Wealth Markets in China: Seeking the Opportunity to Lead

Transcription

CHINA WEALTH 2011
Wealth Markets in China
Seeking the Opportunity to Lead
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the
world’s leading advisor on business strategy.
We partner with clients from the private, public, and not-for-profit sectors in all regions
to identify their highest-value opportunities,
address their most critical challenges, and
transform their enterprises. Our customized
approach combines deep insight into the dynamics of companies and markets with close
collaboration at all levels of the client organization. This ensures that our clients achieve
sustainable competitive advantage, build
more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 74 offices in 42 countries.
For more information, please visit bcg.com.
About China Construction Bank
China Construction Bank (CCB) is one of the
largest commercial banks in China. Headquartered in Beijing, CCB has 13,442 branches across China in mid-2011, as well as a
number of representative offices and subsidiaries around the world. Its staff numbers
are approximately 310,000.
About CCB Private Bank
CCB Private Bank was established on July
18, 2008 and is CCB’s special arm serving
clients with investable assets exceeding RMB
6 million. CCB Private Bank aims to provide
total solutions for all financial needs of individuals, their families and their enterprises
and emphasizes professionalism of services,
protection of privacy, financial stability and
operational efficiency.
CCB Private Bank has set up more than 200
private banking and wealth management
centers across China, and promotes its private banking services across its vast retail
branch network. It currently operates CCB
(Asia) Hong Kong Private Bank, and is also
broadening its overseas private banking services.
Wealth Markets in China
Seeking the Opportunity to Lead
CHINA WEALTH 2011
Frankie Leung
Chunqi Wei
Nan Wang
Yufang Mei
December 2011
bcg.com
ccb.com
© The Boston Consulting Group, Inc. and China Construction Bank, 2011. All rights reserved.
For information or permission to reprint, please contact:
E-mail: [email protected] (BCG)/[email protected] (CCB)
Fax:
21 2 (BCG)/ 10 2 00 (CCB)
Contents
Introduction
Global Wealth: An Overview
Global Wealth Growth
Private Banking Faces Challenges
Global Economic Uncertainty Forces Change
10
Private Banking in China
12
The Drivers of Growth and Macro Trends
1
Infrastructure and Legal Limitations
1
Promoting More Comprehensive Trust Products and Plans
1
The Competitive Landscape for Wealth Management
1
China s High-Net-Worth Individuals
20
The Characteristics of HNW Individuals
20
The Key Drivers of Behavior and Preferences
2
Second-Generation Wealth Inheritors
2
Offshore Wealth Management
1
The Global Offshore Wealth Market
1
Offshore Demand in China
2
Hong Kong: An Offshore Market for Private Banks
2
Offshore Private-Banking Business Models
WEALTH MARKETS IN CHINA
Strategic Implications for Private Banking
Improve Target Marketing by Refining Customer Segmentation
Increase Share of Wallet by Identifying Additional Customer Demands
Prepare for Tomorrow by Understanding the Most Sophisticated Clients Today
Position the Bank as Primary Manager of Offshore Wealth for Chinese Nationals
Build Core Competency Through Integration and Alignment of Business Units
The Mission for Chinese Private Banks
Be Sustainable and Credible
Have Care and Respect and Be Socially Responsible
Build a Successful Business to Pay Back the Community
Invest, Don t Speculate
Note to the Reader
1
• CCB PRIVATE BANK
Introduction
W
hile global markets experienced
tremendous volatility and uncertainty in 2011, the Chinese government continued its efforts to
tighten its monetary policy and
transform the country’s economic structure. In this
report, we reassess the present and future of China’s
private-banking industry at a time of increasing economic and social complexity and change.
The Boston Consulting Group (BCG) and the China
Construction Bank (CCB) have worked together to assess China’s wealth market and the key characteristics
of the affluent population based on detailed modeling
of the present and future of China’s wealth market,
through surveys of more than 2,000 high net worth
(HNW) individuals, and with interviews with a number of private bank relationship managers. As a result,
this report aims to present a clear group profile of private banking clients and many other findings of China’s
wealth market.
Despite the global macroeconomic uncertainties, China’s private-banking sector continues to be a bright
spot. By the end of 2011, the total value of investable
assets1 of Chinese individuals is set to reach RMB 62
trillion, which represents a compound annual growth
rate of 32 percent over the past three years. Of that
RMB 62 trillion, RMB 27 trillion will be held by HNW
households, each with at least RMB 6 million in investable assets. At the same time, the total number of Chinese HNW households is set to reach 1.21 million by
the end of 2011, having grown at 42 percent over the
past three years.
China’s major municipalities and provinces along the
eastern seaboard, including Beijing, Shanghai, and
Guangdong, continue to have and attract an affluent
population. However, wealth is spreading across the
country. The number of HNW individuals is soaring in
places such as Shanxi, with its abundance of natural
resources, and Hainan, where local prosperity is largely
due to a boom in travel and real estate. The growth rate
of HNW households in Central and Western China, including in the provinces of Gansu, Anhui, and Guizhou,
is outpacing the growth rates in other areas.
Close to 60 percent of China’s HNW individuals are private entrepreneurs who started their own businesses
and became wealthy. Our survey reveals that these individuals have divergent views on the financial markets,
investments preference, risk appetite, and to a larger
extent, the meaning of wealth. Very few of them, however, have a sufficient understanding of private banking and the products and services it offers. Although
these HNW individuals appear to be concerned about
preserving their wealth and their way of life and educating their children, they increasingly recognize the
importance of being socially responsible.
Rapid economic growth is the core driver of the wealth
accumulation of HNW individuals and the development of private banking industry in China. However,
the recent economic slowdown and tightening of credit
posed unprecedented challenges to the private entrepreneurs. The Chinese government has started to unveil a series of economic policies to support small and
medium-sized businesses, and private entrepreneurs
have begun to see positive results.
1. Investable asset refers to the combined market value of household deposits, treasury bonds, mutual funds, stocks, financial planning products
and alternative investments. It excludes real estate property that is either
self-owned or for investment purposes, collectables, consumer durables, individual business assets or land resources owned by individuals but have yet
been explored.
In order to build a sustainable business, China’s private
banks must spend more time listening to their clients
whose needs, as our survey shows, tend to reflect their
educational background, their source of wealth and occupation, the value of their assets, and the region in
which they live. By advising them on many fronts, private banks can build long-term relationships and customer loyalty. As clients look for more sophisticated
products and services, private banks should try to build
a competitive advantage based on innovation and better leveraging of their various institutional resources.
As Chinese entrepreneurs increasingly look abroad to
grow and expand their business, offshore private-banking services are sure to be in greater demand. Chinese
commercial banks should start preparing for this by
testing the ground in Hong Kong, with its distinguished
legal, accounting, and regulatory setup. Commercial
banks that are interested in building stronger offshore
wealth-management capabilities for the long term must
begin today.
Chinese private banks—as service provider, wealth
manager, and investment advisor to China’s HNW individuals—are in the enviable position of being able to
take a leadership role and seize a competitive advantage. A key strategic choice for China’s private banks
then is to lead, rather than follow, market developments—to be proactive, innovative, and forward-looking. The investment activities of China’s HNW population tend to have short-term time frames, and many
do not regularly communicate with a financial advisor.
The door is wide open for financial and wealth management institutions to play greater roles in shaping the
financial future of these HNW individuals and assisting
them grow their businesses.
Global Wealth: An Overview
level. During the past three years, AuM climbed by
nearly $20 trillion. (See Exhibit 1.)
Global Wealth Growth
Global wealth grew in nearly every region of the world
in 2010, with assets under management (AuM) showing signs of a sustained recovery in both developed
and emerging markets. By the end of the year, AuM
had increased by $9 trillion and was at a record-high
North America had the largest absolute gain in
wealth, at $3.6 trillion, and the second-highest growth
rate, at 10.2 percent. Its $38.2 trillion in AuM—nearly
one-third of global wealth—made it the world’s rich-
Exhibit 1. Global Wealth Continued to Grow in 2010
AuM, 2008–2010 ($trillions)
4.8
4.8
7.0
7.0
11.1
31.2
34.6
33.1
10.2
2009
37.1
2009
2010
1.4
-0.2
16.6
16.8
16.8
38.2
2008
2008
35.4
24.7
Europe
2010
14.9
North America1
8.2
10.3
2.9
3.2
3.5
2008
2009
2010
2008 2009 2010
Asia-Pacific
(excluding Japan)2
8.6
13.6
3.6
4.1
4.5
2008
2009
2010
17.1
21.7
18.5
33.9
4.6
Change (%)
Households with more than $1 million in AuM
Households with less than $1 million in AuM
2009
2008
2010
Japan
+19.5
10.3
102.3
Middle East and Africa
Latin America3
2008
9.2
112.8 121.8
33.7
6.1
8.2
2009
2010
China
2008
2009 2010
Global
Source: BCG Global Wealth Market-Sizing Database, 2011.
Note: AuM numbers for all years were converted to U.S. dollars at year-end 2010 exchange rates in order to exclude the effect of currency fluctuations.
Percentage changes and global totals of AuM are based on complete (not rounded) numbers. Calculations for 2008 and 2009 are based on the same
methodology used for the 2010 calculations. Global wealth is measured by AuM across all households.
1
United States and Canada.
2
Includes Australia and New Zealand.
3
South America, Central America, and Mexico.
est region. In Europe, wealth grew at a below-average
rate of 4.8 percent, but the region still gained $1.7 trillion in AuM. North America surpassed Europe as the
wealthiest region in part because its capital markets
had a stronger recovery, but also because the euro lost
value relative to the dollar in 2010.
Wealth grew fastest in Asia-Pacific (excluding Japan),
at a rate of 17.1 percent. As recently as 2008, Japan
accounted for more than half of all the wealth in AsiaPacific. In 2010, it accounted for about 44 percent.
In the Middle East and Africa, growth was above the
global average, at 8.6 percent, but was limited to some
extent by volatility in the price of oil as well as by the
real estate crisis in Dubai. In Latin America, wealth
grew by 8.2 percent. Together, these three emergingmarket regions accounted for $29.7 trillion in AuM,
and their share of global wealth continued to rise—
from 20.9 percent of global wealth in 2008 and 22.9
percent in 2009 to 24.4 percent in 2010.
In general, if adjusted to reflect the fluctuations in exchange rates—in other words, with wealth converted to
U.S. dollars using year-end 2010 exchange rates—global
wealth grew by 8 percent in 2010. (See Exhibit 2.)
The strong performance of the financial markets accounted for 59 percent of the growth in AuM in 2010.
The remainder came from savings. During the crisis,
cash was king. Since then, HNW individuals have
been redirecting their assets back into riskier investments. From year-end 2008 through 2010, the share of
wealth held in equities increased from 29 percent to
35 percent, while the share of wealth held in cash and
deposits declined from 49 percent to 45 percent.
