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.

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Theresa May can play big fish with devolved nations - in the EU she's already a nobody

The PM may have more time for domestic meetings in future. 

Theresa May is sitting down with representatives from Scotland, Northern Ireland and Wales on Monday to hear their concerns about Brexit. 

For the devolved nations, it is the first chance since the seismic vote in June to sit down at a table and talk to the Prime Minister together. 

May has reportedly offered them a "direct line" to Brexit secretary David Davis. It must be a nice change for her to be the big fish in the small pond, rather than the small fish in the big pond that everyone's already sick of. 

Because, when it comes to the EU, the roles of Westminster and other nations is reversed. 

Brexit was small potatoes on the menu of Theresa May’s first European Council summit. It may hurt British pride but the other 27 heads of state and government had far more pressing issues on their plate to worry about.

So, it was an awkward debut Council evening meal of lamb and figs for Prime Minister Theresa May and dinner was served with a large reality check.

As May was later asked at her press conference, why would anyone listen to someone who already has one foot out the door?

Britain is in limbo until it triggers article 50, the legal process taking it out of the EU. Until that happens, it will be largely and politiely ignored.

May’s moment to shine didn’t come until 1am. She spoke on Brexit for “five minutes maximum” and said “nothing revolutionary”, EU sources briefed later.

May basically did that break-up talk. The one where someone says they are leaving but “we can still be friends”. The one where you get a divorce but refuse to leave the house. 

It was greeted in the way such moments often are – with stony silence. Brexit won’t be seriously discussed until article 50 is triggered, and then the negotiations will be overseen by the European Commission, not the member states.

As became rapidly clear after the vote to leave and in sharp contrast to the UK government, the EU-27 was coordinated and prepared in its response to Brexit. That unity, as yet, shows no sign of cracking.

German Chancellor Angela Merkel later damned May with faint praise. She hadn’t said anything new but it was nice to hear it in person, she told reporters.

Merkel, as she often does, had a successful summit. She needed Council conclusions on migration that would reassure her skittish voters that the doors to Germany are no longer thrown wide open to migrants. Germany is one of the member states to have temporarily reintroduced border checks in the passport-free Schengen zone

The conclusions said that part of returning to Schengen as normal was “adjusting the temporary border controls to reflect the current needs”.

This code allows Merkel and her Danish allies to claim victory back home, while allowing Slovakia, which holds the rotating Presidency of the EU, enough of an excuse to insist it has not overseen the effective end of Schengen.

But Merkel’s migration worries did not provide hope for the British push for immigration controls with access to the single market. The Chancellor, and EU chiefs, have consistently said single market access is conditional on the free movement of people. So far this is a red line.

Everyone had discussed the EU’s latest responses to the migration crisis at a summit in Bratislava. Everyone apart from May. She was not invited to the post-Brexit meeting of the EU-27.

She tried to set down a marker, telling her counterparts that the UK wouldn’t just rubberstamp everything the EU-27 cooked up.

This was greeted with a polite, friendly silence. The EU-27 will continue to meet without Britain.

Francois Hollande told reporters that if May wanted a hard Brexit, she should expect hard negotiations.

Just the day before Alain Juppe, his likely rival in next year’s presidential election, had called for the UK border to be moved from Calais to Kent.

Hollande had to respond in kind and the Brussels summit gave him the handy platform to do so. But once inside the inner sanctum of the Justus Lipsius building, it was Syria he cared about. He’s enjoyed far more foreign than domestic policy success.

May had called for a “unified European response” to the Russian bombing of Aleppo. It was a break in style from David Cameron, who is not fondly remembered in Brussels for his habit of boasting to the news cameras he was ready to fight all night for Britain and striding purposefully into the European Council. 

Once safely behind closed doors, he would be far more conciliatory, before later claiming another triumph over the Eurocrats at a pumped-up press conference.

May could point to Council conclusions saying that all measures, including sanctions, were on the table if the Russian outrages continue. But her victory over countries such as Italy and Greece was only achieved thanks to support from France and Germany. 

The national success was also somewhat undermined by the news Russian warships were in the Channel, and that the Brexit talks might be in French.

But even warships couldn’t stop the British being upstaged by the Belgian French-speaking region of Wallonia. Its parliament had wielded an effective veto on Ceta, the EU-Canada trade deal.

Everyone had skin in this game. All the leaders, including May, had backed CETA, arguing the removal of almost all custom duties would boost trade the economy. Belgium’s Prime Minister Charles Michel was forced to tell exasperated leaders he could not force one of Belgium’s seven parliaments to back CETA, or stop it wrecking seven years of painstaking work.

As the news broke that Canada’s trade minister Chrystia Freeland had burst into tears as she declared the deal dead, everyone – not the first time during the summit – completely forgot about Britain and its referendum.

Even as the British PM may be enjoying a power trip in her own domestic union of nations, on the international stage, she is increasingly becoming irrelevant. 

James Crisp is the news editor at EurActiv, an online EU news service.