China - The Gold Rush Steps Up A Gear

Lachlan Colquhoun WealthBriefingAsia Features Editor Sydney 12 January 2010

China - The Gold Rush Steps Up A Gear

While many other parts of the year kept their heads down during the past two years because of the financial turmoil, the wealth management industry in Asia has remained in a generally upbeat mood, and nowhere have the prospects seemed brighter than in China.

Private banks and wealth managers in the Asia Pacific are greeting 2010 with great enthusiasm and the mood is particularly exuberant in China.

By any measure, the region survived the global financial crisis in better shape than anywhere else in the world, and the projections for future growth are staggering.

According to the most recent Merrill Lynch and Capgemini report on wealth management trends, the Asia Pacific region will overtake North America as the world’s largest pool of wealth by 2013. No wonder just about every private bank with global aspirations is setting up in Singapore, and the industry’s hiring wars are about to start anew.

But while Singapore is familiar territory, China is the wild frontier for private banking. And like all gold rushes, the stakes and potential rewards are high, as are the risks of failure.

While the economic downturn destroyed wealth around the world and the rebound has been patchy, the number of millionaires in mainland China actually rose by 8.6 per cent in one year, according to a recent report by the Boston Consulting Group. The number of people worth more than $1 million or more now stands at 453,000 and they are worth a collective $1.73 trillion, surpassing the number pre GFC. This means China has gone past Britain as the world’s fourth-largest market for high net worth individuals.

“China is arguably the most explosive wealth market in the world, as rising income and a high savings rate will continue to spur development,” says BCG’s Frankie Leung, one of the authors of the report.

BCG expects the number of Chinese millionaires to almost double to 800,000 over the next four years.

Perhaps unsurprisingly, BCG has not been the only big-name consultancy studying high net worth Chinese.

In late November Bain & Co released highlights of a private wealth study the firm had done for foreign banks, and in conjunction with China Merchants Bank.

The Bain study took a strategic view and surmised that pre-GFC attempts by foreign banks to break into the Chinese wealth market had failed to recognize that most of the market was “first generation wealthy” and that these people had different needs to the more sophisticated investors brought up in other countries.

The financial turmoil, said Bain, may have made investors more risk averse, but it has also made them more open to discussing portfolio management.

Into this opportunity has flooded a plethora of foreign banks, but they are having to fight it out with the locals, who all seem to be catching on to the potential of private banking. 

Domestic banks with private banking operations include the Industrial and Commercial Bank of China, which recently announced it would widen its private banking network from five cities to 10, and the Bank of China, which has private banks in 15 regions and bought Geneva based Heritage Funds Management last year. The Agricultural Bank of China is reportedly preparing to announce its own private bank around the 2010 spring festival.

These banks, with their strong local networks, can provide stiff competition for the likes of HSBC, Citibank, and BNP Paribas, which have launched Chinese private banking operations since 2007.

It is not just banks competing for savings, either. Private equity house Blackstone is there, looking for investors for its funds and rivals like Kohlberg Kravis Roberts and the Carlyle Group are also reportedly scrambling to create yuan-denominated funds. Morgan Stanley has a stake in a $2.9 billion fund created by the China International Capital Corporation.

The banks must also compete with a property investment boom which seems to have become a favourite past-time for the newly wealthy.

For wealthy Chinese, the worries are inflation and a property bubble.  But not too many are giving these much thought, when there are so many millionaires to be made.

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