We expect wealth to grow at a compound annual rate
of 5.9 percent from year-end 2010 through 2015 and to
reach about $162 trillion. Wealth will increase fastest
in Asia-Pacific markets (excluding Japan and China),
at a compound annual rate of 11.4 percent. As a re-
Exhibit 2. Annual Growth of 9.1% from 2008 to 2010, Even Higher Growth Rate Than 2005 to 2007
Change in AuM, excluding currency effects,
2005–2010 ($trillions)1
CAGR2 (%)
2005-2007 2008-2010 2009-2010
Total
95.8
104.9
8.0
100
2.3
3.2
16.7
11.1
50
0
3.6 2.5
17.3
12.8
111.8
102.3
112.8
9.1
2.8
3.9
17.3
15.5
2.9
3.6
4.1
3.2
18.5
33.6
34.8
31.3
35.1
37.5
31.2
34.6
2005
2006
2007
2008
2009
31.3
Latin America
Middle East and Africa
33.1
Japan
Asia-Pacific (excluding Japan)
9.1
8.0
4.5
11.9
9.6
9.2
11.1
8.2
8.6
16.8
2.0
0.6
-0.2
21.7
18.3
20.9
17.1
37.1
5.3
5.9
4.8
38.2
9.5
10.7
10.2
16.8
16.6
14.9
8.0
121.8
3.5
35.4
2010
Europe
North America
CAGR (%)
1
AuM numbers for all years were converted from local currencies to U.S. dollars at year-end 2010 exchange rates (that is, at a constant rate of exchange).
2
CAGR is based on year-end numbers; all growth rate calculations are based on exact value.
sult, the region’s share of global wealth is expected
to increase from 18 percent in 2010 to 23 percent in
2015. In India and China, global wealth will increase
at a compound annual rate of 18 percent and 14 percent, respectively, from year-end 2010 through 2015.
China alone will account for 19 percent of the overall
increase in AuM, while India will account for about 8
percent. We anticipate growth rates in European and
North American markets to be slightly below the global average. (See Exhibit 3.)
Private Banking Faces Challenges
In 2011, BCG benchmarked the performance of more
than 130 financial institutions—either private banks
or wealth management units of large universal-banking groups—around the world. We uncovered regional variations in their asset growth, revenues, costs,
and profit margins. On the whole, the AuM growth
of private banks slowed from 12.8 percent in 2009
to 7.5 percent in 2010. The average return on assets
(ROA) declined, and the average cost-to-income ratio
dropped slightly. (See Exhibit 4.)
Onshore and offshore private banks will likely take different paths to improve performance, but their efforts
will revolve around the same set of core imperatives.
◊ Reduce complexity. Private banks can decrease their
costs by simplifying their business—for example, by
rationalizing client segments, discontinuing unprofitable client relationships, eliminating low-volume
products from their portfolio, and slimming the organization through delayering.
◊ Enhance pricing. The one-size-fits-all approach to
pricing has become outdated. Wealth managers
Exhibit 3. Wealth Will Continue to Grow Faster in Emerging Markets
Compound annual growth in AuM, 2010–2015E (%)1
18
16
Emerging markets
14
China
12
10
8
6
4
2
Mature markets
0
10
5
15
25
Compound annual growth in AuM, 2005–2010 (%)1
Asia-Pacific (excl. Japan & China)
Latin America
Middle East & Africa
Eastern Europe
North America
Western Europe
Japan
Note: Compound annual growth rates are calculated on the basis of year-end values. Not shown in the exhibit: New Zealand, Yemen, and Tunisia.
1
AuM numbers for all years were converted from local currencies to U.S. dollars at year-end 2010 exchange rates (that is, at a constant rate of exchange).
Exhibit 4. Industry Trends Are Affecting the Profitability of Private Banks
Industry trends
Conservative
γߵᄉᠪ̖ᦠᎵ
asset allocation
Low-margin
products
Demanding clients
and regulators
New business
models
ROA levels declining globally
◊ Clients are shiing assets to low-risk
products
◊ A significant amount of assets are still
“parked” in cash, gold, and government
bonds
◊ Clients are questioning the value of
active asset management; ETFs have
strong growth
◊ Price-sensitive clients expect added
value and transparency
◊ The government is increasing regulatory
pressure
◊ Online brokers and social media are
changing the investment process
◊ Clients expect transparency and lower
fees
Average ROA (basis points)
100
94
82
Potentially
less than 80
2010
2015E
75
50
25
0
2008
Source: BCG Wealth Manager Performance Database, 2011; BCG analysis.
need to revise their pricing models to more accurately
account for the cost of serving specific client segments.
◊ Focus on “sticky” products. Wealth managers should focus on selling products such as mutual funds and discretionary mandates, which tend to be longer-term
investments and therefore help increase net new assets (NNAs) over time.
◊ Improve frontline performance. Sales force effectiveness
can be improved at many private banks and wealthmanagement institutions. Relatively straightforward
initiatives, such as coaching relationship managers
(RMs) and improving the management of prospects
and referrals, can have a significant impact on productivity.
◊ Lower costs. Cost-to-income ratios can be improved by
streamlining middle- and back-office functions. Many
private banks and wealth-management institutions
have opportunities to automate processes or adjust
capacity, especially in operations and IT, to reflect
the current scope of the business.
10
Although global wealth posted another year of growth
and was $10 trillion higher than the pre-crisis year-end
peak, the pressure on wealth managers—at least in some
markets—has yet to subside. The positive signs should
not be misread as a return to normal. A set of disruptive
forces, including regulatory reforms, changes in client
behavior, and the possibility of another economic crisis,
are rewriting the rules of the industry. All wealth managers must be aware that a new era is coming.
Global Economic Uncertainty Forces Change
As we approach the end of 2011, we find that the relatively optimistic predictions made about the economy
at the start of the year have not materialized. A series
of events, such as Japan’s devastating earthquake and
tsunami and the swings in oil prices, have significantly
affected the world economy. In the U.S., factors such
as stagnant economic growth, high unemployment, a
sluggish real-estate market, and reduced government
spending have led to an increasingly uncertain economic outlook for growth.
In the euro zone, the financial and sovereign debt crises
have not been effectively resolved and, in fact, have
intensified. Various governments and the European
Central Bank have gone to great lengths to help faltering countries. However, the outlook is likely to remain
cloudy in the near term. The International Monetary
Fund (IMF) has downgraded its prediction for 2011
world GDP growth to 4 percent, and it expects economic growth to slow in both the U.S. and Europe.2
The uncertainty of economic forecasts has been reflected in the capital and wealth markets. Investment strategy and principles that have served investors well in the
past are coming under scrutiny. For example, traditionally, corporate bonds and European government bonds
with high credit ratings have been considered safe assets. But under the current economic circumstances,
it’s important to assess the risks of these assets.
Our survey indicates that most investors are becoming
more risk averse, and they tend to be more cautious
and conservative with investments. Though a significant reallocation of wealth has not taken place following the financial crisis, more investors have taken
steps to be in better control of their finances and their
future and to get a better understanding of the market.
As the increasingly complex macroeconomic environment continues to exert pressure on investments and
wealth, it will be necessary for investors to enhance
their understanding of wealth management. For this
reason, many investors are going to rely more on the
professional services of financial institutions.
2. World Economic Outlook 2011, IMF.
11
Private Banking in China
S
ince it first emerged in 2007, China’s privatebanking sector has experienced remarkable
growth, driven by the continued expansion of
the nation’s economy and the subsequent rise
of individual income and wealth.
The proprietary market-sizing model built by BCG and
the China Construction Bank shows that by the end of
2010, the total value of investable assets held by individuals in China reached RMB 54 trillion, which is 28.6
percent higher than the value of these assets at the end
of 2009 (RMB 42 trillion). It is set to reach RMB 62 trillion by the end of 2011. The total value of investable
assets held by HNW households (those with more than
RMB 6 million of investable assets)3 was RMB 23 trillion
at the end of 2010, accounting for more than 40 percent
of the total investable assets held by individuals in China
and growing at a compound annual growth rate of 44.8
percent, which is higher than that for all individuals, at a
rate of 24.0 percent.
Our analysis 4 also shows that the number of HNW
households in China has also been soaring. It increased
from 510,000 in 2008 to 1,030,000 at the end of 2010, at
a compound annual growth rate of 42 percent. The number of HNW households is set to reach 1.2 million by the
end of 2011. Households with RMB 6 million to RMB 50
million in investable assets continue to account for the
majority of all HNW households. The number of ultraHNW households (those with more than RMB 50 million
in investable assets) is growing at a faster rate than the
number of HNW households with less than RMB 50 million in investable assets. (See Exhibit 5.)
A breakdown of investable assets shows that household
savings represents the largest portion at 55 percent in
2010, down from 61 percent in 2008. Equity market investment is the fastest growing segment, driven primar-
12
ily by the recovery of China’s stock market since its lows
in 2008. Wealth management products offered by commercial banks, the second largest category after savings,
kept growing; the higher interest rates of these products
have been particularly appealing to investors in recent
years. Trust assets have also grown at a compound annual growth rate of 65 percent over the past three years.
(See Exhibit 6.)
Regionally speaking, the most number of HNW households can be found in Beijing, Shanghai, Guangdong,
Shenzhen, and other provinces along the eastern seaboard. A large number of HNW households are also in
Sichuan, Shanxi, Liaoning, Henan, Hebei, Shaanxi, Hubei, Hunan, and Fujian. There are 15 provinces in the
country that have more than 20,000 HNW households
each. Beijing, Shanghai, and Guangdong each have
more than 70,000 HNW households, and Zhejiang, Jiangsu, and Shandong each have more than 50,000 HNW
households. In Tibet, Qinghai, Gansu, and Ningxia, the
total number of HNW households is small. (See Exhibit
7.) The top ten provinces have close to 70 percent of
3. According to Sales and Administrative Measures of Financial Planning
Products by Commercial Banks issued by China Banking Regulatory Commission, and effective starting from January 1, 2012, private bank clients
refers to those commercial bank clients whose net financial asset exceeds
RMB 6 million.
4. In this report, all current and forecast results relating to China wealth
market sizing and geographic distribution are generated by BCG’s proprietary model, which relies on data from many sources, including market research data by CCB, BCG’s China individual income database, BCG’s global
wealth forecast model, as well as public information from National Statistics Bureau, China Securities Regulatory Commission and China Insurance
Regulatory Commission. Our top-down modeling starts from historic data
of national wealth accounts and geographic distribution by different regions, and calculates the current and future size of investable assets in line
with the actual location of assets, rather than the location of asset owner’s
residential registration. The model also uses Lorenz curve methodology to
project general wealth distribution across different wealth bands and specific wealth distribution within regions. Results from modeling have been
further refined based on cross-referencing multiple other data sources to
ensure accuracy and objectivity.
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Households (thousands)
$"(3
80
1,500
+14%
62
60
+32%
27
42
40
31
+42%
54
23
HNW
households
44.8
1,000
17.7
11
20
0
11
18
500
35
31
25
Others
24.0
2009
2010
0
2011E
2008
Source: BCG analysis.
