those who are trying to take on the might of Big Porn need not just to change what we watch, but challenge what we think porn is, too.

The internet has given the porn industry a huge boost – cheaper production and distribution, the potential for more variety, and an influence that it would be ridiculous to ignore. But in our failure properly to analyse the industry, we are accepting a definition of porn that has been handed to us by the dominant players in the market.

Girl on the Net writes one of the UK’s most popular sex blogs: girlonthenet.com

This article first appeared in the 16 February 2017 issue of the New Statesman, The New Times