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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Live blog: Jeremy Corbyn hit by shadow cabinet revolt

Three shadow cabinet members resign following the sacking of Hilary Benn. 

11:47 The hope among Labour MPs is that Corbyn will "do the decent thing" and resign if (or rather when) he loses the confidence vote due on Tuesday. They are convinced they will win a majority but believe that reports of "80 per cent support" are wide of the mark. 

11:40 Labour's only Scottish MP, Ian Murray, has just resigned as shadow Scotland secretary. As I noted earlier, this means the job will have to be done by a non-Scottish MP or a peer. 

11:21 Shadow Scotland secretary Ian Murray (see 09:11) and shadow transport secretary Lillian Greenwood are expected to be the next to resign. 

11:11 Shadow minister for young people Gloria De Piero has become the latest to resign. It's worth noting that De Piero is a close ally of Tom Watson (she's married to his aide James Robinson). Many will see this as a sign that the coup has the tacit approval of Watson (who is currently en route from Glastonbury). 

De Piero wrote in her resignation letter to Corbyn: "I have always enjoyed a warm personal relationship with you and I want to thank you for the opportunity to serve in your shadow cabinet. I accepted that invitation because I thought it was right to support you in your attempt to achieve the Labour victory the country so badly needs.

"I do not believe you can deliver that victory at a general election, which may take place in a matter of months. I have been contacted by many of my members this weekend and It is clear that a good number of them share that view and have lost faith in your leadership.”

10:58 Shadow defence secretary Emily Thornberry has backed Corbyn, telling Michael Crick that "of course" she has confidence in his leadership. She is the fourth shadow cabinet minister to back Corbyn (along with McDonnell, Abbott and Trickett). 

10:52 Our Staggers editor Julia Rampen has written up Benn and McDonnell's TV appearances. 

"Two different visions for the Labour Party's future clashed today on primetime TV. Hours after being sacked from the shadow cabinet, Corbyn critic Hilary Benn was on the Andrew Marr Show ruling himself out of a leadership challenge. However, he issued a not-so-coded cry for revolt as he urged others to "do the right thing" for the party. Moments later, shadowhancellor John McDonnell sought to quell rumours of a coup by telling Andrew Neil Jeremy was "not going anywhere". He reminded any shadow ministers watching of the grassroots support Labour has enjoyed under Corbyn and the public petition urging them to back their leader."

10:46 Asked to comment, Tony Blair told the BBC: "I think this is for the PLP. I don't think it's right for me or helpful to intervene." 

10:38 On the leadership, it's worth noting that while Corbyn would need 50 MP/MEP nominations to make the ballot (were he not on automatically), an alternative left-wing candidate would only need 37 (15 per cent of the total). 

10:27 Jon Trickett, one of just three shadow cabinet Corbynites, has tweeted: "200,000 people already signed the petition in solidarity with the leadership. I stand with our party membership." 

10:14 McDonnell has told the BBC's Andrew Neil: "I will never stand for the leadership of the Labour Party". He confirmed that this would remain the case if Corbyn resigned. McDonnell, who stood unsuccessfully for the Labour leadership in 2007 and 2010 (failing to make the ballot), added that if Corbyn was forced to fitght another election he would "chair his campaign".  

10:12 Tom Watson is returning from Glastonbury to London. He's been spotted at Castle Cary train station. 

10:07 A spokesman for John McDonnell has told me that it's "not true" that Seema Malhotra, the shadow chief secretary to the Treasury, is canvassing MPs on his behalf. Labour figures have long believed that the shadow chancellor and former Labour leadership contender has ambitions to succeed Corbyn. 

09:51 Appearing on the Marr Show, Hilary Benn has just announced that he will not stand for the Labour leadership. "I am not going to be a candidate for leader of the Labour Party." Tom Watson, Angela Eagle and Dan Jarvis are those most commonly cited by Corbyn's opponents as alternative leaders. 

09:46 Should Corbyn refuse to resign, Labour MPs are considering electing an independent PLP leader, an option first floated by Joe Haines, Harold Wilson's former press secretary, in the New Statesman. He argued that as the representatives of the party's 9.35 million voters, their mandate trumped Corbyn's.

09:38 Here's Stephen on the issue of whether Corbyn could form a shadow cabinet after the revolt. "A lot of chatter about whether Corbyn could replace 10 of his shadow cabinet. He couldn't, but a real question of whether he'd need to. Could get by with a frontbench of 18 to 20. There's no particular need to man-mark the government - Corbyn has already created a series of jobs without shadows, like Gloria De Piero's shadow minister for young people and voter registration. That might, in many ways, be more stable." 

09:32 Despite the revolt, there is no sign of Corbyn backing down. A spokesman said: "There will be no resignation from the elected leader of the party with a strong mandate".

09:11 Shadow Scotland secretary Ian Murray is one of those expected to resign. As Labour's only Scottish MP, the post would have to be filled by an MP south of the border or a peer. 

09:01 Diane Abbott, Corbyn's long-standing ally, has been promised the post of shadow foreign secretary, a Labour source has told me. 

The shadow international developmnent secretary is one of just three Corbyn supporters in the shadow cabinet (along with John McDonnell and Jon Trickett). Though 36 MPs nominated him for the leadership, only 14 current members went on to vote for him. It is this that explains why Corbyn is fighting the rebellion. He never had his MPs' support to begin with and is confident he retains the support of party activists (as all polls have suggested). 

But the weakness of his standing among the PLP means some hope he could yet be kept off the ballot in any new contest. Under Labour's rules, 50 MP/MEP nominations (20 per cent of the total) are required. 

08:52 Welsh First Minister Carwyn Jones has joined the revolt, telling BBC Radio Wales that events make it "very difficult" for Corbyn to lead Labour into the next election. 

08:50 Tom Watson, a pivotal figure who Labour MPs have long believed could determine the success of any coup attempt is currently at Glastonbury. 

08:26 Following Hilary Benn's 1am sacking, Jeremy Corbyn will face shadow cabinet resignations this morning. Shadow health secretary Heidi Alexander has become the first to depart.

The New Statesman will cover all the latest developments here. John McDonnell, Corbyn's closest ally, is appearing on The Andrew Marr Show at 9:45.

"This is the trigger. Jeremy's called our bluff," a shadow cabinet minister told me. He added that he expected to joined by a "significant number" of colleagues. The BBC's Laura Kuenssberg has reported that half of the 30 will resign this morning. 

Corbyn is set to face a vote of no confidence from Labour MPs on Tuesday followed by a leadership challenge. But his allies say he will not resign and are confident that he will make the ballot either automatically (as legal advice has suggested) or by winning the requisite 50 MP/MEP nominations. 

George Eaton is political editor of the New Statesman.