AuM (2008- (2010per HH 2010) 2011)
28 >100m
46
50-100m
47.3
45.6
18.0
17.8
559
10-50m
43.1
17.5
578
6-10m
40.8
16.8
476
342
232
10.9
250
2008
24
39
17
28
17
20
CAGR (%)
+17%
495
359
2009
2010 2011 E
Exhibit 6. The Growth Rate of Asset Categories Varies: Less Savings, More Bank Wealth
Management Products
Absolute growth in
asset categories, 2008–2010
60
50
31
30
20
1
2
2
42
2
1 0
2
2
2
1 0
1
1
54
2
2 0
2
3
3
6
7
5
4
3
0
19
2008
Offshore assets
31
Bond market value
18
100
Currency in circulation 20
Fund net value
Commercial
pension insurance
18
Trust assets
28
65
Equity market
investments
74
Commercial banks’
wealth-management
products
46
80
4
4
Offshore assets
0
5
5
4
6
Household savings
23
2009
2010
24
4
4
0
5
5
4
0
4
4
3
5
6
13
10
10
13
55
55
2009
2010
10
60
Bond market value
Currency in circulation
Fund net value
Commercial
pension insurance
Trust assets
Equity market
investments
Commercial banks’
wealth-management
products
40
61
30
10
Percentage
CAGR (%)
RMB trillions
40
Change of relative weight
by asset category, 2008–2010
Household savings
20
0
2008
Note: Some figures do not add up to their totals due to rounding.
13
Exhibit 7. The Highest Concentration of High-Net-Worth Households Is Along
the East Coast
Heilongjiang
Jilin
Liaoning
Xinjiang
Inner Mongolia
Ningxia
Qinghai
Gansu
Tibet
High-net-worth
households
More than 70,000
50,000 to 70,000
30,000 to 50,000
20,000 to 30,000
10,000 to 20,000
Less than 10,000
Beijing
Tianjin
Hebei
Shanxi Shandong
Shaanxi
Henan
Hubei
Sichuan Chongqing
Guizhou
Yunnan
Hunan
Jiangsu
Anhui
Shanghai
Zhejiang
Jiangxi
Fujian
Guangxi Guangdong
Hainan
all HNW households in China; Beijing, Shanghai, and
Guangdong account for as much as 35 percent.
The highest concentration of HNW households is in Beijing, Shanghai, and Guangdong, with 192, 97, and 45 HNW
households, respectively, per 10,000 families. Anhui, Hunan, and Gansu have the lowest concentration with 12, 11,
and 8 HNW households, respectively, per 10,000 families.
In terms of growth rates, Gansu, Anhui, and Guizhou are
seeing the fastest growth in the number of HNW households, while Guangdong, Hunan, and Inner Mongolia are
experiencing the slowest. (See Exhibit 8.) In terms of asset
value, HNW households in Zhejiang, Fujian, and Beijing
are leading the nation, with RMB 29.8 million, RMB 28.9
million, and RMB 27.8 million, respectively. The average
investable assets of HNW households in Gansu, Anhui,
and Shaanxi have been about RMB 10 million each.
14
We also compared household wealth in China’s provinces, municipalities, and autonomous regions. (See Exhibit 8.) This exercise revealed the following insights:
◊ Beijing, Shanxi, and Hainan, in the upper right quadrant, have the highest growth rates. The density of
HNW households in Beijing is driven by the city’s
special political and economic status, whereas natural
resources are the reason for a large number of HNW
households in Shanxi and Hainan. These areas are of
strategic importance for private banks.
◊ Shanghai, Guangdong, Zhejiang, and Jiangsu provinces, in the lower right quadrant, have relatively high
numbers of HNW households but lower growth rates.
Despite slower growth than national average, in absolute terms, growth rates of HNW households in these
Exhibit 8. The Growth of High-Net-Worth Households Varies by Region
Growth in HNW
households (%)
100
90
Nationwide average:
26.6 HNW households per 10,000 households
Gansu
Anhui
80
Guizhou
Yunnan
70
Hubei
Shaanxi
Hainan
Guangxi
60
Ningxia
Tibet
Henan
50
Qinghai
Chongqing
Xinjiang
Liaoning
Jilin
Sichuan
Shandong
Fujian Hebei
Heilongjiang
Inner
Jiangsu
Mongolia
Shanxi
Shanghai
Jiangxi
40
30
Hunan
Zhejiang
Guangdong
Beijing
National
average:
42%
Tianjin
20
10
In billion
RMB
100
15
2000
20
25
30
Size of bubble represents the overall
investable-asset pool of HNW households
35
40
45 180
Number of HNW households
per 10,000 households
regions remain in the range of about 30 to 40 percent.
Individuals across these regions start to accumulate
wealth earlier than elsewhere, and their average
wealth per household is higher. Private banks could
target these regions for both the size of their wealth
and the potential for growth.
◊ Gansu, Anhui, and Guizhou provinces enjoy the fastest
growth rate in wealth accumulation; however, they have
the lowest number of HNW households per 10,000 families. These regions witnessed a recent surge in wealth
and could have vast potential in the long run.
◊ Fujian, Hebei, Shandong, and Inner Mongolia, among
others, have lower densities of HNW households and
slower growth rates. These provinces are often densely populated but less developed than many coastal regions. However, some of these provinces have sizable
wealth and significant potential. Private banks are ad-
vised to develop their own strategy to capture specific
opportunities in these markets.
The Drivers of Growth and Macro Trends
The growth of China’s private-banking sector is largely
the result of a favorable economic environment, which
can be seen in the boom in private enterprise, the
growth of key industries, and the improving capital markets. The current drive towards urbanization, economic
restructuring, and regulatory readjustment provides unprecedented opportunities for growth.
The Drivers of Wealth Creation and Growth. China’s
private enterprises currently are responsible for more
than 50 percent of China’s GDP. In the first three quarters of 2011, private enterprises, foreign joint ventures,
and collectively owned enterprises realized profits of
15
about RMB 1 trillion, RMB 2.1 trillion, and RMB 59.8
billion, respectively. This represents a year-over-year increase of 44.7 percent, 32.4 percent, and 33.6 percent,
respectively, exceeding the growth rate of state-owned
companies.5 This economic boom has produced an increasing number of wealthy entrepreneurs.
Private enterprises are responsible for approximately
one-third of China’s import and export volume. In the
first three quarters of 2011, the value of their imports
and exports reached $739 billion, almost a 40 percent
increase year-over-year. Given the global economic uncertainty, private enterprises, which are often smaller in
size and therefore more adaptable to changing markets,
have seen their 2011 trade volume continue to outpace
the volume of other businesses.6 Because most private
exporters engage in labor-intensive industries, such as
textiles, food, chemicals, construction materials, and machinery, their success in transforming their businesses
for sustainable growth should positively impact Chinese
entrepreneurs’ wealth accumulation.
In recent years, investment gains have become a major source of wealth for HNW individuals—specifically,
gains from investments in natural resources and real
estate. Despite current efforts to build a low-carbon
economy, traditional sources of energy such as oil and
coal continue to provide critical support for economic
growth. Although the government encourages lower
housing prices, real estate will continue to be a key industry supporting economic growth.
China’s improving capital markets have helped to diversify investment channels. In 2010, with 531 companies listed on China’s stock exchanges, the total amount
of new capital raised through its A-share market exceeded RMB 1 trillion. The 2010 total net profit of 638
listed companies was up 52.9 percent when compared
with 2009’s. The combined market capitalization of the
Shanghai and Shenzhen stock exchanges is set to exceed
RMB 26 trillion by the end of 2010, ranked second largest in the world.7 The continuous development of China’s stock markets does not only provide an important
financing channel for private enterprises, but also drives
the wealth creation of Chinese entrepreneurs.
Mutual funds and precious metals have also helped to
diversify investment channels. By November 2011, the
16
number of mutual fund companies stood at 69, with close
to 900 funds having more than RMB 2 trillion in assets.8
The number of privately placed funds has exceeded 2,200,
and their assets are approximately RMB 170 billion.9 Precious-metal investments, including gold products, have also
become popular. In the first three quarters of 2011, China’s
demand for gold investments exceeded 200 tons—more
than the amount for all of 2010—as investors’ appetite for
gold bars and gold coins continued to surge.10
Macroeconomic Trends. As individual wealth continues to flow to China’s urban centers, the number of cities with affluent and middle-class populations (annual
household disposal income above RMB 75,000) of more
than 250,000 will reach 279 by 2020. Fifty-three of these
cities will have more than 1 million affluent and middleclass citizens, and the wealthiest households in these cities should be targets for private banks. (See Exhibit 9.)
China’s economic restructuring efforts will continue to
push for the transformation of industries, including private enterprise. In line with its 12th Five-Year Plan for
National Economic and Social Development, the Chinese government will strive to develop high-value-added
industries, increase investments in technology, and encourage innovation. (See Exhibit 10.) Wealth creation
will be less dependent on traditional industries, which
rely on natural resources and labor, and more focused
on information technology, management, and capital.
Boosting domestic consumer demand will continue to be
a key strategic focus. In the first quarter of 2011, retail
sales of consumer goods reached RMB 13.1 trillion, a 17
percent increase when compared with the corresponding
period in 2010.11 The consumer sector is one of the many
key areas with significant growth prospects. To a large
extent, a core competency for future entrepreneurs will
be an ability to understand the direction of the Chinese
economy, the opportunities provided by its structural
transformation, and how to capitalize on these opportunities to grow their business and generate wealth.
5. National Statistics Bureau.
6. China General Administration of Customs.
7. China Securities Regulatory Commission.
8. China Securities Regulatory Commission.
9. Shanghai Suntime Information Technology.
10. The World Gold Council.
11. China Statistics Bureau.
Exhibit 9. Rapid Surge of Affluent and Middle-Class Households in Cities Across China
2010
2020
3M+ 5
3M+ 16
1M-3M
17
1M-3M
500k-1M
15
500k-1M
48
250k-500k
0
27
59
195
250k-500k
50
100
150
200
Urban mass affluent and
middle class population
Cities
3M+
0
1M to 3M
50
500k to 1M
100
150
250k to 500k
200 Cities
<250k
Source: BCG 2011 China Income Forecast Model.
Exhibit 10. The Chinese Government Is Shiing Its Investment Focus
China allocated RMB 4 trillion to
economic stimulus in 2008
Seven major strategic and emerging industries
are outlined in China’s 12th Five-Year Plan
Construction of railway, highway, and power
grid (RMB 1.8 trillion)
Renewable energy
Post disaster reconstruction (RMB 1 trillion)
Energy conservation and environmental
protection
Rural livelihoods and infrastructure
(RMB 370 billion)
New material
Government-subsidized housing program
(RMB 280 billion)
Biopharming
Ecology and environment
(RMB 350 billion)
New energy vehicles
Economic restructuring (RMB 160 billion)
High-end equipment manufacturing
Health care, culture, and education
(RMB 40 billion)
Next-generation information technology
Sources: China’s 12th Five-Year Plan for National Economic and Social Development; BCG analysis.
17
China’s recent economic policies are also having their affect on private banking. As the People’s Bank of China
continues to tighten—including raising reserve ratios
for deposit-taking financial institutions and increasing
one-year benchmark interest rates—small and medium
enterprises are feeling the pinch. Many are finding it increasingly difficult to obtain bank loans and other forms
of financing. Because private business owners often have
corporate and personal bank accounts at the same institution, many will continue to ask for services (such as corporate financing) or integrated solutions that have not been
strictly within the domain of private banking. This is an
opportunity for private banks to meet the needs of their
clients and grow their wealth management business.
