Banks have high hopes for Chinese new money to replace funds from ailing European and North American economies. The growing number of high net worth individuals in China offers unique opportunities and challenges banks may not have fully embraced. Thomas McMahon looks at BCGs latest research
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The number of potential Chinese high net worth individuals (CHNWIs) is growing rapidly, but the sophistication of their investment demands remains relatively under-developed.
This will not stay the same forever, however, with Boston Consulting Group (BCG)s latest report, Wealth Markets in China, suggesting that private banks need to prepare for this increased wisdom today.
Proper segmentation and a focus on producing high-quality, differentiated products and well-trained relationship managers should be a priority. Working out how to serve Chinese ultra HNWIs increasing desire for offshore services most efficiently is also a key consideration.
The numbers of CHNWIs are increasingly rapidly, although debate swirls around the true size of the market. In 2008, there were only 510,000 high net worth (HNW) households in China, according to BCG. By the end of 2010 there were more than one million, representing a compound annual growth rate of 42%.
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By GlobalDataBy the end of 2011 the number was set to hit 1,200,000, with the ultra-HNW households those with more than CNY50m ($7.94m) in investable assets growing at an even faster rate.
Other studies give different figures. Wealth Insights High Net Worth trends in China to 2015 report put the 2008 figure substantially higher at 790,000, but the 2011 figure at 1,280,000, close to the BCG figure.
WI also agrees with BCG that the richest segment is growing at a faster pace, although they segment the sector differently.
The 2011 Hurun Wealth Report recorded 960,000 Chinese HNWIs, while Bain & Companys 2011 China Private Wealth Study had a wildly different figure of 585,000, half the number found by BCG and WI.
Regardless of the exact numbers, all analysts agree that there is a growing pool of potential clients for private banks. According to BCG, this potential is still largely untapped.
Currently, only around half the typical HNWIs assets are managed by commercial banks, meaning that there is substantial room for growth through properly exploiting existing clients.
General characteristics
Chinese HNW individuals tend to have a very rudimentary understanding of private banking services, a common finding from a range of researchers. According to BCGs research, around half have either only just heard of private banks or have basic conceptual knowledge.
"Our experience in China is that the number of professional investors is far less than in other markets and many Chinese HNWs do not spend a lot of time creating portfolios or thinking about diversifying investments," says Sherrie Dai, managing director and head of private banking China, Standard Chartered.
These less-knowledgeable clients say customised and priority banking services are the most important thing banks can offer them, valuing them higher than investment products and advisory services.
Meanwhile, of HNWIs as a whole, 57% consider the "capabilities and professionalism of relationship managers" (RMs), 41% the "privacy and credibility of services", 39% the "product offering" and 30% the "brand" to be the important factors influencing their choice of a bank.
Banks may not be focusing on these features enough. Andrew Sum, head of Greater China for Coutts, says that Chinese HNW individuals knowledge of private banking is improving.
However, he adds: "There is a general lack of differentiation in onshore banks proposition, especially in the product offering. Rather, brand prestige, service and pricing are the main focus of onshore private banks."
HNW individuals say the most important factors when choosing an RM are their "financial expertise and product knowledge" (68%), their "ability to communicate" (41%) and their "trustworthiness" (39%).
Offshore interest
Chinese HNWs retain a stronger interest in onshore banking, being less concerned with tax avoidance and more with stability.
As a result, demand for offshore banking is in an early stage and largely found among clients from tier-1 cities, UHNW individuals (those with CNY50m or above), or those who have made gains from property.
On average, those households which do hold overseas assets hold just 16% of their total assets offshore, although this proportion rises in Tier-1 cities. This could be changing though. BCGs research suggests nearly 60% of HNW households in these regions claim that they will increase their overseas assets.
This underlines how offering offshore wealth management will become more and more important for private banks.
"In some regions, overseas investment products and wealth management services have become the most important criteria when it comes to choosing a private bank," the report says.
Dai says: "The challenge is to balance regulatory restrictions on cross border activities and client demand," she adds.
"The number of enquiries on offshore banking from global Chinese families, however, has definitely seen a sharp rise over the past three years. Most are looking for well-structured solutions and products that do not exist in the onshore market at the moment," says Dai.
Sum says the opportunities for the development of the offshore banking industry will depend on a number of factors.
The development of onshore investment opportunities and returns will affect HNWIs appetite for offshore investments, he says, and the development of tax and exchange controls will be important.
It also remains to be seen how much clients will develop an appreciation of holistic wealth management (including wealth protection and succession planning considerations) or prefer to focus solely on wealth creation.
Finally, Sum sees RMs as crucial. The availability of talent to service Chinese HNW clients will play an important role.
Training matters
BCG concludes that improving their analysis and segmentation of clients in order to refine their marketing, product development and services, is a key consideration for private banks.
To take advantage of this growing market, banks need to ensure RMs are sufficiently trained to transmit confidence in their knowledge to clients.
The research suggests that the number of customers overseen by each RM should be reduced, allowing bankers to build meaningful and trusting personal relationships.
Commercial banks should aim to be a single solutions provider for their private banking customers.
To do this they need to build up their internal capabilities in terms of speed to market, risk management, operational efficiency, resource allocation, talent development and incentive design among others, ensuring that all business units interact loosely.
The challenge is great, but the rewards are greater.
