Meet Mr and Mrs Liu. They are both 31 and work at the same design company, taking home a combined US$3,600 each month. The Lius have a small car, a US$30,000 mortgage on their apartment, and savings and investments worth more than US$40,000. Next year Mrs Liu will give birth to the couple’s first child.
The Lius want to pay off some of their debts and upgrade to a bigger apartment. Beyond that, their goal is to save enough money to send their child to university overseas. They are wary of exposing themselves to an excessive amount of risk and would be happy with a 15% annual return on their investments.
In a climate of global market volatility, and facing mounting pension commitments and family expenses, what should the Lius do with their money?
Ad mirrors life
While Mr and Mrs Liu’s situation mirrors that of many young Chinese couples, it is not real. The Lius are in fact the fictional stars of a wealth management case study published by Standard Chartered Bank in a Chinese newspaper.
“China has really just picked up on wealth management and, at this stage, a lot of people still think of it as investment in the stock market,” said Christina Liu, managing director of wealth management at Standard Chartered China. “We put a lot of effort into education to help Chinese people understand that it’s a financial planning solution for different customers who have different needs.”
The educational process is much the same as that first employed by fund management companies in the first half of last year as the stock market was peaking and demand for fund products was off the charts: Persuade investors to focus on long-term growth rather than tactical short-term plays.
“Building a portfolio is a new concept in China,” explained Anand Selva, head of consumer banking at Citibank China. “The market is about growing wealth, it is not necessarily goal-oriented.”
Neither is the market well-defined. Product scope is limited, which in turn means that the line between mass market wealth management products and more-specialized private banking services is often blurred. As far as most Chinese customers are concerned, wealth management stretches little beyond buying into an equity fund. Cash, bonds and structured products also play a role, while tax planning and estate management are not really in demand here.
Yet there is no denying China’s potential. Most family fortunes are barely a generation old, which means the target market for wealth managers is fast-growing. (See “China’s superrich: How do they manage their wealth?)
“The wealth management group is growing everywhere in China, not just in the major cities,” said Standard Chartered’s Liu. “It’s not just Guangzhou, Shanghai and Beijing, but also Hangzhou, Xiamen, Chengdu and Chongqing.”
According to a report compiled by consultancy Capgemini and investment bank Merrill Lynch, at the end of last year there were 415,000 people in China with investible assets in excess of US$1 million, up by about 20% on the previous year. This growth rate was more than three times the global average.
Earlier research by the same companies found that China was home to nearly 5,000 ultra-high-net-worth individuals – those deemed to have upwards of US$30 million in investible assets – in 2006, nearly a third of the total for the Asia Pacific region.
There is no shortage of financial institutions queuing up to help these people make the most of their money. In addition to banks, brokerages, fund management companies, insurers and trust companies are all offering wealth management services in one form or another. Foreign banks – once happy to cater to wealthy Chinese able to get their money offshore – are also entering the fray.
“I firmly believe onshore wealth management will become bigger than the offshore market,” said Richard Leung, head of wealth management at UBS Securities, the Swiss bank’s securities joint venture in China. “As the local economy develops, as the local investment environment improves, as regulations change and as the variety of products increases, people will become increasingly comfortable about keeping their money onshore.”
The market opened up for foreign lenders when the banking sector underwent significant deregulation at the end of 2006. Previously restricted to offering only foreign currency services to local residents, foreign banks got the green light to enter the renminbi market. This was on the condition that they incorporate their local operations in China rather than just run them as a satellite business.
Local incorporations began in earnest in April 2007, led by Citibank, HSBC, Standard Chartered and Bank of East Asia. These four lenders all have genuine ambitions to establish themselves in the retail banking mass market by aggressively expanding their branch networks.
But they are not the only ones with an eye on local wealth management. Twenty-five foreign banks had incorporated in China by the end of March, according to the China Banking Regulatory Commission (CBRC), and more are set to follow.
Credit Suisse is among the most recent entrants, its sights firmly set on the onshore private banking market.
“Our growth strategy will focus on entrepreneurs, executives and corporates in the key cities, which make up 80% of the wealth,” Anuj Khanna, Credit Suisse’s managing director and head of private banking for North Asia, told CHINA ECONOMIC REVIEW.
“While our China onshore business is at an early stage, we will continue to build on our wealth management presence in Shanghai and roll out strong local products and services capabilities.”
The bank’s Swiss counterpart UBS is already making headway with its own multi-channel operations. In UBS Securities it has the only joint venture securities firm permitted to provide wealth management services.
There are just six branches in the UBS Securities network, but the company’s strategy is not about mass market exposure. Potential customers must have at least US$700,000 in investible assets to qualify for wealth management services. This puts the company in what might be described as a mid-market position. The minimum asset requirement for the mass affluent services offered by the likes of Citibank and HSBC is around US$70,000, while private banking services are targeted at those with more than several million to their name.