Infrastructure and Legal Limitations
The improvements in China’s financial markets, which
now include equities, bonds, currencies, foreign exchange, commodity futures, insurance, and precious
metals, only highlight the country’s rudimentary financial infrastructure. The financial derivatives market,
especially financial futures and options, is still developing. In contrast to bank financing, the debt and corporate bond markets are subpar. Transactions in money
markets still focus on short-term liquidity management.
There is a significant gap between the financial products
private banks offer and the demands of sophisticated investors.
In addition to infrastructure limitations, there are also
legal ones, which are apparent when China’s laws and
regulations are compared with those of Western countries, where private banking originated. The restrictions
that have the greatest affect on the wealth market are
those governing commercial banking, foreign exchange,
the inheritance tax, and trusts.
According to China’s law on commercial banks, commercial bank shall not undertake the businesses of trust
and securities, nor shall they invest in real property (for
purposes other than their own use) or nonbank financial
institutions and enterprises. The regulations for separate
operations prevent commercial banks from undertaking
nonbanking-related activities. Private banks of commercial banks should develop themselves as a platform to
provide comprehensive services through working with
18
other players like, insurers, securities firms, and trust
companies. Chinese private banks must continue to pursue business model innovations for better services and
products.
Under the currency-control system, outbound RMB investment and inbound foreign-currency investment are
subject to government control. However, the Chinese
government continues to encourage domestic companies to set up businesses abroad, and since the end of
2010, there have been some signs that laws pertaining
to this may be relaxed further (for example, domestic
enterprises have been allowed to retain the revenue
generated from product exports in offshore accounts).
Today, capital account controls remain and Chinese private banks face challenges to provide global investment
services, which is a key requirement for private banking.
Given the increasing uncertainty in the global economy,
China might find it difficult to further relax its control
over foreign exchange in the near term. Chinese private
banks can develop offshore business platform to fulfill
clients’ overseas investment needs.
There is no inheritance tax in China despite significant discussion on this topic since the 1980s. Thus clients’ demand
for inheritance-related services (e.g., offshore accounts,
individual trusts) remain limited. If China was to levy
an inheritance tax in the future, complications in wealth
management for HNW individuals will rise and there will
be key roles for private banks to play in this arena.
Promoting More Comprehensive Trust
Products and Plans
China’s trust law, effective since 2001, defines “trust” as
“the act by which the trustor entrusts certain property
rights to the trustee. And the trustee manages or disposes of the property rights under the trustee’s own name
in accordance with the benefit of the beneficiary or for
specific purposes. ” The interpretation of the law mostly
focuses on the independence of trust property, the separation of ownership with beneficiary rights, the limited
nature of liability, and trust continuity.
In China, trust companies filled some important gaps in
capital markets, offering highly flexible multi asset class
investment and financing services. In recent years, trust
companies have started to transform themselves into
professional wealth management institutions, and serve
as an important supplement to today’s financial system.
China’s trust business model is different from those in
other countries. In China, trust products are wealth management products. They offer higher yields than savings
accounts and mutual funds, and they have little to do
with estate planning and wealth protection.
Acknowledging the legality of private property is one of
the prerequisites for the development of a more comprehensive trust business. Because of a general misunderstanding of the concept of trust and the lack of clarity in
laws and regulations, trust plans for individuals or families have not become part of the offerings and services
of private banks.
China has successfully built the basics of legal protection for trust and property rights over the years, but significant gaps remain in terms of the enforcement of trust
plans, including trust registration, taxation, and regulation. China’s private-banking sector thus faces the challenge of leveraging the use of trust for property protection, inheritance, and high-end investment.
Private banking in China requires innovation in products, services, and business models; promotion of trust
services requires educating the public about such services and building institutional capabilities. HNW individuals are looking for trust plans as possible solutions
to the mounting wealth-management issues they are
facing, especially child education, wealth transfer, and
tax management. Despite the difficulty of designing trust
plans constructed around real estate, equity, and debt
ownership, the market remains wide open for trust plans
constructed around financial instruments. The potential
for private banks in these areas could be substantial.
The Competitive Landscape for Wealth
Management
A multipolar wealth-management market is emerging in
China. By October 2011, there were ten domestic commercial banks—the Big Five state-owned banks and five
major joint-stock banks—all offering private-banking
services. The number of foreign banks allowed to offer
private-banking services has increased to 16, with many
trying to use their global brands to distinguish themselves. Meanwhile, more than 110 medium-sized and
small commercial banks have introduced wealth management services that target mid-level clients, many of
whom will eventually migrate to private banking’s upper echelon.
Nonbank institutions are also joining the competition.
Securities firms, life insurance companies, third-party
independent wealth managers, trust companies, and
mutual fund companies are all playing in the same field,
and competition has intensified. Nonbank players, securities firms in particular, are no longer satisfied with
the traditional commission-based business model, and
actively developing more comprehensive service offerings in wealth management and investment advisory to
their clients.
To succeed, financial institutions must differentiate
themselves by their business model and market position.
Brokers, insurers, trust companies, and mutual fund
companies are in better positions to create broader categories of products. Many are now offering value-added
and tailor-made financial advisory services and are investing more in product development. For commercial
banks, building on an existing customer base and emphasizing the role of RMs have become as important
as leveraging their cross-functional teams, including investment-banking and corporate-banking departments.
Some of the leading third-party financial advisory firms,
though mostly niche players because of their small size,
are in the process of establishing product expertise in
areas such as private equity and trust, hoping to secure
future growth opportunities.
Despite the increasing number of players in private
banking, the industry as a whole is still in the process
of learning and development, it is difficult to identify
current market leaders. Competition will intensify as
wealth management institutions continue to study customer needs, adjust strategic priorities, and build internal capabilities.
19
China’s High-Net-Worth
Individuals
D
espite China’s short history of individual
wealth creation, its HNW individuals
stand at the very top of a relatively steep
wealth pyramid, and they are exerting
significant influence over their peers
and society as a whole.
BCG and the Wealth Management Department of China
Construction Bank conducted an in-depth survey of 2,102
HNW individuals. In addition, we interviewed a large
number of private-bank executives and Relationship
Managers (RMs). Our intent was to obtain a better understanding of this unique group of wealthy individuals.
The Characteristics of HNW Individuals
To understand the characteristics of HNW individuals,
we analyzed their demographics as well as their views of
wealth, approaches to wealth management and appetite
for risk, institutional selection process, product needs
and preferences, and service expectations.
Demographics. Our survey shows that close to 60 percent of China’s HNW individuals are private business
owners, and about half describe their core competency
for creating wealth are management and marketing
skills and the ability to leverage natural resources.
Our survey also shows that 57 percent of the respondents
are “entrepreneurs.” Sixteen percent are “senior executives
of state-owned enterprises” and “management professionals,” and 10 percent are “professional investors, doctors, and
lawyers.” HNW individuals are on average 45 years old, and
those 40 to 49 years old make up the largest age group, accounting for 43 percent. Those with college degrees are the
largest group, accounting for 60 percent of HNW individuals.
20
When asked about the source of their wealth, 59 percent claimed to have built their wealth by running their
own company, 14 percent said they realized gains from
the real estate market, 12 percent cited investments in
capital markets, 10 percent noted an accumulation of
salary and benefits, and 5 percent pointed to a family inheritance. When asked to identify their core competency
for amassing wealth, many cited their ability to leverage natural resources (24 percent), while others thought
it was their management and marketing skills (24 percent). Sixteen percent noted their reliance on the use of
information, 15 percent credited their access to capital,
and 14 percent cited their use of high technology. (See
Exhibit 11.)
View of Wealth. Chinese culture and social norms have
shaped the popular view towards wealth. Some individuals have acquired their wealth through unexpected, nontraditional channels and have flaunted it. Therefore,
there has some public skepticism of the legitimacy of
individual wealth and the means by which they acquire it.
China’s HNW individuals are deeply concerned about
preserving their wealth. Of the individuals surveyed, 56
percent believe being wealthy means “leading a free and
safe lifestyle,” while 48 percent think it means having a
“superior quality of life.” When asked how they plan to
use their wealth, 46 percent want to “guarantee immediate family’s security.” (See Exhibit 12.) Although only 8
percent of HNW individuals believe that “giving back to
society” is important, those who are better educated or
have more assets tend to pay more attention to social
responsibilities. 15 to 20 percent of respondents in the
higher educated segments and UHNW segments highlighted “giving back to society” as a core means of using
their wealth.
Exhibit 11. Most Individuals Have Created Wealth by Operating a Business
What is your core competency for
creating wealth?
What is your source of wealth?
Interviewees (%)
100
Interviewees (%)
100
24
75
75
59
24
100
50
50
14
25
0
5
15
25
12
100
16
14
10
Family
Salary Investment Investment Profits
inheritance and
gains from gains from from
benefits financial real estate running a
markets
business
Total
0
1
5
Artistic
talent
Ownership
Information Management
of high
advantage and marketing
technology
skills
Access
Access to
Ability to
Total
to cheap
capital
leverage
labor
natural resources
Source: China Construction Bank and BCG’s 2011 survey of 2,102 high-net-worth individuals from 27 provinces, municipalities, and autonomous regions in China.
Note: Some figures do not add up to 100% due to rounding.
Exhibit 12. Safety and Preserving Assets Are Most Important to High-Net-Worth Individuals
What does being wealthy mean to you?
Leading a free
and safe lifestyle
Maintain and increase
asset value
56
Having a superior
quality of life
48
Helping the next
generation
How do you plan to use your wealth?
56
Guarantee immediate
family’s security
46
26
Help entire family
Having a distinguished
social status
41
23
Giving back to society
Reinvest
15
Exerting influence over
public affairs
Benefit others and
society (including charity)
8
0
31
20
40
60
Interviewees (%)
8
0
20
40
60
Interviewees (%)
Source: China Construction Bank and BCG’s 2011 survey of 2,102 high-net-worth individuals from 27 provinces, municipalities, and autonomous
regions in China.
21
Wealth Management and Risk Appetite. Overall, the
rich feel that “planning for their children’s future” is more
important than “making further improvements in their
careers” and “seeking high-quality lives.” They attach
great importance to the education of their children.
HNW individuals appear to be aware of the risks associated with investing, and few claim they would like to
take high risks. In practice, their investment behavior is
moderately risky. Of the individuals surveyed, 61 percent believe that they can tolerate risk to some extent,
30 percent describe themselves as risk averse, and only
9 percent are willing to accept bigger risks for higher returns. (See Exhibit 13.)
HNW individuals tend to have only a rudimentary understanding of private-banking services: about half have
a conceptual knowledge of private banks or only have
heard of private banks. For these individuals, customized and priority banking services are the most important functions a private bank can provide. In fact, these
services are more important than investment products
and advisory services, and far more important than nonfinancial services.
