Overseas investment may become more of a choice for China’s richest families as foreign private banks are looking at offshore opportunities for their Chinese customers to avoid tougher regulations in the country, a PricewaterhouseCoopers survey said.
The report, surveyed 200 institutions from more than 50 countries, with 24 percent of the respondents coming from the Asia-Pacific region, including four to five major banks on the Chinese mainland with private banking business.
Although the report found that the Chinese mainland is the leading market for private banks targeting new clients over the next two years, 88 percent of the respondents said that they regarded offshore transactions as a first choice for Chinese clients.
“This is a result of the larger number of high-networth individuals (those with investable assets exceeding $1 million), and an increasing need to allocate their assets globally,” says Patrick Zhou, a financial service partner at PwC China.
At the same time, tougher capital supervision on the mainland is also fueling that trend.
In comparison, in Hong Kong, the third destination market for private banks and where there are fewer restrictions on capital flow, only 14 percent of the private banks said they would recommend offshore investments to their clients.
In this year’s survey, compliance is the top risk concern for private banks, as they struggle to keep pace with the scale, speed and costs of current and planned regulatory changes. The cost of regulation is expected to rise steadily. Cross-border banking regulations and greater tax transparency will increase risks, according to 94 percent of the respondents.
“Offshore strategy must be water-tight and not expose clients and the organization to risk,” says the report.
“We hope that the private banking activities on the mainland would increase in the wake of a more convenient cross-border capital flow,” says Jimmy Leung, banking and capital markets leader at PwC China.
“But China is not yet comparable to the United States or Europe in this area.”
Leung says that some foreign banks are now retreating from China or have marked the country as an “inactive” market, because they found it’s hard to develop new customers or launch new products.
Deutsche Bank recently closed its last retail business branch in China, following in the steps of Royal Bank of Scotland, which made a similar move earlier this year.
In China, private banks’ clients – the majority of whom belong to the so-called “first generation” who created their own wealth – are more sophisticated and private banks need to shift their services from traditional asset investment to financial planning and wealth solutions advice, Leung says.
Despite the rebound of global wealth to around pre-2008 levels, Asia-Pacific’s wealth management industry is facing significant margin pressure caused by increasingly stringent and costly regulatory requirements, uneven growth across geographic markets and subdued client activity. These dynamics are further compounded by shifting demographics and existing challenges around operations, technology and talent management.
Yet there’s still potential for development: As Asia’s population ages, preparing for retirement, enjoying accumulated wealth and the planning for business transitions will become increasingly important, Zhou says, adding that there is still a large gap in competency levels of advisers to engage clients in philanthropy support, tax planning and specialist collection.
“Tailored client servicing ought to be considered to capture more market share. As global and regional private banks target the China market for their new clients, China’s private banks need to equip themselves to compete,” says Leung.
While continuing to invest in technology infrastructure to achieve efficient processes and sophisticated technical platforms, private banks are being advised to consider sharing back-office functions and creating a center of process excellence to maintain costs and improve efficiency.
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