This ability to slice and dice target markets into different consumer segments – which ultimately allows products and services to be targeted more efficiently – is seen as a competitive edge for the foreign banks. Their domestic counterparts employ a broader and somewhat less refined approach.
“China Merchants Bank is one of the most famous wealth managers in terms of retail products. They will do anything, even saying ‘You’ve got one of your kids going to school in the US so you need a bank account in the US and we can set this up for you’,” said Min Tha Gyaw, a research associate at Shanghai-based fund management consultancy Z-Ben Advisors. “It’s a very basic concept. They will buy anything the customer wants.”
China Merchants Bank (CMB) was one of several local lenders visited by CHINA ECONOMIC REVIEW in search of wealth management products in Shanghai. The others were Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), China Construction Bank (CCB) and Bank of Communications (BoCom).
Most products required a minimum investment of US$7,300 and a commitment of at least three months. Mutual funds, bonds, money market funds and foreign currency all featured strongly, as did an assortment of commodities. Banks also offered exposure to in-house financing projects, securitizations and even hedge fund-like products whereby investors’ money is pooled and put toward IPO subscriptions.
Products offered through the Qualified Domestic Institutional Investor (QDII) program were unsurprisingly more limited but still cover a variety of options, depending on the individual’s appetite for risk. Overseas equity funds, treasury bills and money market funds were all available.
The same fact-finding mission also offered insights into the marketing techniques employed by local banks. A consultant at BoCom in Shanghai was keen to talk up his top seller of the year so far – Taikang Life’s Yingjia equity-linked insurance product, a relatively conservative bet for a time of market volatility. Holding out his sales listings as proof, the consultant said he was bringing in at least two new customers per day, with investments ranging from US$1,500 to US$73,000.
It wasn’t long before he turned his attentions to a new target, a middle-aged woman surnamed Wang, who ultimately decided to invest US$7,300 in the Taikang Life product.
“The projected rate of return of 7% satisfies me, although it’s not 100% guaranteed,” said Wang. “This product is also quite flexible: It can alter investment styles according to market conditions. Customers who buy RMB50,000 [US$7,300] can also get a RMB100 [US$14.50] supermarket coupon.”
It took the consultant with his silky sales patter all of five minutes to reel in Ms Wang.
“Most local banks don’t really have the personalized relationship management concept,” said Citibank’s Selva. “We don’t have a product-pushing strategy. We want to understand the customer so we go through all the client suitability processes and recommend portfolios.”
As such, the customer experience at a Citibank branch in Shanghai is not unlike those in other cities across the world. Once a new account is opened, the customer is guided through the Citigold wealth planner, which collects data on existing assets and financial commitments, and cross-references this against other factors such as risk tolerance. In this way, the bank creates an asset management portfolio, which the customer is free to follow to the letter or dismiss out of hand.
“It is not just about the products but also the services and the whole package,” said Selva. “People don’t come into the branch and ask for particular QDII products – our ads sell the wealth management concept of Citigold.”
Standard Chartered’s Liu advocates a similar approach. She sees the quality of the bank’s advisory services as a vital part of the brand-building process. Consequently, Standard Chartered tries to stay ahead of the curve both in terms of what it says to customers in private and comments it makes in the public domain.
“Last year, when people were asking about investing in equity products, we launched our bear market seminars,” said Liu. “We encouraged people to go for a more long-term, balanced portfolio and explained why it is important to hold cash, structured deposits and bonds.”
In this respect, foreign banks’ educational and marketing objectives are fused together. Case studies appear in the media, booklets are published telling investors about different financial products and seminars are regularly held. According to Selva, the larger Citibank events attract up to 600 people, with topics ranging from the challenges facing global markets to expected movements in the renminbi.
Seminars held by UBS Securities, meanwhile, are more intimate affairs, in keeping with the firm’s narrower customer focus. Invitees are cherry-picked from the guest lists of high society functions and the seminar programs are designed to correspond to the particular interests of those in attendance.
“We don’t want to have hundreds of people there; we want to make sure we have the right type of people there,” said Leung. “One of the most effective ways of meeting prospective customers is through introductions made by our existing clients. They like what we do and want to introduce our services to their friends.”
Foreign bankers agree there is a high level of interest in wealth management at all levels of the China market and, as these customers gain greater exposure to the industry, they will demand a wider range of products and better quality services. Domestic banks will have to respond.
“Now, the customers tend to buy the products rather than advisory services, but this is changing,” said Selva. “What we will probably see is the advisory concept coming through.”
The impact of this shift is likely to be far-reaching.
While the foreign players are able to leverage their international expertise to provide a variety of overseas investment options through the QDII program, there remains a strong local flavor to the Chinese banks’ offerings. As it stands, the most popular of these – funds and insurance products – are provided by third-party operators.
