some of the industry biggest players including HSBC, Standard Chartered and Credit Suisse had either set up shop on the Chinese mainland or introduced private banking services to their existing retail offerings.
The foreign banks motives were straightforward: China mints hundreds of new millionaires every day, and private banking establishes a relationship that might eventually lead to other, more lucrative transactions, like investment and commercial banking. The domestic banks were, by contrast, only reacting: China new millionaires were already their customers, and while the threat presented by foreign banks forced them to add value, it has also opened up new revenue streams. Mike Werner, an analyst at Bernstein Research in Hong Kong, agrees. t is more about the Chinese banks trying to create an extra service for its investment banking and commercial banking clients, he told the Financial Times, o that they can keep as much of their business as possible today and in the future. /span>
Five years ago, Boston Consulting Group published a report stating that eight percent of China total personal wealth was invested offshore. Recent estimates suggest a significantly higher figure. As much as 9.3 trillion renminbi is thought to be idden from the state, much of it offshore, and the 2010 Asia-Pacific Wealth Report compiled by Capgemini and Merrill Lynch put the home-region allocation of investment by Chinese high-net worth individuals at 85 percent. Chinese wealth invested offshore has almost certainly grown in real terms too. The 124,000 individuals with a net worth of over ten million yuan recorded in 2001 had grown to over one million individuals by August last year.
What typifies these new millionaires? Reports vary, but experts reckon that as much as 41 percent of the country personal wealth is owned by 0.1 percent of the population, and according to a recent report from the Julius Baer Group, Chinese millionaires are expected to hold half of Asia total personal wealth by 2015. In the US, by comparison, the richest one percent of the population controls only a third of total wealth. China richest people are much more regionally concentrated too: two thirds of the country millionaires live in Beijing, Shanghai, Guangdong, Zhejiang or Jiangsu, along a narrow industrial belt in the country east.
Wealth in China is distinguished by more than just concentration. At an average age of only 39, the country millionaires are a full fifteen years younger than their counterparts in the developed world. Fifty five percent of them are entrepreneurs while only 10 percent are executives. Real estate speculators (20 percent) and stock market millionaires (15 percent) make up the rest. These differences are a start at separating China rich from the rich elsewhere, but only a start. The new millionaires at the centre of China explosive growth are also defined by the context in which they have made their money: a country that offers an unprecedented opportunity to get rich, but lacks the regulatory environment or fiscal maturity for both the secure investment and legal protection of that wealth, at least in comparison with other, more mature economies and the offshore financial centers that many of the country rich have turned to. he private banker's biggest competition for the Asian millionaire's share of wallet is not other private banks it is the client's own business, says Tan Su Shan, the Head of Wealth Management at DBS in Singapore. ith his fortunes so intricately linked to his business, the Asian high net-worth individual requires a holistic evaluation of his financial needs. A keen understanding of the industry his client operates in, as well as the ability to help him grow the business while managing financial risks, is crucial for the private banker. /span>
China high net-worth individuals like to experiment, and many work with a variety of different financial institutions. According to a report by Bain & Company, released in April of this year, 60 percent of the country millionaires do business with multiple wealth management institutions, and a surprising 85 percent channel at least some of their money into China state-owned domestic banks, which are only just beginning to grapple with the diverse needs of wealthy clients.
Of these needs, among the most important and most in demand is advice about offshore finance, because China wealthiest people look abroad for a wide and growing variety of reasons, including the education of their children and the investment and protection of their assets, on top of more ordinary business. any wealthy Chinese have children being educated in other countries, or own real estate overseas, explains Jenner Davis, CEO of the Cook Islands Financial Services Development Authority. hances are they have business interests worldwide too. All of these things create a more complicated financial and legal picture for them. /span>
China strict tax laws complicate the picture further, by preventing Chinese corporations from moving money offshore to minimize local taxation. No bank be it domestic or foreign can offer its offshore services to Chinese citizens or China-domiciled companies. Chinese individual that either relinquishes Chinese citizenship or is a permanent resident of another country shifts from a worldwide basis of taxation to being taxed as though he or she is an expat, meaning that they will be taxed on Chinese source income only, explains Mike Grover, an offshore tax specialist. his is highly advantageous, because it allows for an increase in the amount that can be transferred offshore under Chinese foreign exchange rules, as well as the ability to remit funds offshore for start-up purposes in the new location and the receipt of inherited assets without restriction to non-residents. As a result, there are more avenues to send funds offshore. If the remitted funds are put into a trust or foundation, which has always made good sense from an asset protection and for succession planning purposes, it also means that the funds may be professionally managed for the beneficiaries and benefit from being lowly taxed. /span>
A list of the common services offered by both domestic and foreign offshore banking units includes the following:
• Taking foreign currency deposits and offering foreign currency loans
• Organizing and participating in international syndicated loans
• Issuing guarantees and providing witnessing services
• Conducting foreign exchange transactions, remittance and other international settlements
• Accepting and discounting bills and handling trade finances
• Dealing with international inter-bank borrowing and lending
• Providing advisory and consultancy services
Domestic banks normally distinguish themselves by offering a much wider service network within China, along with a sharper understanding of local conditions, while foreign owned private banks can normally boast of more nuanced experience and broader range of products, offered globally. Clients might also question how far they can trust state-owned Chinese banks, especially in the area of wealth and tax planning, services that are amongst the most important private banks typically offer.
A 2008 report by the Boston Consulting Group highlights the importance of secrecy to Chinese clients. “Chinese high net-worth individuals generally do not like to disclose their wealth,” it explains, “either for fear of investigation over the source of their wealth, or for concerns over attracting attention to their wealth. Consequently, in selecting their private banks, they can be quite careful about approaches to banking security and client privacy, from how they are introduced to their relationship managers to the reputation of their private banks, from the domicile of their private banking accounts to how they access their accounts.”
China’s state-owned banks have to go further to prove to that clients’ interests are paramount, but also need to cultivate expertise comparable to foreign banks, which have generations of experience. “I think that what is happening,” says Mike Grover, an offshore tax specialist, “is that private banking and independent financial advisors create the ‘solutions’ for their clients with offshore locations such as Labuan IBFC providing the enabling structures. It is a ‘collaborative’ relationship between the high net-worth individual, the advisor and the jurisdiction selected to domicile the activities.”
Bank of China made an effort to improve its service offering by starting a Swiss private bank of its own, but was largely unsuccessful. Instead, it has handed over the management of roughly one billion Swiss Francs to Julius Baer, in what has been described as a strategic partnership.
Unfortunately, the toughest problem faced by private banks in China remains unsolved. Regulation severely limits the range of products they can offer, because to invest in offshore markets on behalf of clients, banks must apply for a QDII quota, clearly defining the amount of renminbi they can convert and move out of the country as well as the kinds of securities they can buy. This leaves both foreign and domestic banks with the problem of differentiating their products, because the domestic market still has a relatively small range of financial instruments. Bonds, for example, are still in their infancy and the trading of futures, within a limited regulatory framework, was only introduced in 2011.
The Chinese government is gradually reducing the obstacles that prevent more nuanced investment, both on and offshore. It allowed foreign banks to incorporate locally and provide renminbi services in 2007, for example, and is constantly tinkering with its exchange controls, a process that is expected to culminate in the full internationalization of the renminbi by 2020. Chinese banks will want to make sure they are ready to compete globally by then, or they will quickly discover that capital is not patriotic.
