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. She is on Twitter as @SEMcBain.

Photo: Getty Images
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What's going on in Northern Ireland?

Power-sharing and devolved rule are under threat. What's going on? Ciara Dunne explains. 

The UUP will formalise their decision to withdraw from the Northern Ireland executive on Saturday. The DUP then announced that it may consider voting to remove Sinn Fein from the executive effectively ending or at least suspending devolution. This is due to a statement by PSNI chief constable George Hamilton stating that former IRA member Kevin McGuigan may have been murdered by people connected to the Provisional IRA (PIRA). However Hamilton also stressed that there was no evidence to prove that the murder occurred due to PIRA orders and there are claims that it was a personal vendett.

The UUP declaring that they will withdraw from Westminster is not particularly destructive. They only have one minister and their vote share has been steadily declining since they signed the Good Friday Agreement to the benefit of the DUP. By acting so dramatically, they run the risk of this seeming like the death rattle of a party trying to remain relevant in a world so different from its heyday rather than a principled stand to protect the fundamentals of the Good Friday Agreement.

Nesbitt voiced disgust that the IRA was still in existence. However the IRA is not one group and many of its splinter groups such as the Continuity IRA (CIRA) and Real IRA (RIRA) didn’t sign up to the Good Friday Agreement and have been active since it. They were not the only paramilitary groups that did not sign up, fragments of extremism have existed since the PIRA decommissioned and it seems likely that they incorporated those who had been PIRA members who were disillusioned by the agreement. Bertie Ahern, former Taoiseach and Good Friday Agreement negotiator, explained while the PIRA had to decommission as part of the agreement, for various reasons it was allowed to exist in a non-armed state. News of its existence shouldn’t come as a shock to the only major unionist party that engaged in Good Friday Agreement negotiations. If the PIRA were proved to be armed and active then this response would be understandable but that is not the case.

What this stand does however give the UUP is a unique selling point compared to their rivals the DUP and it can somewhat tackle the perception some have that the UUP betrayed the unionist community when it agreed to work with Sinn Féin in government.

The DUP has been less drastic. Although they have stated that they would consider pulling out of government, they have described it as temporary suspension of government rather than a total breakdown of trust. Jeffrey Donaldson, a DUP MP, said that if they are to continue to power share with Sinn Féin, they must ensure the PIRA issue dealt with ‘in terms that gives everyone the reassurance that this isn’t going to happen again’. This is a reasonable request and something Sinn Féin must do. They should be unwavering in their condemnation of any paramilitary organisations. However so far they haven’t done otherwise, several senior figures have denied that the PIRA have rearmed. Pearse Doherty, a prominent Sinn Féin TD, insisted that when it came to the IRA “the war is over, they’re not coming back”.

The best way to tackle paramilitaries is to tackle the reasons people joined them. This can be done not by threatening to withdraw from the government but standing together against sectarianism. Parties must ensure that there is a functioning government that works for the good of everyone and gives people a genuine stake in society. It is important that representatives of both communities condemn paramilitaries, in actions as well as words. All parties will soon have the opportunity to move away from old associations, as the old guard age and move aside and the younger members who are untainted by such associations, take charge of the party.

However, it is vital that parties take a considered stance in anything controversial for this to work. In this case, it is not yet certain whether the connections are historical or current. Garda Commissioner Noirin O'Sullivan has stated she has no reason to believe that the PIRA are active in the military sense. Bertie Ahern pointed out that it is possible that ‘these atrocities are being done [by those] who might have been on the inside but are now long since on the outside?’ Political posturing could have terrible consequences for the Good Friday Agreement, especially if results in a party with a large electoral mandate being removed from government when there is no proof it has broken the agreement.

If the UUP and the DUP are truly concerned, a more constructive reaction is to push for the reintroduction of the Independent Monitoring Commission (IMC). The IMC monitored paramilitary activity from 2004 to 2011 and its final report stated that ‘transition from conflict is a long slow process’. This latest incident shows this is true and it is likely that the IMC was disbanded too soon. Reconvening the IMC would offer a way to monitor paramilitary activity and to find patterns and evidence rather than allowing a single incident to destroy progress. If reconvened however it should address the issues that resulted in Sinn Féin’s criticism of the body. A more balanced panel, one agreed by all parties, would address this, the previous one was described as three spooks and a lord, but would still add value to the peace process.

If political parties pull out of the power sharing agreement over an incident that the police have not yet connecting to a sophisticated paramilitary organisation with political connections, they are handing extremism a victory while taking democratic choice away from the people of Northern Ireland. The majority of people in Northern Ireland have been clear, both in referendum and in their actions, they want peace and stability. If the parties of Northern Ireland don’t fight to protect this then they are betraying everyone who believed in the Good Friday Agreement and reconciliation.