HONG KONG With the fastest growing economy in the world, mainland China is one of biggest untapped markets for private banking in Asia. Unfortunately, however, for interested institutions, there remain many obstacles to entry into the Chinese market, and much of the country's new wealth has unclear sources.
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"We have to feel comfortable about these people's wealth," said Michael Fung, chief executive officer of JP Morgan's private banking division in Asia. "If you track the high-net-worth new wealth in China, it doesn't have a very clear background."
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China's richest people are mainly entrepreneurs who capitalized on economic restructuring policies such as the privatization of state resources that began in 1978, when Deng Xiaoping opened the country to free enterprise.
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With China's relatively recent transition to capitalism, standard business practices such as record-keeping and accounting have not been closely monitored, leaving sources of new wealth often obscure.
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In addition, the status of the new rich is precarious at best as shown by the fluctuating ranks in the list of "China's 100 Richest" people that is published annually by Forbes Magazine. "You see tremendous volatility on the list. One year they're up there, the next year they're off," Fung said.
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Despite concerns over the transparency and disputed legality of this new wealth, private banks are highly aware of the potential of the Chinese market.
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UBS private banking executives estimate that there is $755 billion in liquid assets in China, with the potential share for private banking of about $100 billion.
.
"Basically it's a big pie," said Kathryn Shih, head of UBS's Asia-Pacific private banking department.
.
China's market potential in assets is greater than that of Hong Kong and Taiwan combined, according to a study released by the Boston Consulting Group last year. BCG assessed wealthy Chinese households' total net investment assets to be $636 billion, with 270,600 households in China holding net investment assets worth more than $1 million.
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The business information company Datamonitor forecasts that China's compound annual growth rate of net investable assets for the next five years will be 20 percent, compared with 12 percent for Hong Kong and 11 percent for Taiwan.
.
Other attractions for private banking lie in the country's small base of local banks and its virtually non-existent base of foreign banks. "Since private service is so unknown in China, hopefully when the country opens up, the market will already be there," said Monica Wong, chief executive of Asia private banking at HSBC Republic.
.
Private bankers seeking to develop the Chinese market face several challenges: Foreign banks can only operate in China on a trial basis, and no private banking services may be offered at the moment. China has been easing controls on its banking industry since its accession to the World Trade Organization in 2001, but no timetable has been set for permitting specific services such as private banking.
.
Another concern is the convertibility of currency. Since all foreign currency exchange of yuan is handled by the Bank of China, it is extremely difficult for wealthy individuals to move their assets out of the country.
.
Much of the wealth in China is in the form of assets that are difficult for private bankers to transfer freely: yuan-denominated shares, government bonds and real estate. Those assets that are in cash or bank deposits are likely to be self-managed by entrepreneurs who are neither familiar nor trusting of Western concepts of wealth management.
.
But, for many private banks, the biggest obstacle lies in the very factors that make the mainland market attractive: its rapid growth and immense quantity of new wealth.
.
"If money is being generated over a relatively short period and in quite substantial amounts, one needs to have comfort as to how that wealth has been arrived at," said Paul Davies, head of Coutts Bank in Asia. Davies noted that the Chinese market was not yet mature enough for such due diligence.
.
These obstacles have not stopped most foreign private banks from making tentative moves into the market.
.
UBS Private Banking's entry into China is expected to be facilitated by its parent bank's application for a bank branch license. Private banking executives at the bank say that should the license be granted, they expect its scope to be expanded to include private banking.
.
Most private banks are familiarizing themselves with potential clients in the mainland through their Asian clients.
.
"Almost all our clients have manufacturing facilities in China. Doing business with them, we get to know the people they work with," said Wong of HSBC Republic. She added that her institution currently helps mainland clients with assets outside of China. Until the domestic market opens, most foreign private banks are servicing a few select clients from China. UBS Private Banking and HSBC Republic did not deny having clients from mainland China. JP Morgan Private Bank stated that, while it did not have any mainland Chinese clients, it did send representatives to the country to meet with overseas investors from Hong Kong and Taiwan.
.
In contrast, Coutts Bank is focusing on its operations in Hong Kong and Taiwan until China has greater transparency.
.
"We set ourselves higher standards when it comes to knowing our customer and taking due diligence. At this point in time, there is substantial wealth in China, but it is not easy to understand how that wealth has been generated," Davies said.
.
For most private banks, the next big development will be in 2006 when China is required to open its banking industry to foreign institutions under its commitments as a member of the WTO.
.
"You could say we're banking on it," said Shih of UBS.
.
