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Money & Markets ... ...
    Managing money
2005-12-19 07:33

Mr Chen is the chief executive officer with an IT company. His wife Mrs Chen, works for a well-known multi-national.

The couple earns about 1 million yuan (US$123,400) a year and has invested heavily in stocks over the last five years, only to see an 80 per cent loss. But because of the high consumer price index and low interest rate, the Chens are reluctant to entrust their money to the bank. They are frustrated about where their money would be most productive.

Some members of China's rising middle class advocate keeping a third of their assets in real estate, a third in securities and depositing the remainder in the bank. However, others doubt it is the ideal solution to managing their wealth.

That more and more rich are becoming "bothered" about their wealth is a sign of the country's growing wealth management market.

A report by Boston Consulting Croup (BCG) says China represents the second largest market in Asia excluding Japan, with about US$1.44 trillion in assets being managed (AuM) for wealthy individuals defined as those whose AuM is above US$100,000.

The AuM of China's wealthy is expected to reach US$2.63 trillion by 2009. BCG's survey of retail banks reveals that the average private banking customer can be 10 times more profitable than an average mass market retail customer, a statistic that explains why banks are paying increasing attention to the wealthy.

The burgeoning new wealthy

Much of the wealth in China has been created in the course of the rapid economic expansion of the past two decades. Many entrepreneurs have made their money in real estate, manufacturing, retailing, and information technology, and more and more professionals are entering the ranks of the wealthy.

"By contrast, wealth in the United States and Europe comprises a mix of old, inherited money, and new, entrepreneurial assets." Deng Junhao, vice president and director of BCG points out.

"This may explain why China's wealthy are highly speculative and have a high tolerance of risk." Deng adds.

Indeed, China's new wealthy like the Chens are inclined to pursue high risk direct investment and prefer to be directly involved in making investment decisions. Having made their money as entrepreneurs, many believe they are more capable of generating good returns than the inexperienced managers at their wealth management institutions.

Facing the emerging wealth management market, Chinese banks have made impressive headway in the creation of new wealth management products and services. There are now more than 20 kinds of wealth management products on offer at the State-owned big four banks and national joint-stock banks. The China Everbright Bank's November 2005 financial report shows a 20 billion yuan (US$2.5 billion) wealth management revenue, up 50 per cent over last year.

Chinese banks, especially the State-owned big four, have inherent advantages in wealth management. They have a large customer base and an extensive service network that offers customers accessibility and convenience. Managers at the big banks also tend to have a good relationship with local customers.

However, analysts believe that, although the level of personal assets held in financial institutions in China is significant, wealth management products and services offered by Chinese banks are still relatively unsophisticated.

Deng characterizes China's typical wealth management offering as more "hardware" than "software".

Key issues that continue to stymie domestic banks' progress include a lack of properly-trained managers, limited differentiation of customers, limited products and similar brands.

There is no real "private banking" service in China, typically available with an AuM of US$1 million in international markets, only offerings for all customers with more than 500,000 yuan (US$60,000) to invest.

Despite having 20 kinds of products to choose between, there is actually little separating them. Brands do not have a sufficiently unique or differentiated product to target specific types of customers.

And, due primarily to regulatory hurdles, most wealth managers are only able to provide limited products.

Competitive threat

There is only one year left until the Chinese banking market is fully liberalized and foreign institutions are able to serve individual customers in renminbi-based business.

Foreign banks have already experimented and learned about the market despite regulatory limitations over the type of businesses they can operate. Standard Chartered Bank has offered an "SC Priority Banking" card for customers with quarterly average account balances of US$100,000 or the equivalent, while Citibank has launched its "Citigold" product for customers with monthly average account balances of US$100,000 or the equivalent. Both banks have set up dedicated wealth management centres in key cities such as Beijing, Shanghai and Shenzhen.

Foreign banks have many competitive advantages over local banks including brand names with internationally recognized prestige and trust, experience and expertise in a broader range of investment products and advisory models, established operational models, particularly processes, systems and policies, and capabilities to attract, train and retain the best talent.

Foreign banks will create tough competition in the wealth management market, as they enter the retail market and attempt to pick the most attractive customers. Unless Chinese banks can respond, there is a real and significant threat that many wealthy customers will be lured away by the highly-evolved products and services foreign banks can offer.

(China Daily 12/19/2005 page4)


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