Private banks bet on Hong Kong as China financial reforms still hazy

Private banks are not waiting around for reforms to bring greater access to the mainland market. Instead, they are placing their bets on Hong Kong as a long-term hub.

"We believe running a wealth management platform based in Hong Kong and Singapore is probably going to serve our purpose for a long time to come," Vincent Chui, