Wang Feng is the kind of successful tech entrepreneur whom private wealth bankers from Goldman Sachs to Credit Suisse would love to land as a client. He’s chairman of Beijing-based Linekong Interactive Group, a Chinese mobile and online game developer valued at about $194 million—and Wang, 46, owns a 20 percent stake.
What’s more, five years ago, Wang co-founded Geek Founders Capital, which has since raised 300 million yuan ($45.7 million) in three financing rounds and invested in more than 60 companies. Last year he and a partner, Zhang Xiaowei, a former Huawei Technologies executive, raised $60 million from venture capitalists to launch a home-console game company to take on the likes of Microsoft’s Xbox and Sony’s PlayStation in China. “Fast technological innovations have created waves of opportunities,” says Wang, whose rectangular black glasses, slim build, and red sweater seem inspired by the hipsters of Silicon Valley. “As long as you’re smart, you’re going to make money.”
And if you’re going to make money, you need to do something with it. The rise of Wang and others who’ve built fortunes in technology reflect how China’s great wealth machine is changing. This expanding group of high-net-worth individuals (HNWIs)—people who have investable assets of more than $1 million excluding property—presents both an opportunity and a monumental challenge for global banks such as Morgan Stanley, UBS, and Credit Suisse that are seeking to make inroads into the country’s deep wealth-management market.
True, China’s economic slowdown and stock market turmoil this year have spooked global investors. And there are signs the white-hot venture capital enthusiasm for Chinese tech startups is cooling over valuation worries. However, private bankers with a longer time horizon still eye the country with boundless optimism.
Since paramount leader Deng Xiaoping kicked off the country’s modernization drive in the late-1970s, China has evolved into a $10 trillion-plus economy with vast sums of household wealth. In 2014 the country’s HNWI population grew by 17.5 percent, to 890,000; the elite group’s combined wealth came in at $4.5 trillion, according to Capgemini and RBC Wealth Management. Swiss private bank Julius Baer sees HNWI wealth reaching $8.2 trillion by 2020.
Tech entrepreneurs are one of the fastest-growing groups within China’s swelling ranks of 1 Percenters. Four of the five richest Chinese are in the tech sector. China’s second-richest man isn’t an industrialist or property developer. It’s Jack Ma, founder of the Alibaba Group, a Chinese mashup of EBay and Amazon.com. He was worth $27 billion on Feb. 22, according to the Bloomberg Billionaires Index, more than Hong Kong business magnate Li Ka-shing, whose flagship companies CK Hutchison Holdings and Cheung Kong Property Holdings have interests in real estate, ports, and infrastructure.
Private banking in China is a huge market—and a devilishly tough one to crack for a foreign bank. The country’s first wave of multimillionaires and billionaires tended to be factory owners and exporters who started businesses in the 1980s and 1990s, when China clocked double-digit growth rates and the export sector boomed.
As a general rule, they’ve invested their wealth in property and financial assets and prefer to deal with private bankers at local institutions such as China Merchants Bank.
Although some foreign banks—including JPMorgan Chase, Goldman Sachs, and Citigroup—have licenses or joint ventures that give them partial access to China’s wealth-management market, they don’t have the branch footprint and scale of Chinese banks. “They have very, very low market share, largely because they don’t have distribution,” says Sameer Chishty, a Hong Kong-based partner at Bain & Co., who co-leads the firm’s financial services for Greater China and its global wealth-management practice.
The new entrepreneurial class amassing great wealth at a younger age provides another opening for global banks. These risk-takers are sophisticated, often Western-educated, and comfortable working with foreign banks at home and dabbling in investments abroad. They research investments on their smartphones, and “when they go to meet their private bankers, they’ve done a lot of homework,” according to Chishty. These clients need help not only managing their money but also building their businesses. Because of that, says Chen Shi, a personal banker based in Hangzhou with China Merchants Bank, “the relatively younger generation are probably more open-minded about using [products offered by] foreign banks.”