Anna Ling Kaye is a free-lance journalist based in Hong Kong. HONG KONG With the fastest growing economy in the world, mainland China is one of biggest untapped markets for private banking in Asia. Unfortunately, however, for interested institutions, there remain many obstacles to entry into the Chinese market, and much of the country's new wealth has unclear sources.
.
"We have to feel comfortable about these people's wealth," said Michael Fung, chief executive officer of JP Morgan's private banking division in Asia. "If you track the high-net-worth new wealth in China, it doesn't have a very clear background."
.
China's richest people are mainly entrepreneurs who capitalized on economic restructuring policies such as the privatization of state resources that began in 1978, when Deng Xiaoping opened the country to free enterprise.
.
With China's relatively recent transition to capitalism, standard business practices such as record-keeping and accounting have not been closely monitored, leaving sources of new wealth often obscure.
.
In addition, the status of the new rich is precarious at best as shown by the fluctuating ranks in the list of "China's 100 Richest" people that is published annually by Forbes Magazine. "You see tremendous volatility on the list. One year they're up there, the next year they're off," Fung said.
.
Despite concerns over the transparency and disputed legality of this new wealth, private banks are highly aware of the potential of the Chinese market.
.
UBS private banking executives estimate that there is $755 billion in liquid assets in China, with the potential share for private banking of about $100 billion.
.
"Basically it's a big pie," said Kathryn Shih, head of UBS's Asia-Pacific private banking department.
.
China's market potential in assets is greater than that of Hong Kong and Taiwan combined, according to a study released by the Boston Consulting Group last year. BCG assessed wealthy Chinese households' total net investment assets to be $636 billion, with 270,600 households in China holding net investment assets worth more than $1 million.
.
The business information company Datamonitor forecasts that China's compound annual growth rate of net investable assets for the next five years will be 20 percent, compared with 12 percent for Hong Kong and 11 percent for Taiwan.
.
Other attractions for private banking lie in the country's small base of local banks and its virtually non-existent base of foreign banks. "Since private service is so unknown in China, hopefully when the country opens up, the market will already be there," said Monica Wong, chief executive of Asia private banking at HSBC Republic.
.
Private bankers seeking to develop the Chinese market face several challenges: Foreign banks can only operate in China on a trial basis, and no private banking services may be offered at the moment. China has been easing controls on its banking industry since its accession to the World Trade Organization in 2001, but no timetable has been set for permitting specific services such as private banking.
.
Another concern is the convertibility of currency. Since all foreign currency exchange of yuan is handled by the Bank of China, it is extremely difficult for wealthy individuals to move their assets out of the country.
.
Much of the wealth in China is in the form of assets that are difficult for private bankers to transfer freely: yuan-denominated shares, government bonds and real estate. Those assets that are in cash or bank deposits are likely to be self-managed by entrepreneurs who are neither familiar nor trusting of Western concepts of wealth management.
.
But, for many private banks, the biggest obstacle lies in the very factors that make the mainland market attractive: its rapid growth and immense quantity of new wealth.
.
"If money is being generated over a relatively short period and in quite substantial amounts, one needs to have comfort as to how that wealth has been arrived at," said Paul Davies, head of Coutts Bank in Asia. Davies noted that the Chinese market was not yet mature enough for such due diligence.
.
These obstacles have not stopped most foreign private banks from making tentative moves into the market.
.
UBS Private Banking's entry into China is expected to be facilitated by its parent bank's application for a bank branch license. Private banking executives at the bank say that should the license be granted, they expect its scope to be expanded to include private banking.
.
Most private banks are familiarizing themselves with potential clients in the mainland through their Asian clients.
.
"Almost all our clients have manufacturing facilities in China. Doing business with them, we get to know the people they work with," said Wong of HSBC Republic. She added that her institution currently helps mainland clients with assets outside of China. Until the domestic market opens, most foreign private banks are servicing a few select clients from China. UBS Private Banking and HSBC Republic did not deny having clients from mainland China. JP Morgan Private Bank stated that, while it did not have any mainland Chinese clients, it did send representatives to the country to meet with overseas investors from Hong Kong and Taiwan.
.
In contrast, Coutts Bank is focusing on its operations in Hong Kong and Taiwan until China has greater transparency.
.
"We set ourselves higher standards when it comes to knowing our customer and taking due diligence. At this point in time, there is substantial wealth in China, but it is not easy to understand how that wealth has been generated," Davies said.
.
For most private banks, the next big development will be in 2006 when China is required to open its banking industry to foreign institutions under its commitments as a member of the WTO.
.
"You could say we're banking on it," said Shih of UBS.
.
Anna Ling Kaye is a free-lance journalist based in Hong Kong.
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