Institutional Selection Process. The most important
considerations for HNW individuals when choosing a
private bank are the “capabilities and professionalism
of the relationship managers,” followed by “privacy and
credibility of services.” The “layout and décor of private banks and branches” are the last thing they care
about. HNW individuals are looking for RMs who possess “financial expertise and product knowledge,” have
the “ability to communicate,” and are considerate. (See
Exhibit 14.)
On average, private-banking clients tend to have relationships with 2.5 private banks and their level of customer loyalty is relatively low. When asked whether
they would transfer their money from their current private accounts to another bank offering products with
higher returns but with the same level of risk, 24 percent
of those interviewed said yes, while 29 percent were not
sure. However, 35 percent stated they would not transfer their money because they had a longer-term association with an RM.
Product Needs and Preferences. HNW individuals (53
percent) have demonstrated an increasing interest
Exhibit 13. High-Net-Worth Individuals Tend to Tolerate Moderate Risk Levels
Risk appetite
Average asset composition
Interviewees (%)
Assets (%)
100
100
30
35
23
75
75
12
High-risk
assets
27
Moderate-risk
assets
60
Low-risk
assets
32
100
50
50
25
61
25
25
0
8
High-risk
appetite
40
45
0
Moderaterisk appetite
Low-risk
appetite
Total
High-risk
appetite
Moderaterisk appetite
Low-risk
appetite
regions in China.
22
Exhibit 14. The Capabilities of the Relationship Managers Are the Top Concern When
Choosing Financial Institutions
Factors considered when selecting
a private bank
Capabilities and professionalism
of relationship managers
Factors considered when selecting
relationship managers
Financial expertise
and product knowledge
57
Privacy and credibility of services
41
39
Product offering
Rapport between
relationship manager and customer
34
Brand
68
Ability to communicate
41
Trustworthiness
39
30
Other integrated financial services
17
Diversity and usefulness
of nonfinancial value-added services
12
Easy-to-access online banking
8
Branch coverage
Capability to provide overseas
investment products and WM service
Layout and décor of
private banks and branches
6
32
Warm and considerate
services
32
Unbiased product
recommendations
4
27
Other business
suggestions
2
0
Personal quality and
common language
30
60
Interviewees (%)
13
0
40
80
Interviewees (%)
regions in China.
in trust products; the higher returns of these products
make them appealing. The minimum investment threshold of selected trust products made them exclusive to
the HNW clients. Despite government efforts to reign in
real estate speculation, interest in real estate investment
remains high (36 percent). Investments in works of art,
antiques, wine, and store-front retail properties are the
latest trends, followed by private equity and venture capital. (See Exhibit 15.)
HNW individuals are not satisfied with their portfolio
returns. In addition, they would like to see their private
bank diversify its product offerings and launch products
more frequently. With respect to investment terms,
products with a term of less than one year are the most
popular: 50 percent of HNW individuals prefer these
products. Generally, HNW individuals tend to avoid
products with a term of more than three years. With regards to minimum investment requirements, HNW individuals tend to be satisfied with existing terms, with
27 percent preferring a higher threshold and 28 percent
favoring a lower one.
Service Expectations. HNW individuals place high importance on the exclusive access to some designated service
areas in branches. Two-thirds believe “private meeting
rooms” and “dedicated service counters” are essential.
Most care little about a bank’s décor, the availability of expensive tea and drinks, entertainment facilities, access to the
Internet, and other perks, despite many Chinese banks having invested substantially in these areas.
Regarding financial services, close to half are interested
in comprehensive wealth planning, followed by portfolio management and customized products and services.
The most popular nonfinancial services are “premium
health-care services,” with 71 percent expressing an interest. Many others favor high-end “premium travel advisory services” and “child-education advisory services.”
Relatively few people, only 12 percent, seek “high-end
entertainment,” such as golf.
HNW individuals generally feel that there is little difference in the quality of nonfinancial services offered by
23
Exhibit 15. High Demand for Fixed Income and Trust Products, and also Priority
Transactional Services
Demand for private-banking products
Fixed income
Demand for other financial products
Priority transactional services
Diamond or platinum credit cards and
private-banking lending
Consumer loans
Discounted payment settlement,
transfer, and remittance services
Deposit
57
Trust
53
Savings and cash
management
Real estate-related
investments
49
36
Stock offering
12
11
17
13
Financial derivatives
9
Overseas investment
2
28
Private-banking insurance products
20
Insurance
30
29
Corporate loans
Family and corporate
cash management
Premium debit cards
Precious metal investments
E-banking, 400 VIP line,
and premium online banking
RMB overseas offering
34
Physical asset
investment
Private equity and
venture capital
33
32
25
22
17
17
16
Issuance of asset certificates
6
Investment banking services
Trust, legal, and tax advisory services
0
30
60
4
4
0
20
Interviewees (%)
40
Interviewees (%)
Exhibit 16. Private-Banking Customers Look for Improved Services and Tailor-Made
Products
Branch look and feel
Private
conference room
67
Dedicated
trading desk
66
Non-financial services
Premium health-care
services
Premium travel advisory
services
Child education advisory
services
High-end retirement
services
Salon event
14
Luxury decoration
9
Internet access
Premium beverages
and food 8
Entertainment
(for example, TV)
4
0
Interviewees (%)
100
42
24
23
Investment information
16
Legal advice
16
Investment immigration
advisory services
Macroeconomic advice
15
Taxation advice
Corporate management
advisory services
High-end entertainment
Artwork collection and
investment advice
Private aircra, yacht, and
luxury property purchase
advisory services
40
80
Interviewees (%)
71
44
Non-financial services
improvement
38
75
50
34
15
14
25
26
12
12
11
3
0
100
2
0
No improveNeed to
Total
ment
improve existing
needed
services
Need to
Too many
customize homogeneous
40
80
services
offerings; need
Interviewees (%)
new offerings
24
various financial institutions. Thirty-eight percent of interviewees believe private banks “need new offerings” in nonfinancial services, and 34 percent believe that banks “need to
improve the existing services.” (See Exhibit 16.) This indicates
that high-end clients are usually not easily swayed by competing but similar offerings from banks, airlines, telecommunication carriers, and others that offer these services.
The Key Drivers of Behavior and Preferences
To better understand the drivers behind the investment
behavior and preferences of HNW individuals, we analyzed their age, education, industry, occupation, source
of wealth, core competency, risk appetite, the value of
their assets, and the region they live in. The results show
that four of these nine factors are key.12
Education Level. Of all the key drivers of behavior
and preferences, education level is the most influential.
HNW individuals who are better educated tend to rely
more on information, technology, and capital to generate wealth and less on natural resources and cheap labor. Typically, the higher the education level, the less
likely they are to be entrepreneurs.
◊ View of Wealth. HNW individuals who have pursued
a higher education are more inclined to believe that
being wealthy means being more socially responsible.
For example, 26.7 percent of HNW individuals with
doctoral degrees have this belief, compared with 14.7
percent of HNW individuals on average. Similarly, although on average 48.1 percent of HNW individuals
think that being wealthy means leading a “superior
quality of life,” only 23.3 percent of those with doctoral degrees agree.
◊ Financial Institution Selection. Better educated HNW individuals tend to establish relationships with foreign banks.
Of those with doctoral degrees, 16.7 percent are clients
of foreign banks, compared with 8.3 percent on average.
In addition, the services RMs offer and their ability to establish a rapport with clients are relatively less important
to well-educated HNW individuals than RMs’ ability to
make unbiased investment-product recommendations.
◊ Risk Appetite. Education levels are proportional to risk
appetite: the higher their education level, the more
risk HNW individuals are willing to take. (See Exhibit
17.)
◊ Product Needs and Preferences. The higher their education
level, the less interest HNW individuals have in cash
and fixed-income products and real estate investments,
and the more interest they have in complex products
such as private-equity investments and derivatives. In
addition, the higher the education level, the longer the
preferred investment term and lower expected return
from investment products. (See Exhibit 17.)
◊ Service Expectations. Well-educated HNW individuals
also tend to demonstrate more interest in high-end entertainment as well as in art collections. They usually
welcome industry updates and information on macroeconomic policies from wealth management institutions. Moreover, these HNW individuals would prefer
to have customized nonfinancial services. Of the HNW
individuals with doctoral degrees, 40 percent have such
preferences, compared with 25.1 percent on average.
◊ Satisfaction. HNW individuals who are better educated
tend to be less satisfied with private-banking services.
◊ Loyalty. Well-educated HNW individuals tend to place
greater importance on solving a problem than maintaining a relationship. Generally, they will move their
money to another institution if they aren’t satisfied with
a product despite their rapport with their bank’s RMs.
Occupation and Source of Wealth. The source of
wealth—which is often related to an individual’s occupation—refers to the means by which HNW individuals initially acquired their wealth, such as accumulating wages
and benefits, receiving an inheritance, benefiting from
investments in the financial and real estate markets, and
profiting from business operations. A HNW individual’s
occupation and source of wealth affects their investment
behavior and preferences. (See Exhibit 18.)
◊ Investment professionals look for private banks that offer online banking and nonfinancial services, however,
they have little interest in cash and fixed-income prod-
12. “Key factors” mentioned here are relative concepts and they refer to
relative, not absolute, characteristics of specific segment of HNW individuals
when compared with other segments.
25
Exhibit 17. Risk Appetite and Product Preference Vary by Customers of Different
Educational Background
Product preference
Risk appetite
Fixed-income offerings
Interviewees (%)
100
26
75
44
17
17
Prefer
inflation-proof
products
44
Interviewees (%)
100
50
63
63
56
0
Middle school High school/ College/
technical
undergraand below
secondary school duate
47
33
Graduate
PhD
35
33
Graduate
PhD
12
13
Graduate
PhD
PE/VC
54
50
68
Willing to
take some
risk
52
25
29
0
6
5
8
20
17
13
9
0
technical undergraand below
66
51
Interviewees (%)
40
16
Middle High school/ College/ Graduate
school technical undergraand
secondary duate
below
school
Willing to
take higher
risk
Derivatives
Interviewees (%)
20
10
PhD
9
7
6
0
technical
undergraand below
regions in China.
ucts. Professional investors also are more interested
in cross-border services but show the least interest in
customized products or services.
◊ Private entrepreneurs care most about sharing a common language with their RMs when choosing a private
bank. Additionally, they tend to have a more conservative risk appetite.
◊ Senior executives of state-owned enterprises are particularly fond of cash products. In general, they care most
about a superior quality of life. Like entrepreneurs,
they tend to have a conservative risk appetite.
◊ Wage and salary accumulators are inclined to manage
their wealth on their own. They attach great importance to freedom and safety when it comes to the
management of wealth.
26
The Value of Assets. We grouped HNW individuals by
the amount of investable assets they have: RMB 6 million to RMB 50 million, RMB 50 million to RMB 100 million, RMB 100 million to RMB 300 million, and RMB 300
million and more, or ultra-HNW individuals. We found
that the amount of wealth they have accumulated influences their investment behavior and preferences.
