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.

Photo: Getty
Show Hide image

Could Labour implement universal basic income?

The battle over this radical policy is moving gradually into the mainstream.

Shadow chancellor John McDonnell has called universal basic income (UBI) “an idea whose time may well have come”. It means a fixed regular payment to each citizen, irrespective of income or behaviour. It is seen by both socialists and Silicon Valley as a panacea for the post-industrial world, addressing unrestrained inequality, economic insecurity, and automation-generated unemployment in the modern economy.

Guy Standing, a professor at Soas and founding member of Basic Income Earth Network (BIEN), says a “perfect storm of factors have suddenly pushed us into being a mainstream policy question” in recent years. “A lot of people who were sitting on their hands, as it were, have started to come out in favour ... I'm inundated with requests to speak and involvement in conferences, and it's indicative of the sudden realisation that if the growing inequality and growing economic insecurities persist, then the drift to fascist populism will continue. 

“Of course, in the background, a lot of these techies including prominent names in Silicon Valley have come out in favour because they see robots displacing us all. I don't buy that argument, but it's added to a growing chorus of people saying that we should take it more seriously.”

Standing's recent book charts the long history of thinking about UBI (through ancient Greece, Thomas More, and Martin Luther King). But the idea's rise to prominence is the result of a interlinked developments in the economy and the nature of work. As Labour MP Jonathan Reynolds argues, changes such as the rise of self-employment and the gig economy challenge the appropriateness of the traditional welfare state. It's “based around the principle of compulsion, and broadly believing there's two binary states – people in work, and people out of work. We know it's becoming a much more complicated picture than that... The state can't keep up with the complexity of people's lives.”

For Standing, the prospects of UBI being implemented successfully depend largely on how it is framed. He is wary of libertarians who see it as an opportunity to dismantle the welfare state, and believes it needs to be placed within the context of chronic economic insecurity for a growing number within the post-industrial economy.

“The argument that I think is going to prove really important for the left is linked to the growth of the 'precariat',” he says, meaning those living without predictability or security. “People in the precariat are experiencing chronic insecurity that will not be overcome by any existing policy.” 

Even so, support from business could be key. Peter Swenson's work on the history of the welfare state finds that reforms and expansions of social policy have only succeeded when key sections of the capitalist class are in support. He, and other academics, resist the idea that the welfare state is simply the focal point for the battle between left and right over Robin-Hood style redistribution. If UBI is to make its way into policy, support from business may be more important than the strengthening of the left.

Reynolds claims UBI may solve not just policy problems, but political ones.  "You have to say that Labour's situation, in terms of how we've struggled on all of these issues (the party's polling is significantly behind on running the welfare state) over the last few years, means that we should definitely be open to new thinking in this area.” Both he and Standing  are part of the working group that was brought together by McDonnell in February to produce a publication on the issue before the next general election, which would then be discussed across the country. Understandably, the group didn't quite meet its deadline. But Standing says “the general thrust of the plans hasn't changed”.

Standing is hopeful that important sections of the Labour Party are either in support, or can be won over. Clearly, the leadership is generally supportive of the idea – both McDonnell and Corbyn have expressed as much in public statements. Standing says many MPs are “rethinking their position ... many of them have not taken up a position because they thought that this was not an issue to be considered. I think we're seeing a real opening for a much more constructive discussion.”

Reynolds says that “there's people on the right and the left of the party who are in favour, there's people on the right and the left who are against”.
 
Nevertheless, discussion is winning over important Labour constituencies. It's not just radical activist groups, but also trade unions, who are coming round to the idea. According to Standing: “Unite now supports it, as well as a lot of unions in Europe. It used to be the case that the unions were among the most fierce critics of a basic income, on the spurious grounds (in my view) that if people had a basic income they wouldn't push for higher wages and employers wouldn't give higher wages.

“We found in our pilots and in our psychological research that people who have basic security have a stronger bargaining position and are therefore more likely to stand up for their rights, and can lead to improvement in wages and working conditions. So I think that all of those objections are gradually being exposed by theoretical arguments against them, or empirical evidence, from pilots.”

Reynolds agrees that “there's a lot of support coming from the wider labour movement”, but warns that people must not be too optimistic about anything happening quickly. “Clearly it's going to need a radical change to how the tax and benefits system would work, and you'd obviously be completely recasting how personal allowances work, and all of that,” he says. “I think this is sort of the cutting edge of thinking about the future and what our economy will look like in 50-100 years' time, that is the frame that we're looking at.” 

Rudy Schulkind is a Danson scholar who recently graduated in philosophy and politics from St Anne's College Oxford.