After flubbed attempts to crack the Chinese market in the previous decade, several private banks are making a renewed push, Nick Xiao tells finews.asia.
Nick Xiao, international private banks have tried to break into the China onshore market before, didn’t they?
Yes indeed. In the mid-2000s, the first wave of wealth creation in China became quite apparent, driven by explosive manufacturing growth and an accelerating real estate boom.
Against this background, foreign commercial banks launched their onshore private banking business under local subsidiary bank licenses, while foreign investment banks offered private wealth management from their local securities joint ventures and trust company JVs. But most of them decided to close their onshore private banking business after a few years.
What went wrong?
The global financial crisis, unavoidably, dampened the risk appetite of international private banking players that entered China. But a changed sentiment was not the main reason for the retreat from China, because an onshore private banking business with correct positioning and solid trajectory could have survived any «strategic reviews».
So what was the real reason?
For foreign commercial banks, the main shortfall was a weak client proposition. The years 2007 and 2008 marked the inception of China’s shadow banking, which could be defined as deposit-gathering and loan-making that happens outside banks’ balance sheets but with their close involvement.
«Foreign private banks were uncomfortable with these strong Chinese characteristics»
To high net worth clients, shadow banking meant an expanding variety of high-coupon (8 to 12 percent annually) investment products to choose from, with performance guarantee that was offered implicitly but upheld seriously by commercial banks which distributed such products to their clientele.
What happened with the private banks?
Chinese private banks embraced shadow banking as a mainstream asset class for their wealthy and affluent clients. But foreign private banks were uncomfortable with this product category of strong Chinese characteristics, and chose not to add shadow banking products to their onshore offering. Therefore, the private bankers of Standard Chartered, HSBC, Citi, BNP in Beijing, Shanghai or Shenzhen could offer only plain deposits, spot foreign exchange, dual currency deposits, and some QDII products (which are onshore feeder funds to offshore funds/equity baskets).
«All the foreign banks’ onshore private banking businesses had been phased out»
This rudimentary product range was no competition for Chinese private banks’ vast universe. By 2012, after years of slow growth and losses, all the foreign banks’ onshore private banking businesses had been phased out or folded into onshore retail divisions.
After all these frustrations, why are the foreign wealth managers trying again to enter China?
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