HSBC, Citi's renewed China plans reignite global vs local contest for wealth biz

Despite an opening up of China's wealth management industry, estimated to be worth at least US$17 trillion, foreign managers continue to have a problem: entrenched local players with much wider distribution networks and loyal customers oftentimes lured by promises of unrealistically high returns.

The question of how best to tap into China's growing wealth has been brought to the fore again, after HSBC Holdings PLC and Citigroup Inc. recently unveiled plans to beef up their wealth management operations in the world's second-largest economy, as they seek stronger fee-income growth in Asia-Pacific to mitigate the slowdown in the U.S. and Europe.

Partnering with a Chinese bank, wealth manager or online fintech platform remains an attractive, perhaps realistic, strategy for foreign wealth managers, even though the Chinese government has allowed them to establish wholly owned onshore operations since April 2020 as part of the nation's financial-market opening, experts say.

"In general, foreign wealth managers still struggle to achieve meaningful market share onshore," said Cliff Sheng, partner, Hong Kong office at McKinsey & Co. "These firms also do not have the same distribution power as local banks and third-party internet platforms."

"Pragmatic local investors look for more competitive onshore product offerings and special investment opportunities, which most global wealth managers cannot offer currently as their global products are still subject to a certain level of capital constraint," he said.

Major global financial institutions including HSBC and Citi have formed onshore joint ventures with Chinese partners for years, from securities broking and asset management to insurance underwriting. However, their market share and revenue from China are still very small compared with domestic players. Competition has further intensified as homegrown online fintech platforms entered the market in recent years.

Scale is key

China's onshore wealth management industry is ripe with growth opportunities due to high savings rates, strong national economic growth prospects, under-funded state pension pots for an aging population, as well as an increase of formalized channels of outbound investments for mainland residents and companies.

Profitability for wealth management businesses rely on the "meaningful, sustainable scale of both number of customers and assets under management," according to McKinsey's Sheng. At the moment, local banks have the upper hand as they have built a substantial customer base as a result of their extensive physical networks and banking account services, especially among affluent customers.

Foreign financial institutions in China still have very small footprint compared with their local counterparts. Industrial & Commercial Bank of China Ltd., China's biggest bank, has 16,164 branches, and China Construction Bank Corp., the second-biggest bank, has 14,112, S&P Global Market Intelligence data show. In contrast, HSBC has only 186 physical branches in mainland China, while Citi has 23.

Foreign wealth managers may also find it hard to compete on investment returns, said Shirley Ze Yu, a political economist and a fellow at Harvard Kennedy School's Ash Center.

Trusts, a type of shadow banking product, are a popular wealth management tool for Chinese investors. They often offer attractive returns by leaning on risky investments or lending to the real estate sector. Structured deposits, which combine traditional deposits with high-return investment products, were once a very popular wealth management product until the central bank last year reportedly asked banks to set the guaranteed rates at no more than 150% of term deposits of the same maturity.

Avoid head-on competition

But the game isn't all doom and gloom for foreign wealth managers.

Michael Wu, senior equity analyst at Morningstar, said that foreign banks might have an opportunity if they focus on the middle class. According to think tank Macro Polo, China's middle class is set to dominate the country by 2025.

"Because of the international network that foreign banks have, they're able to provide different types of service, both on the business side, which ties into the wealth side as well," Wu said. "That's where the focus should be, rather than [to] compete head on with the Chinese banks."

Wu added that regional banks such as Singapore's DBS Group Holdings Ltd. focus on the flow between Southeast Asia and Greater China, so a similar cross-border strategy would be able to help global banks such as HSBC gain some market share.

"HSBC has been in China for a period of time now," he said. "They'll be doing quite well going forward, including in wealth management and even in SME banking or on the cross-border needs. They have the network to cross-sell from the commercial and corporate side into the wealth management side."

Room to grow

While the pool of investible wealth in China is already considered to be attractive enough for foreign players to grab even a small slice of the pie, experts believe that the industry is still in the early stages of its development in terms of product range and market structure.

"Chinese financial market is still in lack of the depth and breadth of financial products, including structured products, options, [and] derivatives," said Harvard's Yu. "There are many opportunities to broaden the wealth management opportunities through deepening and broadening the financial market."

Ben Ma, Partner, Shanghai office at McKinsey added that improvements in market structure and the opening of the market will "increasingly even out the playing field for global managers", even though at the moment, regulations still limit global investment and commitment to China.

"This, however, will gradually change as China continues to grant more entity licenses and business licenses, allowing foreign managers in China to operate and bring their global capabilities onshore," Ma said.