◊ View of Wealth. HNW individuals with significant assets generally are not concerned about “leading a
free and safe lifestyle” or “leaving their fortunes for
the benefit of future generations.” Rather, they place
more weight on social status and exerting influence
over public affairs. With respect to the purpose of
wealth management, these individuals have a sense
of social responsibility and would like to improve
public welfare; they are less concerned about their
own retirement.
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25
25
25
20
20
20
15
15
15
21
10
5
7
0
8
10
10
12
12
Private
Professional
Other
entrepremanagers professionals
neurs
Executives
Investment Freelancers
of state-owned professionals
enterprises
10
14
5
0
10
8
15
13
5
19
16
11
15
10
10
6
Private
Professional
Other
entrepremanagers
professionals
neurs
Executives
enterprises
0
Private
Professional
Other
entrepremanagers professionals
neurs
Executives
enterprises
regions in China.
◊ Risk Appetite. HNW individuals with significant assets
tend to be less conservative. Few of the richest individuals, those with more than RMB 300 million in investable assets, are willing take on more risk.
◊ Institutional Selection. Richer HNW individuals are more
likely to depend on themselves, rather than private
banks, to manage their wealth. They put greater emphasis on the professionalism of RMs, the convenience
of online banking, and the capability of private banks
to offer a comprehensive financial-products package.
Fifty-six percent of HNW individuals manage their
wealth on their own or rely on their families; they
place much weight on the richness and practicality of
nonfinancial services.
◊ Product Needs and Preferences. HNW individuals with significant assets look for product diversity and are willing
to lower their expectations for investment returns. In addition, they are interested in enterprise loans, high-end
credit cards, and exclusive line of credit extensions.
◊ Services. HNW individuals with significant assets tend
to be interested in family wealth trusts. In the category of nonfinancial services, they prefer assistance
with high-end travel and their children’s education.
Individuals with more than RMB 100 million in assets
show less interest in expensive entertainment, while
those with more than RMB 300 million in assets have
a strong desire to freely customize their nonfinancial
services. (See Exhibit 19.)
Regions. The HNW individuals surveyed are from
27 Chinese provinces, municipalities, and autonomous regions, which we classified into six groups:
tier 1 cities (including Beijing, Shanghai, Guangzhou,
and Shenzhen), the southeast coast (including Shandong, Jiangsu, Zhejiang, and Fujian), the central
region (including Shanxi, Shaanxi, and Hubei), the
northeast (including Heilongjiang, Jilin, and Liaoning), the southwest (Sichuan, Yunnan, Guizhou, and
Guangxi), and the northwest (including Xinjiang,
Qinghai, Ningxia, and Gansu). There are significant
27
Exhibit 19. The Services Preferred by High-Net-Worth Individuals Also Depend on the
Value of Their Assets
Which services do you prefer?
Interviewees (%)
Are you expecting changes to
nonfinancial services?
Family trust services
Interviewees (%)
100
30
20
40
10
11
0
6 million to
50 million
15
21
18
50 million to 100 million to
100 million
300 million
40
39
Expecting new
programs
33
Expecting
improvements
to existing
services
33
Expecting more
tailor-made
solutions
75
More than
300 million
50
Child education advisory services
Interviewees (%)
33
31
33
38
60
25
40
20
0
38
6 million to
50 million
41
48
50 million to 100 million to
100 million
300 million
28
45
More than
300 million
0
25
22
Not looking for
changes
2
2
2
1
6 million to 50 million to 100 million to More than
50 million 100 million
300 million 300 million
Source: China Construction Bank and BCG’s 2011 survey of 2,102 high-net-worth individuals from 27 provinces, municipalities and autonomous
regions in China.
differences between the HNW individuals in these
groups. (See Exhibit 20.)13
◊ Tier 1 Cities. HNW individuals in tier 1 cities prefer
taking higher risks. They have established the closest
relationships with private banks, and they like the convenience of online banking and the diversity of products. They are fond of equity-linked, trust, and private
equity products. They believe that there are no major
differences among nonfinancial services offerings.
◊ Southeast Coast. HNW individuals in this region have
much in common with tier 1 cities, but they are more
concerned about the professional services and professional skills of RMs and their rapport with them. When
asked about product preferences, they placed more
emphasis on immigration services and high-end retirement planning and support.
28
◊ Southwest Region. HNW individuals in this region tend
to believe that being wealthy means leading a free,
safe, and high-quality life. (See Exhibit 21.) They attach less importance to raising their social status than
individuals in other regions, and they pay less attention to influencing the discourse about public affairs.
Contrary to the idea of securing worry-free lives for
their children for the long term, these individuals tend
to spend their wealth on themselves and on their own
families now.
◊ Central and Northeast Regions. HNW individuals in
these two regions have relatively conservative risk appetites: they prefer inflation-proof products and would
allocate the smallest portions of their wealth to me13. Characterstics of HNW individuals from northwestern region are not discussed in this report because of shortage of data.
Exhibit 20. Attitudes Towards Wealth and Risk Tolerance Vary by Region
What is your risk appetite?
What does being wealthy mean?
A safe and free life
Interviewees (%)
Interviewees (%)
100
80
60
40
20
0
54
55
60
Southeast
coast
Central
Northeast
56
Tier-1 city
71
Southwest
Distinguished social status
61
64
80
35
68
Willing to
take some risk
56
6
6
8
Willing to take
a higher risk
20
20
0
Prefer
inflation-proof
products
38
59
30
10
24
60
40
Interviewees (%)
29
27
19
Tier-1 city
26
Southeast
coast
27
Central
24
Northeast
17
Southwest
0
10
9
Tier-1 city Southeast Central Northeast
coast
Southwest
regions in China.
dium- and high-risk products. They also tend to be more
loyal, believing that return on investment is the most
important issue to consider and long-term relationships
of trust with RMs matter. HNW individuals in the central region are fond of cash and fixed-income products,
with equity-linked products being their least favorite.
Second-Generation Wealth Inheritors
One hundred and one of the 2,102 HNW individuals in
the survey attributed the source of their current wealth
to an inheritance from their families. This special group
is generally described as “second-generation wealth” or
the “rich second generation” in Chinese.
The rich second generation is a very special group in Chinese society. Our survey shows that in this group, less of
them continue to be private entrepreneurs, and many
have become professional investors. They were raised
in well-off surroundings, have a strong sense of financial
safety, and prefer to lead a good life. As private-banking
clients, these individuals are far more willing to accept
the services of private banks, and their views on private
banking are often mixed with international perspectives.
Specifically, these individuals like to take on bigger risks
and prefer more complicated investment products. Usually better educated than their parents, these individuals also expect more from private banks and could potentially be difficult clients to manage and satisfy. (See
Exhibit 21.)
Our survey reveals that 49.5 percent of HNW individuals are prepared to hand over their wealth to the next
generation or have already done so. This indicates that
wealth inheritance will become increasingly important
in the future.
As HNW individuals age, they will face the issue of
wealth transfer as well as the continuation of their own
businesses. These situations present opportunities for
private banks. Some second generations will be happy
29
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100
25
26
30
Prefer inflation-proof
products
75
20
15
25
50
53
10
61
25
Willing to take
some risk
14
23
17
14
5
22
8
0
HNWIs inherited
family wealth
Willing to take a
higher risk
All HNWIs
0
Salary and
benefits
Family Investment Profit from Investment
wealth
gains
running a
gains
from financial business from real
markets
estate
Source: China Construction Bank and BCG’s 2011 survey of 2,102 high-net-worth individuals from 27 provinces, municipalities and autonomous
regions in China.
to take on the business responsibilities from their parents, while others will not. The introduction of professional managers at private companies will become
common. With the population of “second-generation
wealth” on the rise, it will be of strategic importance for
30
private banks to understand their needs and requirements—such as child education, wealth planning, asset
preservation, business continuity, estate planning, and
retirement—and provide them with appropriate and innovative product and services.
Offshore Wealth Management
O
ffshore wealth management services are
offered to nonresidents of a country and
are usually not subject to the resident
country regulations. Although these services are often used to hedge risks associated with the host countries, more commonly they are
used as a means to improve asset allocation and to gain
access to more attractive opportunities, investment returns and liquidity.
As the global economy and financial markets become
more integrated, offshore wealth management has become an important tool for China’s HNW individuals.
For Chinese entrepreneurs whose businesses are increasingly interacting in a global marketplace, offshore
wealth management services help them to guard against
interest-rate and exchange-rate volatility and to enhance
their investment returns.
Private banks in China could be more proactive in addressing the offshore needs of HNW individuals and
entrepreneurs, helping them to properly allocate their
assets and wealth.
The Global Offshore Wealth Market
Global offshore wealth increased to $7.8 trillion in 2010
(See Exhibit 22.), up from $7.5 trillion in 2009. The
increase was driven by a combination of market performance and capital inflows, primarily from emerging
markets. At the same time, however, the proportion of
wealth held offshore slipped to 6.4 percent, down from
6.6 percent in 2009. The decline was the result of strong
asset growth in countries such as China, where offshore
wealth only accounts for a small portion; as well as strict-
er regulations in the U.S. and Europe, which prompted
individuals to move their wealth back onshore, thus lowering the net increase in offshore assets.
Generally, offshore private banking faces higher business volatility than onshore private banking. Nevertheless, there are always genuine demands from HNW
individuals who want to move money offshore. Tax
considerations have certainly influenced the flow of offshore assets, particularly for individuals in the U.S. and
Europe. And safety, stability and access to investment
products, more than tax considerations, attract individuals in emerging markets.
Chinese HNW individuals are increasingly attracted by
the onshore market, which has created competitive investment products. Despite banks have developed taxsystem optimization solutions, but unlike their counterparts in US and Europe, most HNW individuals in China
are less concerned about taxes and more concerned
about safety and stability.
Offshore private banking may become more complicated because of two changes on the global horizon.
The first involves a rebalancing of offshore demand
across regions, since regulatory pressure is expected to
reduce the growth of offshore assets from the U.S. and
Europe.
The second change involves increased competition
among offshore centers, which are becoming more specialized. In an effort to maintain or increase their share
of global assets—and their associated revenue pools—
many centers are focusing on providing services that
influence a wealthy individual’s choice of an offshore
center. For example, many HNW individuals prefer off-
31
Exhibit 22. Sixty Percent of Global Offshore Assets Booked in Europe, Including
Switzerland, Luxembourg and UK
Wealth held in offshore centers, 2010 ($trillions)
Origin of
offshore
wealth
Destination of offshore wealth
Switzerland
North
America
Europe
U.K., Channel
Islands,
and Dublin
0.06
Luxembourg
0.23
0.74
1.04
Asia-Pacific
0.25
Latin
America
0.24
CaribbeanIslands
and Panama
–
0.36
0.54
0.36
0.08
Middle East
and Africa
0.49
0.52
Total
2.1
1.9
Hong Kong
and Singapore
0.05
0.14
0.15
0.70
0.013
0.18
–
0.6
0.06
0.9
0.03
0.7
0.27
3.0
0.17
0.12
1.8
0.02
0.04
0.7
Regional
total
0.12
0.38
0.02
0.9
Other2
0.003
0.09
0.06
0.04
United
States1
0.26
0.7
0.9
1.4
7.8
Note: Discrepancies in totals reflect rounding.