Should banks begin to play a larger role in shaping their customers’ wealth management requirements through advisory services, they may be able to rebalance the relationship with these third-party operators. Instead of serving as distributors, banks could dictate the market, telling fund managers and insurers what products their customers require.
“The way it works now, fund managers and insurers find out the needs of the customer and sell products through the banks,” said Standard Chartered’s Liu. “Ultimately the position will be reversed and this means fund managers will have to be more innovative.”
The future of funds
It’s unclear whether banks will be able to go full circle and supplant fund managers with their own in-house product teams. The major local banks have set up fund management joint ventures, but these units have yet to challenge the pure-play fund management firms. (See “Playing catch-up: Can banks topple fund firms?”)
A more feasible outcome is that fund managers will shift their focus from retail toward institutional business as banks draw on fund managers’ financial expertise and effectively commission them to design products. Citibank’s Selva says this could result in fund houses reducing or even disbanding their sales forces, but opinion is divided on the matter.
“I would not be surprised to see banks develop their own products or source products from outside – it’s the open architecture platform,” said Rex Auyeung, Asia CEO of Principal International, which has a fund management joint venture with China Construction Bank.
“But China is so large and the market is still growing. Even the smaller [fund managers] have a place in the fish pond.”
The big question is who rules the pond. Wealth management services are targeted at the high end of the market, the magical 20% of the customer base that delivers 80% of the revenue. Everyone wants a piece of the action, and – in one way or another – they are getting it.
Over the past year or so, China’s financial regulators have allowed banks, insurers, brokerages and fund management companies to diversify their operations. Licenses have been issued permitting access to previously restricted areas such as QDII and private equity, while companies are increasingly able to dip a toe into one another’s business areas.
The strict divisions within the financial sector have created concentrated income streams and, in this respect, diversification is important, as it means companies can become less vulnerable. Banks, for example, are pushing into fee-based services because interest income is governed by economic cycles. It may ultimately be crippled should Beijing relax interest rate controls, said Samuel Chen, a vice president in the banks and financial services division at JPMorgan Securities in Hong Kong.
Diversification also means more competition as financial institutions look to leverage their wider remits by selling services to affluent customers. There is only one logical conclusion, according to many industry experts.
“We can expect much more consolidation in the financial sector,” said Simon Gleave, head of the China financial services practice at KPMG. “Banks want to become like financial supermarkets.”
This view is supported by Auyeung of Principal International, who envisages a future in which fund management companies are either subsidiaries of very large financial conglomerates or niche players.
Indeed, domestic-led consolidation is already taking place. The regulatory authorities unveiled a pilot program in August that will see ICBC, CCB, BoCom and Bank of Beijing take controlling stakes in seccond-tier insurers.
Min of Z-Ben Advisors wrote in a recent report that “more bank-insurance mergers are a foregone conclusion.” He tips Minsheng Bank, CITIC Bank, Everbright Bank and Shanghai Pudong Development Bank to be involved in the next wave of investments.
Measures have also been put in place for insurers to invest in second-tier banks. Ping An Insurance was the first mover, assuming control of Shenzhen City Commercial Bank last year.
“This is the first step in a kind of crossing of the wall,” explained Leung.
No one expects this realignment of the financial sector to be quick or easy. Banks are in the process of reinventing common perceptions of them as “plain vanilla” deposit takers and loan granters, while investors are still coming to terms with the notion of investment options that extend beyond property and stocks.
Furthermore, most cross-investments are currently nothing more than equity stakes – companies are still some way from being able to create synergies between different kinds of business.
Tang Zhihong, an executive vice president at CMB, spoke to CHINA ECONOMIC REVIEW in August of last year, shortly after the bank stole a march on its rivals by becoming the first lender granted permission to invest in an existing fund management company. Tang stressed that CMB was still only talking with China Merchants Fund Management about integration. He expected these preliminary discussions to continue well into 2008.
Bumps in the road
Once an integration plan is in place, progress is not always smooth. Bancassurance – where banks act as agents for the sale of insurance firms’ products – is successful in the West and industry participants are tipping it to feature strongly in China’s wealth management market.
However, Bartholomew Ng, who oversees two joint venture insurance firms in his role as China country manager for ING Asia Pacific, was frank in his assessment of the obstacles: Sales of regular payment insurance policies – which are more profitable than single payment products – will struggle unless banks allow insurers to bring in experienced sales people and the required technical systems.
Technological infrastructure related to advisory services remains an issue for many Chinese banks, and Citibank’s Selva stresses that these challenges must be overcome if local lenders are to become full-service providers.
In the meantime, there is a wealth management gap waiting to be filled in China. Despite ambitious expansion plans, foreign and domestic players are still searching for the ideal combination.
“Wealthy people are going around and asking, ‘If I put my US$1 million in your bank what can you do for me?’” said Min of Z-Ben Advisors. “The fact that they are shopping around suggests that no one is offering the best mix.”
At least, not yet.