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China's wealth managers look to profit from risk and capital crackdowns

[HONG KONG] As regulatory crackdowns in China hit risky investment products and capital outflows, the country's private banks are looking to profit as they target a bigger share of growing wealth in the world's second-largest economy.

Wealth managers like Noah Holdings and units of China Merchants Bank and China International Capital (CICC) are casting wider nets to tap affluent clients, who have so far remained outside mainstream private banking.

They are now targeting small cities, where the wealthy have traditionally relied on shadow banking investment products that promise high returns but are illiquid and opaque, according to bankers and consultants working for the wealth managers.

Beijing's clampdown since last year on sending capital outside the country was also opening up opportunities for domestic wealth managers in China, they said.

China's onshore private wealth market has grown rapidly in the last few years. This year, it is set to reach US$28 trillion, nearly three times the country's gross domestic product in 2016, making it the second-largest such market after the United States.

But only about 10-12 per cent of China's high net worth individuals, or those with more than 10 million yuan in investable assets, are served by professional wealth managers, which compares with roughly 20 per cent in South Korea and 55-60 per cent in the United States and Europe, according to Noah.

That proportion is likely to rise as wealth managers promote their investment advice and products more widely, and as awareness grows of how to diversify from bank deposits and property investments, the bankers said.

"The government is trying to clean up and trying to push the money into regulated channels with transparent investment schemes," said Wu Bo, head of CICC's wealth management business.

"That plays to our advantage."

Mr Wu, whose firm manages about US$100 billion worth of private individual wealth, said the migration of money to wealth advisors represented an important business opportunity for firms like his.

Chinese wealth managers face little competition from bigger foreign rivals such as Credit Suisse and JPMorgan in the onshore market, said an executive at a consultancy that works with wealth managers.

Regulatory restrictions and a less developed capital market have deterred some global banks from setting up a private banking presence in China.

Offshore businesses remain the preferred route for many international wealth management firms who want to tap into the millionaires spawned by China's booming technology sector and its surging stock market.


Noah is one of the local private banks who are now looking beyond cities like Beijing and Shanghai, where rivals including HSBC and some fintech giants are expanding their footprints and offerings to serve wealthy clients.

Founded in 2003, Noah, which has assets under management of US$63 billion, plans to add more people to win new business in smaller cities such as the industrial centre of Shenyang in the northeast and the coastal city of Wenzhou.

"We see a lot of entrepreneurs in the second- and third-tier cities who are low-profile," said Noah's president, Kenny Lam, referring to cities with populations of about 7 to 10 million.

Noah plans to increase its headcount of 1,200 by 5-10 per cent a year for the next three to five years in order to tap those opportunities.

In places like Wenzhou, Mr Lam said: "When you see them, you don't know them having hundreds of millions, they will be in a t-shirt and jeans and say 'Kenny, can you teach me about private equity?'."

Each of China's 22 provinces have over 20,000 high net worth individuals, with nine counting more than 50,000 each, according to a study by the consulting firm Bain & Co and China Merchants Bank released in June.

Regional wealth distribution is now becoming more balanced, and a number of rich individuals in central and western China, and regions associated with the Belt and Road infrastructure and trade initiative, have increased significantly, the report said.

The push into smaller cities, however, is also raising concerns about risk management, checks and balances, and how carefully wealth managers are conducting background checks on clients, according to the consultants.

It is also fuelling demand for more compliance executives.

"That, I would say, is the biggest risk or challenge for the Chinese wealth managers, as much as their global peers," said the consulting executive, referring to the client due-diligence process to ascertain sources of wealth.

The executive, who declined to be named while discussing client matters, said the due-diligence process was particularly onerous in China. The country has a more lax corporate governance culture and that sometimes made it difficult to ascertain even company ownership structures, the executive said.

"The know-your-client process is very important in China and also very difficult as in many cases the real source of wealth is not disclosed," the executive said.