China Merchants Bank readies itself for emergence of rivals

Five years after launching its private banking service to high net worth individuals, China Merchants Bank is the leading wealth manager in the country, handling relationships from 30 private banking centres and client assets of more than $40bn (€31bn). Following the group’s massive shift from corporate to retail banking, CMB is on the road to its second strategic transformation, which aims to optimise the bank structure while minimising risks and lowering costs.

But that does not mean innovation will take a back seat at the institution, based in the Southern city of Shenzen, but fast developing a footprint in economically developed regions of the Yangtze River Delta, Pearl River Delta and Bohai Rim.

Over green tea at CMB’s private banking centre in Beijing, the man ultimately responsible for all client relationships, Ding Wei, shares his thoughts about the banks’s plans to consolidate its position in the provision of wealth services and the new strategies currently being devised.

Q Where is the wealth being created in China and how are you servicing the needs of your private banking clients?

A Most of our clients’ wealth – around 60 per cent – has been created by entrepreneurial activities over the last 30 years. We are selecting particular regions to concentrate on first. The coastal areas are the most economically attractive, with the richest people. We want to focus on where the rich people are living.

But different areas have different needs, cultural profiles and risk appetites. In Beijing, our clients want to be risk-free. They are steady people who need everything under their control. But in Shenzen and Guangzhou, they like taking risks and want higher yields. These are immigration cities, their people are from all over the country and adventure is in their blood. Before Mr Deng [Xiaoping] decided to open things up more than 30 years ago, Shenzen was just a small village.

But all high net worth customers have their own needs and issues; we cannot satisfy everyone. Also, we can only work within government policies and do the best we can.

Q What type of investment products and asset allocation strategies are you hoping to develop as the private banking sector is gradually liberalised?

A We ask our client advisers to conduct a systematically determined asset allocation, according to a client’s needs. The bottom line is that the portfolio must perform much better than inflation, as measured by the consumer price index (CPI). We also have hedge funds to help minimise the risks.

Beating inflation is a requirement for all our client advisers. But unfortunately, due to government policies, we don’t have a lot of products on offer and are severely constrained by this.

But we are also educating our customers and as they become more mature, they are not just pursuing high returns. Their aim is first to preserve their assets and then to help the value appreciate.

Q Bearing in mind this limited choice of investments, do you direct clients to invest in real estate?

A We do what our clients want; we don’t emphasise real estate to them. Instead of buying houses abroad, we recommend focusing on real estate trusts and diversifying into commercial property.

However, some customers are asking us to help them acquire residential properties, especially in London and the US and we can help them to explore this opportunity.

With the Chinese economy growing faster than Western counterparts, people with money are becoming more willing to explore opportunities to send their kids abroad for their education.

But people are also looking to investments of passion, such as paintings and antiques. They want to buy assets which can preserve or appreciate in value, which is why they are also interested in gold and jade. When the price drops sharply, many people take the opportunity to purchase a lot more gold.

Q Hong Kong has always been a strong financial centre in this part of the world. Which are the most popular regional booking centres for your private banking clients?

A People have been moving their assets overseas, which is why we have developed a platform at our recently acquired Hong Kong subsidiary Wing Lung Bank, to cater for their diversification needs. We also explore opportunities to work with foreign institutions.

Some clients may be looking at a wider choice of financial centres, but China’s government is moving in the right direction and that is very healthy. They are making it easier for people to do business in Hong Kong and put their assets there. But people are also looking to invest assets in Singapore, the US and other countries.

Q Who are your key competitors in Chinese private banking and what are their strengths?

A Everybody is making their move to enter the wealth management market. The state-owned banks are used to making money on interest-rate spreads. But now that the market for investments is opening up, it is more important for them to focus on this for revenue, as we are talking about fees rather than spreads.

We think ICBC will be the key competitor we will be looking at. They are such a large bank and number one in terms of assets. But in private banking, we can do better than them. Among the Chinese banks, not only are we the best at private banking, but also the most profitable.

Foreign institutions will also be our competitors, but we have advantages over them. We know the Chinese culture, which they do not understand and have to fit into. It is not going to be easy for them.

Q How are you adapting the way you communicate with private clients in a fast-changing world?

A Younger Chinese people are keen to use electronic devices. Fortunately, we have been very consistent in developing our offer of e-banking. Our payment systems are also designed for younger people using the internet and we are looking to satisfy their needs. Compared to foreign institutions, our e-banking service is doing very well. By the end of the year, we will have as many people doing their banking through the internet as we have coming to the counter.

But we also need to look at who controls the money flows. In reality, even though men own the money, a lot of the decisions come from their spouses. So a lot of our communication goes through the female partner. The parties and salons we are holding are designed specifically for ladies, focusing on luxury goods and jewellery.    

China’s big push into wealth management

Private banking is fast becoming the “next big thing” for Chinese institutions, says finance professor Ning Zhu, who recently set up the Beijing campus for the Shanghai Advanced Institute of Finance (SAIF) and also hosts a regular programme on investing for state-owned channel CCTV.

The largest, state-owned banks – Bank of China, China Construction Bank, ICBC, Agricultural Bank of China and Bank of Communications – have not previously been desperate to make a push into wealth management, as their existing retail and corporate business has been growing at between 20 to 30 per cent each year, advises Mr Zhu.

However, since banks are now being expected by the government to grow without expanding their capital reserves, wealth management is looking increasingly attractive to them as a source of revenue, even though they have no experience of it as yet.

The shareholder-owned banks, led by CMB and closely followed by Pudong Development Bank, have had a much stronger incentive to enter private banking at an earlier stage, says Mr Zhu.

“CMB is the first of the Chinese banks to really push into wealth management to a clientele of HNWs, with an emphasis on personal banking. They don’t have a corporate network, but have been flexible enough to integrate private banking, securities and asset management into a financial services offering which attracts investors.”

While around 3 per cent of the market is occupied by foreign banks such as HSBC, Bank of East Asia, Citi, Standard Chartered and DBS, they will struggle to maintain their share due to limitations on taking deposits. But they also have particular advantages, believes Mr Zhu. “Foreign banks can access overseas markets, attract wealth and they are definitely able to manage the assets.”