Private banks fail to gain traction in China

Relatively low returns and curbs on capital transfers dampen affluent clients' interest

PUBLISHED : Monday, 11 March, 2013, 12:00am
UPDATED : Monday, 11 March, 2013, 4:51am

Private banks have their eyes on the growing number of high-net-worth individuals on the mainland, but getting their attention is proving to be a challenge.

For one thing, the self-made millionaires believe they can generate higher returns than those available from private banking products. For another, the free transfer of assets across the border is forbidden and not all the high-net-worth individuals are eligible to open offshore accounts, limiting their ability to participate in many wealth management products.

In the circumstances, it was not uncommon for mainland clients to question why they should put their money in private banks, said Eduardo Leemann, the chief executive of Falcon Private Bank.

"Returns generated by businesses on the mainland and onshore investments can reach 20 to 30 per cent a year," Leemann said. "By comparison, asset management by private banks may give returns of just 6 to 7 per cent. So they [mainland clients] ask why bother to have private bank accounts outside the mainland."

Alan Luk Ting-lung, the assistant general manager and head of private banking and trust services at Hang Seng Bank, said it was not easy for affluent mainlanders to transfer their assets across the border. "Not many of them have companies outside the mainland," he said.

Individuals with offshore companies can transfer capital across the border with the permission from mainland authorities. There is no limitation on companies to exchange yuan outside Hong Kong, as long as there is an adequate supply of the currency. So those offshore companies can do so in Hong Kong freely and wait for appreciation of the yuan. They may use both company and private bank accounts for such conversion.

"Mainland clients are not attracted to the idea of investing through private banks," a private banker from a mainland offshore private bank said. He declined to be named because he was not authorised to speak to the media.

So rather than selling investment products to mainland clients, private banks opt to provide corporate solutions, such as secured loans, since borrowing costs are lower in Hong Kong than on the mainland.

"Arbitrage between the Hong Kong dollar and the yuan offers an attractive return, and it is safe," the banker said.

Arbitrage takes advantage of a price difference between different markets - in this case, the attractions being lower interest rates in Hong Kong and the possibility of a gain in the yuan.

A report from the Boston Consulting Group and China Construction Bank Private Banking published in December said the number of the mainland's high-net-worth households - those with investable assets of more than 6 million yuan (HK$7.4 million) - would reach 1.74 million by the end of this year, an increase of 17 per cent on last year.

There are more than 100,000 such households in Guangdong, Beijing, Shanghai and Jiangsu, but underdeveloped inland provinces such as Anhui and Hunan have become new growth points, where the proportion of such households has reached more than 30 per cent.

"When they question us on the need for a private bank's service, we stress that the present high growth rates achieved by their businesses are not likely to last forever, hence they still need to diversify their investments," Leemann said. "And the banks can help their succession planning."