aPersonal advisors are on hand to help wealthy clients with anything from acquiring credit for large purchases to establishing education funds for family members. Private clients may also have access to financial products that offer much higher returns than those available to the average customer. For private banking services clients pay either based on the number of transactions, the annual portfolio performance or a flat fee, usually calculated as a yearly percentage of the total investment amount.
As part of their service, private banking advisors will help clients with asset allocation. Depending on the needs of the individual they are almost certain to recommend a portion of the assets be invested offshore. Although the RMB is not a freely traded currency and its transfer into and out of the country is heavily regulated, offshore investment is now possible through the Qualified Domestic Institutional Investor(QDII) scheme. Under QDII investors may invest in fixed income, money market and stock products through institutions that have been approved by(CSRC). QDII quotas have been granted to both domestic and foreign banks. Private banking clients of QDII banks have easy access to financial products that allow them to invest offshore.
Not looking for returns.
Offshore investments currently account for only about 10 percent of Chinese HNWIs' assets. In the United States, offshore business accounts for 20 percent of the total; the portion is even higher in Europe, where it is 30 percent. Since offshore accounts are the most profitable, they have been one of the most important businesses for private banks in the United States and Europe.
The reason for this reluctance to allocate assets outside mainland China may stem from the ultimate purpose for their offshore capital, especially for HNWIs who own assets in the West. Their offshore investments are primarily used to finance travel and immigration, send their children to study abroad or avoid domestic regulations. Since return on investment is not their primary focus, they are just a small portion of their total assets.
But these funds are incredibly stable. Even if they suffer diminished returns, investors are unlikely to withdraw funds, but rather will keep their money offshore while waiting for new investment opportunities. Even if HNWIs want to withdraw funds, they often face barriers to doing so, since foreign exchange regulations restrict the flow of capital into and out of China.
The amount of offshore investing is usually related to total assets and aHNWI's occupation. Wealthy individuals with a higher share of offshore investments are usually business owners who have offshore businesses and are in the highest asset band. The more assets, the higher the portion of offshore investments. In China, full-time housewives and entrepreneurs tend to have the highest portion of offshore assets. Housewives use these assets to fund immigration, children's educationand investment opportunities. Business owners typically have offshore investment accounts for their foreign businesses.
Closer to home.
At present, Hong Kong is the major destination for Chinese HNWIs' offshore investments. Unlike other offshore markets, more than half of the capital in Hong Kong is used for investing in local assets like Hong Kong stocks, property and insurance.
There are several reasons that Hong Kong is the preferred offshore market forChina's HNWIs. From there the island serves as a gateway for mainland capital flowing into foreign markets, enabling quick and convenient transactions between China and markets abroad. With its status as a global financial centre, mature capital and foreign currency markets with high liquidity, Hong Kong is the destination of choice for both foreign and domestic banks looking for Chinese private banking clients. Furthermore many mainland enterprises have business dealings with Hong Kong and often park capital there. Because of this close relationship, many HNWIs say they want help from a trusted bank that can provide asset management services in Hong Kong.
Hong Kong is also attractive due to its low tax regime. There is no capital gains tax or withholding taxes on dividends, interest or royalties. Other jurisdictions in the region, including Singapore and Labuan, Malaysia have similar low taxation policies that attract significant private banking business.
Further afield, jurisdictions such as Switzerland, Lichtenstein and Bermuda have a long history of domiciling private banking services. Despite their proximity to European markets, diminishing banking secrecy in these locations means they might not be as appealing to a Chinese HNWI as somewhere closer to home. In fact both Hong Kong and Singapore now offer a higher level of opacity and secrecy than their European counterparts.
According to China Merchants Bank/Bain & Co Private Wealth Study more than half of Chinese HNWIs say they would choose a foreign bank to oversee their offshore investing. The overseas branches of domestic banks can be in a difficult competitive position to attract offshore capital. Foreign banks have a huge advantage because of their familiarity with local markets, products and regulatory systems. In addition, since capital in offshore markets other than Hong Kong often finance immigration and studying abroad, the users of funds(investors or their family members) are overseas and can conveniently access foreign banks' extensive offshore outlets.
However, domestic banks do have some advantages in the competition for offshore investments. Chinese banks can be more familiar with HNWIs' needs and HNWIs, in turn, are more familiar with domestic bank brands and business practices. Recent global financial instability gives Chinese banks another advantage in winning over management of offshore assets: unlike many foreign banks, they tend to be backed by the Chinese government.