1
Predominantly Miami and New York.
2
Includes Dubai and Monaco, among others.
shore centers that have no cultural or language barriers
and that are close to their country of residence. (See Exhibit 23.) Offshore centers are also competing in providing more specialized services in areas like discretionary
mandates, hedge funds, trade finance, or philanthropy.
Offshore Demand in China
In China, the demand for offshore wealth management
from private-banking clients is still at its early stage. The
demand originates mainly from tier 1 cities and coastal
regions, especially from the Guangdong province. Clients
in these regions are far more willing to accept offshore
wealth management than those in other regions.
Our survey also shows that the richer the clients, the
more they demand offshore products. Of clients with
more than RMB 50 million in assets, 22 percent have
already used offshore products and services. In addi-
32
tion, clients who have gains from real estate investments
have an interest in overseas investment. On average, of
HNW households with offshore products, overseas assets make up 16 percent of their total assets. When we
look at households in tier 1 cities and coastal regions,
the percentage is much higher. And nearly 60 percent
of HNW households in these regions claim that they will
increase their overseas assets. (See Exhibit 24.) This indicates that offering offshore wealth management will
become more and more important for private banks. In
some regions, overseas investment products and wealth
management services have become the most important
criteria for choosing a private bank.
Hong Kong: An Offshore Market for Private Banks
In Asia, Hong Kong and Singapore are often regarded as
two of the most important offshore centers for private
banking. These regions have a number of strengths as
Exhibit 23. Proximity to Offshore Financial Centers Is the Most Important Selection
Criterion for Offshore Investors
Origins of offshore wealth in select offshore centers
(2010, % of total offshore center AuM)
Switzerland
Luxembourg
Germany
Italy
Saudi Arabia
France
United Kingdom
0%
Germany
Belgium
France
Italy
United Kingdom
10%
20%
30%
United Kingdom1
United States
Saudi Arabia
Germany
Taiwan
0%
42%
10%
20%
30%
United States
Brazil
Taiwan
Venezuela
Mexico
20%
30%
Dubai
Saudi Arabia
Turkey
Iran
Kuwait
Russia
36%
0%
67%
10% 20% 30%
45%
Caribbean Islands and Panama
Taiwan
China
Indonesia
Japan
United States
10%
0%
58%
Hong Kong and Singapore
0%
United Kingdom, Channel Islands,
and Dublin
10% 20% 30%
0%
57%
10%
20%
30%
66%
Assets of the top five sources of offshore wealth as a proportion of total offshore assets held at a given center
1
Assets flowing from the U.K. into the Channel Islands and Dublin.
Exhibit 24. Most HNWIs Using Offshore Services Are in the Tier 1 Cities and Coastal
RegionsMost Plan to Increase Exposure
Regional distribution of HNWIs using offshore services
Future expectations for using
offshore services
HNWIs who have used offshore servies as % of total number
of HNWIs who have used offshore services
Future needs for offshore services
by wealth banks
%
21
100
80
7
8
60
9
11
4
4
3
100
Interviewees (%)
100
0
80
47
60
40
20
38
6
16
48
34
35
36
0
67
33
0
8 3 6
0
7
0
0
0 0
50100>300mn
100mn 300mn
20
20
To sharply increase offshore exposure
To gradually increase offshore exposure
To maintain offshore exposure at current level
To gradually decrease offshore exposure
0
Beijing
Shanghai
Shenzhen
Dalian
Xiamen
Total
To sharply decrease offshore exposure
Guangzhou
Zhejiang
Fujian
Sichuan
Others
Offshore investment not relevant in
foreseeable future
regions in China.
Note: Some figures do not add up to 100% due to rounding.
40
13
9
6 0
6-50mn
33
offshore centers, including deep pools of financial services expertise; well-developed legal, accounting, and
regulatory systems; large numbers of multilingual professionals; financial stability; and robust equity and foreign-exchange markets.
While Singapore is actively developing itself into a private banking hub, Hong Kong has its unique advantage
as an offshore renminbi center. In addition, Hong Kong’s
strengths of low taxes, talent pools, and being adjacent
to Mainland China provide a solid foundation for its
bright prospects.
China’s 12th Five-Year Plan supports Hong Kong to become an offshore renminbi center and an international
asset-management center. The gradual formation of
Hong Kong’s offshore renminbi market has provided a
good basis for leading commercial banks in China to extend their reach and conduct offshore businesses.
In the first half of 2011, offshore renminbi deposits in Hong
Kong totaled RMB 553.6 billion with a net increase of RMB
235 billion; at the end of 2009, offshore renminbi deposits
totaled only RMB 63 billion. Offshore renminbi deposits are
expected to increase to RMB 1 trillion by the end of 2011.
A renminbi-denominated bond market is also starting to
take shape in Hong Kong. From January 1, 2007, through
March 31, 2011, Hong Kong-based and Mainland Chinabased companies, together with multinational enterprises, jointly launched 40 renminbi-denominated bonds in
Hong Kong with a total value of RMB 82.8 billion.
By the end of 2011, 14 banks in Mainland China that
are listed on the Chinese stock exchanges will have established 19 subsidiaries and branches in Hong Kong.
Since 2000, acquisitions totaling HKD 60 billion have
been completed by Chinese banks. For example, China
Construction Bank has acquired branches of Bank of
America in Hong Kong, CITIC Group has acquired CITIC
International Financial Holdings, and China Merchants
Bank has acquired Wing Lung Bank. So far, these banks
have made great strides building an offshore platform
for not only commercial banking but also wealth management in Hong Kong—and perhaps even worldwide
in the future.
Although Hong Kong is an attractive offshore wealthmanagement center, Chinese commercial banks still
34
face many challenges in expanding their businesses
in the region. Many large foreign banks have been attracted to Hong Kong’s well-developed private-banking
and wealth-management markets and have established
a presence. In doing so, they have brought advanced
management experience in global private banking and
a sound product portfolio to Hong Kong. With their wellknown international brands and established presence in
Hong Kong, foreign banks have been the leading players
in the Hong Kong offshore private banking market.
By contrast, the primary strengths of China’s commercial
banks are their huge customer bases and deep understanding of Chinese HNW individuals, some of whom already
have part of their assets in Hong Kong. However, their
products, services, and brands have yet to be well established internationally, including in Hong Kong. Therefore,
in the short run, it will be challenging for Chinese banks to
rapidly grow their offshore wealth management clients.
Additionally, the required start-up costs, which could be
significant, will keep margins low for private-banking operations in Hong Kong. Given these factors, choosing the
right strategy to build an offshore platform in Hong Kong
is the key to success for the Chinese private banks.
Offshore Private-Banking Business Models
There are a number of approaches a bank can take to build
an offshore private-banking center. (See Exhibit 25.)
◊ Build. A bank can build a wholly owned offshore center with the same brand used in China and staff it with
the appropriate teams. Part of the middle- and backoffice operations may be outsourced.
◊ Acquire. A bank can acquire all the assets of a relatively small private bank or wealth management institution, including the brand, RMs, product specialists,
and back-office management.
◊ Joint venture. Another approach is to establish a new
entity and create a new brand with a foreign partner.
Shares should be jointly held by both parties, and both
parties will dispatch experienced management and
sales teams to run the new organization. The business
will rely more on its foreign partner for back-office administration.
Exhibit 25. Several Options for Offshore Market Entry
Offshore option
Own entry
Middle & back
office
Brand
◊ Client staff (RM and
experts)
◊ Wide assortment of
products
◊ Proprietary and
outsourced IT
systems
◊ Client standalone
brand
◊ Acquisition of small
private bank or asset
manager with focus
on HNW clients
◊ Acquired RMs and experts
Acquire
a bank
◊ Use acquisition’s
solution
◊ Acquired brand or
client captive brand
Form a joint
venture
◊ New private bank or
asset-manager entity
(jointly controlled)
◊ Fully staffed (with
partner support)
◊ Full staff of joint RMs
and experts
◊ Wide assortment of
products
◊ Leveraging partner’s ◊ New brand
structure for
research, back
office, and reporting
◊ No new structure
◊ Revenue sharing
contract for assets
referred to partner
◊ Partner’s RMs and
offering
◊ Partner’s solution
Set up
a center
3
Entry using
partners
Advisory/offering
◊ Asset manager
◊ Fully staffed (RMs,
research and
administrative staff)
1
2
Setup
4
Partner with a
bank
◊ Partner’s brand
◊ Referral. Rather than establish a new offshore institution, a bank can refer clients to a foreign partner and
get rewarded according to the contract signed. The
bank can completely rely on its partner to provide
middle- and back-office solutions.
Which approach should be chosen depends on the strategic positioning of the bank in the offshore market and
the accurate evaluation of the bank and the market environment.
Just as selecting the right business model is key, so too is
knowing how to win clients, offer products, and obtain
middle- and back-office support.
How to Win Clients. The most important asset Chinese
commercial banks have is their customer base. Therefore, they must determine how to effectively leverage
this resource to succeed in private banking. Most RMs,
however, know little about the offshore wealth-management needs of clients, and they are not provided with an
incentive to generate referrals for offshore services.
To win clients, private-banking departments should partner with other departments, such as investment banking
and small and medium-sized business departments, and
set up an internal referral system to facilitate the promotion of offshore products and services by RMs. RMs
should be encouraged to embrace the system, and internal rules on the referral program and incentive structure should be fair and transparent. Most importantly,
the referral mechanism has to be fully supported by top
management.
How to Offer Products. The lack of offshore products is
a key obstacle for Chinese commercial banks to expand
their offshore business. Since China’s financial market
is still in an earlier stage of development than global financial centers’, like Hong Kong’s, many Chinese banks
have not yet equipped with capabilities in offering many
offshore products. Given that, a common approach is to
set up a relatively small client-relationship team in an
offshore center that focuses on offering a limited number of the most attractive products. Commercial banks’
private-banking units are therefore encouraged to de-
35
velop only the core products and outsource others from
third-parties in order to improve the bank’s performance
and overall profitability.
Financial institutions in Hong Kong have an abundance
of private-banking products. Standard private-banking
products, including mutual funds, index funds, structured products, options, hedge funds, and private-equity
funds, can be easily offered through third-party partnerships. New wealth-management institutions may need
to develop products in areas such as savings, foreign
currency, equities, bonds, and credit products, as well
as products and services that can be tailored to clients’
needs. The decision to white label, or develop, products
depends on how a bank enters the market and how it
intends to position its own businesses overall.
shore wealth center to manage large assets and a variety
of securities trades, and to provide offshore financing,
settlement, and fund custody. Depending upon a bank’s
commitment or investment, it may choose to set up a
platform or share one.
For Chinese banks going abroad, taking a solid first step
in building these platforms is key to future growth. The
platforms can be put into place in Hong Kong and, after
a period of time, duplicated on the mainland to strengthen their private-banking businesses at home.
Chinese banks have numerous alternatives to expand
into offshore wealth management. Therefore, the offshore business should be on its way to becoming a key
part of the growth strategy for China’s private-banking
industry.