That provides several potential revenue streams for full-service banks offering wealth management along with investment banking services such as equity underwriting and merger advice. “From zero to billionaire can be as quick as six years in this new tech sector,” compared to more than 20 years in a more traditional industry, says Francis Liu, a Greater China manager for ultra-high-net-worth clients at UBS. “The ultimate goal is to help entrepreneurs grow their wealth. We don’t just come to you when you are really rich. We want to support you across all life stages.”
In January, Liu’s boss, UBS Chief Executive Officer Sergio Ermotti, told Bloomberg TV that, recent market turmoil aside, “China is a great opportunity, like it has been for the last 20 years.” The Swiss bank plans to double its staff in the country within five years. Private banking is an attractive business for global banks in China and elsewhere, because it doesn’t tie up huge amounts of capital and generates a steady return.
Typically, private bankers charge clients a percentage of the assets they manage and extra fees for customized products. Credit Suisse CEO Tidjane Thiam also wants to expand in Asian wealth management and boost the lender’s presence throughout China. He’s not alone. “Every bank is getting out of capital-intensive activity,” Thiam said at a financial industry conference in Paris on Jan. 12. “Every bank is going into asset management and wealth management, and that worries me.”
Aside from a potential stampede of Western bankers tripping over each other in the quest for mainland clients, another challenge is the rise of insurgent financial technology firms in China that are launching smartphone apps and other digital investment tools that appeal to the younger, new-rich set. Online brokerage Tiger Brokers, in which Chinese smartphone maker Xiaomi is an investor, and Futu Securities have developed apps that allow investors to buy stocks using their phone. Beijing-based robo-adviser MiCai, modeled on U.S.-based automated investment advisers such as Wealthfront and Betterment, started operation last fall.
The supreme irony for private bankers is this: The very Chinese tech entrepreneurs they’re all chasing could develop new fintech models that disrupt the way wealth managers are doing things on the mainland. Li Zhiguo, 38, is a financial app developer who made a pile of money from the stock options he accrued working at Alibaba, which raised $25 billion when it went public in 2014. Li left the e-commerce giant in 2010 and tried his hand at angel investing. In 2013 he became CEO of Wacai.com, which has developed a wealth-management platform on which 1 million customers trade actively, according to the company.
Li is a private-banking client of both UBS and China Merchants Bank. He’s generally happy with the service at both banks but wonders if these large, prestigious institutions really see what’s coming over the horizon. “These big banks,” he says, “tend to be very conservative. They don’t see the importance of digital applications.” He says younger wealthy investors want to manage their own portfolios on their phones.
Global banks are monitoring new fintech business models emerging in China and the evolving preferences of wealthy clients there. “It’s a completely new frontier,” says Boris Collardi, CEO of Julius Baer, Switzerland’s third-biggest private bank.
Julius Baer has traditionally served wealthy Chinese with offshore accounts in Hong Kong and Singapore, Asia’s two main cross-border wealth centers, or advised Chinese expatriates. More recently, it’s made tentative moves to enter the domestic market. In 2011 it established a representative office in Shanghai and a year later struck a partnership and referral arrangement with Bank of China. In December, Julius Baer acquired a 5 percent stake in Jupai Holdings, a wealth management firm catering to HNWIs in Shanghai.
In the past, Collardi has described the domestic Chinese banking market as “practically impenetrable” given the restrictions on overseas banks. But the changing technology of finance in China seems to have aroused his interest. When he visited the country last year, Collardi met primarily with fintech companies. He now says he’d consider forming strategic partnerships or making direct investments. A Julius Baer spokesman says the bank has about $100 million to invest in the country.
Collardi is still figuring out how Julius Baer can benefit from that trend: whether to own Chinese companies, strike partnerships, or have staff on the ground. “I do not exclude that maybe one or other fintech disruptive models could come from China over time,” he said in an interview with Bloomberg last year. “If I just look at what they’ve done with their version of Twitter, Facebook—these are products that in pure functionality are ahead of their international American competitors.”
Even as China’s economy cools, global banks could benefit hugely from the convergence of two trends: wealth transfers, from industrialists finishing out their careers to their children, and the rise of China’s new tech millionaires. The world’s second-biggest economy is no longer growing at double-digit rates, but its past success has created a huge pile of wealth that could keep private bankers busy for many years to come. —With Giles Broom