Private banks look at the mainland wealth market as a vast, unplucked opportunity. The region is the third largest wealth generator in the world, according to a Credit Suisse report, and the pace of accumulation is growing rapidly.
Wealth management is a new concept to the mainland and its legion of newly rich have yet to be converted into private banking clients. It is a supremely ripe new market, and one that is held in fascination by the world's international banks.
But countering the irresistible force of big banks charging into lucrative new territory is the immovable object of mainland rules. The international wealth houses want in, but the massive obstacles of winning approval and licensing to do private banking on the mainland means few institutions are set up to do this.
Meanwhile, the international banks have to address growing competition in the form of mainland banks launching wealth management platforms.
The advantage of the local houses lies in the fact that they have relationships with millions of retail clients. Simply, they know who the rich people are.
Their approach is also different to the traditional European private banking model of bespoke services, industry sources said.
'In China, we have seen up to half the investment portfolio offered by local private banks made up of private equity. In contrast, private equity would typically only feature up to 5 per cent in portfolios in Hong Kong or Singapore,' Kathryn Shih, head of UBS wealth management in Asia-Pacific, said.
'Local mainland private banking models usually involve a private banking team based at the headquarters, delivering products to clients at local branches. It is run more like a premium segment within a retail bank.'
Their investment strategies focus on private equity products, in response to mainland investors' appetite for higher risk investments.
The country's strong economic growth and the rapid development of its capital markets is positioning China to surpass Japan in the next few years in having the largest number of high-net-worth individuals, sources said.
The individuals driving this development are young, dynamic, and self-made, more open to risks and focused on building rather than preserving wealth. 'Mainland investors are typically first generation entrepreneurs, so they tend to be more aggressive with their investments because they have made the money themselves,' said Kenneth Toong, chairman of boutique Swiss private bank Clariden Leu in Asia.
He adds: 'It is hard for someone who came from nothing, has risked everything, and has been running a hugely successful business for just seven years, to understand the concept of a balanced portfolio.'
Western private banks are also grappling with the challenges of navigating a heavily regulated and complex banking environment.
'Anyone who is familiar with international banking practices will have to relearn banking practices in China because it is a much more regulated and restricted environment,' Lee Hsiao-yun, chief executive of Societe Generale Private Banking China, said.
'Unlike mature markets like Hong Kong or Singapore that operate on a combined business banking model offering open architecture and diversified asset allocation, China's onshore private banking sector is still run under a segregated model. Partnering with a qualified third party is essential in order to offer of a full spectrum of services,' she said.
Societe Generale Private Banking China last year became the first foreign operator to form a partnership with a local trust company to facilitate the offering of a broader range of products beyond deposits, simple foreign exchange products and loan portfolios on a selective basis.
'This synergy with the trust company allows us to look at offering products like equity, fixed income, foreign exchange, private equity funds and alternative investment products,' said Lee.
Meanwhile, banks like UBS have identified talent shortage as another area of difficulty. Industry sources say there are simply not enough people expert in mainland private banking to address the full potential of that market.
'There are very few people focused on wealth management because the industry is so new,' said Shih. UBS tended to hire individuals from other disciplines, such as stock broking, investment, retail and corporate banking, and trained them in private banking, she said.
Other bankers noted that mainland institutions were starting to compete aggressively for the few good people available. Just as the international banks want people familiar with mainland regulations and mainland clientele, the onshore banks want people who are good on the technical side of private banking.
'The mainland banks are definitely competitive when it comes to hiring,' said Marcel Kreis, head of private banking Asia-Pacific, Credit Suisse.
'Relationship managers need to be quite entrepreneurial minded when working with Asian clients; and in China, even more so, because people there have just made their money,' said Toong, adding that with the country's investment horizon that much more short-term, it was important for the relationship manager to be closer and more connected to the client.
This need to maintain a close relationship was even more necessary given the competitiveness of the industry. 'At the end of the day, it is a shared market. Very few people will have just one private banker so it is not a question of who can secure the business, but rather, how much of the business you get,' said Toong.