How to Obtain Middle-Office and Back-Office Support. An advanced booking center is critical for an off-
36
Strategic Implications for
Private Banking
I
ncreasing competition and client sophistication
are contributing to the on-going evolution of
private banking in China. Wealth managers will
need to find the proper balance between size
and quality in order to sustain the growth of a
business that is becoming an increasingly important part
of China’s banking industry.
survey findings in earlier chapters, we believe that banks
must implement the following five recommendations to
secure a place in China’s private-banking industry.
Large state-owned banks, primarily Industrial and Commercial Bank of China, the Agricultural Bank of China,
Bank of China, China Construction Bank, and the Bank
of Communications, which are known as the Big Five,
enjoy a systemic advantage in private banking, with
broader geographic coverage and a significant customer
base built over many years. Their corporate, retail, and
investment banking capabilities can be effectively leveraged to support wealth management initiatives. Many
of these top banks are also actively expanding their
footprints abroad, starting mostly in Hong Kong. Then
they are using the experience they gained overseas to
improve their private-banking business back home.
The geographic expansion of wealth and the rapid
changes in the financial needs of HNW individuals pose
challenges to the private-banking business. Chinese commercial banks will need to invest more in customer analysis and segmentation in order to refine their marketing,
product development, and service initiatives.
Joint stock banks are newer, smaller, and more agile
by comparison. They are committed to providing highquality services and products, and are actively pursuing
new clients. As a result, they are presenting a formidable
challenge to the Big Five. More recently, independent
financial advisors have also joined the game. They are
positioning themselves as niche players, and often as
product aggregators, and are using innovative marketing
to attract like-minded clients. Last but not least are foreign banks, which were among the first to target affluent
clients in China. They are localizing their global brands
and services as the core of their competitive advantage.
It is important to recognize that forward-looking strategic
and tactical plans will be required to win in China’s privatebanking business. In line with our industry forecast and
Improve Target Marketing by Refining
Customer Segmentation
These initiatives will include tailoring products to clients
with varying wealth assets. They also will require localizing products, such as creating more conservative product
offerings for mid-western clients and products carrying
higher risk profiles for clients in tier 1 and major coastal
cities. If possible, the assignment of RMs should also
take into account the needs of different customer groups
to ensure these managers can provide the types and levels of service required. Although private banking is only
now emerging in many heartland provinces, it has great
growth potential. Banks will need to study these markets
more closely in order to prepare for further expansion,
which may come more quickly than predicted.
Increase Share of Wallet by Identifying
Additional Customer Demands
Our survey shows that a single bank’s wallet share of a
typical Chinese customer is around 20 percent, and only
half of the investable assets of a typical HNW individual are being managed by commercial banks. In other
words, a customer’s assets can far exceed the amount on
37
deposit in a bank. A customer with RMB 10 million on
deposit may have as much as RMB 50 million in investable assets. Banks should approach these clients—the
low-hanging fruit—as the first step to expanding their
business.
Chinese wealth overseas, starting in Hong Kong. In doing
so, they will need to be innovative in their value proposition, product development, target marketing, customer
service, and platform buildup, among other things.
In order to do this, RMs will need to spend more time
with their clients. Although private banking RMs are
usually better educated and more informed than other
sales people at banks, many are not ready to converse
with their clients as peers either because they are not
comfortable with corporate and investment banking
topics, or because they lack the sales and marketing sophistication needed. This gap can be bridged only with
additional investment in training and hiring. Additionally, the number of clients assigned to RMs should be
reduced to enable them to build meaningful and trusting
personal relationships with their clients.
Build Core Competency Through Integration
and Alignment of Business Units
Prepare for Tomorrow by Understanding the
Most Sophisticated Clients Today
Our survey indicates that customer preference and behavior are largely shaped by educational background. As
Chinese HNW individuals place a lot of focus on the education of their children, in the future, the typical privatebanking customer will not only have a better education
but also more sophisticated investment preferences and
more demanding needs. Private banks should research
this customer segment with higher education and more
sophisticated needs to understand what future privatebanking clients in China will be seeking in terms of
risk tolerance and products and services. By combining
the results of this research with the developed market
trendst, banks can prepare their business for the future.
Banks across China have very similar business models,
and there are no clear winners or losers at this time.
Therefore, this is the time for commercial banks to build
up their internal capabilities in terms of speed to market, risk management, operational efficiency, resource
allocation, talent development, and incentive design,
among others.
The success of product and service innovation often
depends on close interaction among the various business units that relate to private banking. These business
units include small and medium-sized business banking, corporate banking, investment banking, cards, and
third-party product and service providers. Channels of
communication among these individual setups should
be open. A commercial bank, despite its diversified businesses offerings, will need to be one single solutions provider for a private-banking customer.
Position the Bank as Primary Manager of
Offshore Wealth for Chinese Nationals
As Chinese businesses engage increasingly with the global marketplace, it will be of strategic importance for Chinese banks to be more proactive in managing offshore
wealth for Chinese HNW individuals. Chinese commercial banks will need to take advantage of their capital,
infrastructure and platforms to market more aggressively, positioning themselves as the preferred caretakers of
38
The Mission for Chinese
Private Banks
C
hinese commercial banks remain mostly
state-owned and they are often viewed
as commercial setups with critical social
responsibilities. As private banks grow,
they should assume a more prominent
social role. They do not only have the important responsibilities in helping Chinese HNW households to manage
their wealth, but also shaping their perspectives on how
to make an impact on the society, and leading the industry to develop in the right direction.
Be Sustainable and Credible
A key mission for Chinese private banks is to build a
reputation of sustainability and credibility in the market.
This is especially critical for this relatively young business. A private bank which takes a long-term perspective in developing its business, rather than a short-term
focus on quarterly profit and loss, will help to strengthen
customer loyalty, which in turn will help it weather the
economic ups and downs. Strategies for private banks in
China should not be random choices—there needs to be
continuity in both product development, and sales and
relationship management. At the same time, private
banks should treat compliance together with the protection of customer rights and interests as a serious and top
priority responsibility.
Have Care and Respect and Be Socially Responsible
As many Chinese HNW individuals have only accumulated their wealth in the past one to two decades, many
are still forming their perspectives on the meaning of
wealth. Private banks are in a better position than oth-
ers to help shape the views and behaviors of the wealthy
population. There are opportunities for HNW individuals to leverage their wealth and influence to raise public
awareness on social responsibilities. If these individuals
were given an effective platform by their institutional
wealth managers, they could not only give back to the
society but also become a showcase to increase public
awareness for care and respect at the time when China
needs more individuals who can set an example.
Build a Successful Business to Pay Back the
Community
Business owners interact with private banks on both corporate and business affairs, as company and individual
bank accounts for many entrepreneurs are often not
kept separate. Chinese private bankers, therefore, have
the unique opportunity to not only manage personal
wealth but also to serve their commercial needs. To fulfill this role, Chinese private bankers will need to understand their clients’ businesses and industries. At the end,
a successful business which brings significant economic
value to its stakeholders, including employee, shareholders, local economy, and its suppliers and buyers, is an
entrepreneur’s ultimate pay back to the community, and
private banks can help them succeed.
Invest, Don’t Speculate
Chinese wealthiest populations have yet to establish a
high level of loyalty and trust with private banks. More
often than not, many HNW individuals tend to be relatively short-term or opportunistic investors—the opposite of private banks’ traditional mission. Some often look for quick investment returns and have little
39
patience for asset accumulation. Therefore, there is an
important role for private bankers to play. Through developing a trusted relationship with clients, wealth managers should encourage diversified portfolio structuring,
controlled trading activities, and a global perspective
combined with a local understanding, which are all key
to sustaining a stronger private-banking business.
In conclusion, Chinese private banks need to understand
not only their clients, but also the families as well as the
businesses of these clients in order to assist with the long
term development of their enterprises and personal development prospects. At the same time, these private
banks should increase the size of their assets under management and improve the efficiency of their operations
in order to contribute to value contribution of private
banking in the entire commercial banking business.
40
Private banking business, in playing its multiple roles as
not only the wealth manager of their clients, but also
protector of customer rights and interests as well as business partner for their clients, will need to leverage systemic, institutional and resource allocation advantages,
and play important roles in shaping customer’s view on
wealth so that the use of individual wealth, in the end,
will benefit social and economic development of our society.
This is the most important historic mission of China’s
private banking industry, and we expect the industry
continue to seek the opportunity to lead, and we look
forward to many proud accomplishments in the future.
Note to the Reader
About the Authors
Frankie Leung is a partner and
managing director in the Hong Kong
office of The Boston Consulting
Group and leads the Financial Institutions practice in Greater China.
Nan Wang is a principal in the Beijing office of The Boston Consulting
Group.
Chunqi Wei is the general manager
of Wealth Management and Private
Banking at China Construction
Bank.
Yufang Mei is the deputy general
manager of Wealth Management
and Private Banking at China Construction Bank.
Acknowledgments
This report is based on a close collaboration between China Construction
Bank (CCB) and The Boston Consulting Group (BCG). Several leaders in
CCB and BCG’s Financial Institutions
practice made important contributions to this year’s Wealth Markets in
China report.
We would like to thank Xiaohuang
Zhu, vice president of CCB, and Tjun
Tang, partner & managing director
and the head of BCG’s Financial Institutions practice in Asia Pacific for
their support and guidance. Furthermore, we are grateful for the invaluable advice and insights we received
from various CCB and BCG leaders:
Guiya Wang, investment and finance
director of CCB, Jun Liu, president
of Shenzhen branch, Yiqiang Wu, assistant president of Shanghai branch,
Guo Li, president of Chongqing
branch, and Richard Huang and Michael Guo, BCG partners & managing
directors. The authors also thank our
clients and staff for their help with indepth interviews and questionnaire
surveys. We extend further thanks to
MillwardBrown ACSR that supported
this study.
We acknowledge CCB team and BCG
consulting team that led the effort to
produce this year’s report: Lan Yan,
Yi Yang, Linlin Peng, Greg Zhu, Minji
Xu, Yijia Li, Jie Zhang, Hong Yu and
Lianyou Cui. We would also like to
thank the members of the editorial
and production teams, including
Yueming Lun, Qiang Wang, Xiaojia
Tang, Trudy Neuhaus, Li Gu, Yu Liang, Hui Zhan and Fan Zhou.
For Further Contact
As always, we welcome your feedback and invite you to discuss the
findings with us.
The Boston Consulting Group
Frankie Leung
Partner and Managing Director
BCG Hong Kong
+852 2506 2111
Nan Wang
Principal
BCG Beijing
+86 10 8527 9000
CCB Private Banking
Lan Yan
Deputy Senior Manager
Wealth Management and Private
Banking
+86 10 6759 6394
Yufang Mei
Deputy General Manager
Wealth Management and Private
Banking
+86 10 6759 6386
41
42
For a complete list of CCB publications and information about how to obtain copies, please visit our website at www.ccb.com.
For a complete list of BCG publications and information about how to obtain copies, please visit our website at www.bcg.com/publications.
To receive future publications in electronic form about this topic or others, please visit our subscription website at www.bcg.com/subscribe.
12/11

Wealth Markets in China: Seeking the Opportunity to Lead

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