BCG - The Boston Consulting Group

• BCG Financial Institutions in China
• Preface
• China's Wealth Market: Poised to Resume Strong Growth
• High Net Worth Individuals: A Distinct Segment
• Private Banking in China: A Rapidly Developing Sector
• Developing a Winning Model for China's Wealth Market
• Note to the Reader

Global wealth declined by 11.7 percent from 2007 to 2008, as assets under management (AuM) were weighed down by the financial crisis and the economic downturn. The crisis took a heavy toll on wealthier households—the number of millionaire households fell from 11 million in 2007 to about 9 million in 2008. The damage was most pronounced in larger, more developed markets such as North America, while Asia as a whole was less affected. AuM declined by only 6.2 percent in Asia-Pacific (excluding Japan), but the impact of the turmoil—as well as the outlook for the timing and strength of a recovery—varies by country.

Although China's economy has suffered significant reductions in production, its GDP is expected to grow by about 8 percent in 2009. China's wealth market remains strong—it declined by only 2.3 percent in 2008 and is expected to exceed its precrisis level in 2009. China's strong economic growth, rising incomes, and high savings rate will continue to create wealth at a phenomenal rate. We expect the wealth market in China to grow at an average annual rate of 17.2 percent between 2008 and 2013, to reach $7.6 trillion.

On the demand side, China's wealth market remains immature. The penetration of private banking is low, and many high-net-worth individuals (HNWIs) do not fully appreciate the value that private banking can offer. This creates challenges for both local and foreign banks, but it also presents unique opportunities. To introduce private banking products and services to Chinese HNWIs, banks will need to understand their existing and potential customers—they have distinct needs and investment behaviors—and take time to build trust and good relationships. It will be crucial for banks to develop targeted value propositions that appeal to specific customer segments.

Cultivating relationships requires substantial time and effort, but the rewards can be significant. If a bank can make a connection with a client just as he or she is becoming more interested and active in wealth management, the bank will be in an advantageous position to become the client's main wealth manager. And as the client's wealth and financial sophistication grow, this relationship will become increasingly valuable.

On the supply side, China's private banking market is also at an early stage of development. Bank of China, the first local mover, launched its private-banking business in 2007, and was followed by a number of players. No one has established a dominant position yet.

Local banks have been using different approaches to organize their private banks. The options include
establishing a private bank as an independent business unit, integrating it into retail banking network,
or adopting a hybrid approach. Most Chinese banks, however, are still searching for the right balance between leveraging their existing HNWI resources in the retail network and developing a differentiated and professional private-banking operation. Many are also developing the necessary capabilities and addressing a range of organization issues. At the same time, foreign banks have been actively developing their private-banking businesses in China. While they have deep private-banking expertise in international markets, many are not able to deploy their full global capabilities and advantages in the local market.

The race to build a strong wealth-management business in China is still in its early stage. We believe that China’s wealth market will develop rapidly over the next couple of years, offering a window of opportunity for banks to establish competitive positions—but they need to act quickly, before others take an unassailable lead in the most attractive segments and geographies. The winners will be the ones that have defined a clear goal, developed a deep understanding of their customers, invested in a tailored and differentiated business model (backed by the requisite capabilities), and mobilized the organization to take advantage of this attractive opportunity.

Nelson Choi is a principal in the Hong Kong office of The Boston Consulting Group.

Frankie Leung is a partner and managing director in the firm's Hong Kong office.

Dr. Holger Michaelis is a partner and managing director in BCG's Beijing office.

Tjun Tang is a partner and managing director in BCG's Hong Kong office and the head of the firm's Financial Institutions practice area in Greater China.

Chris Wu is a project leader in BCG's Beijing office.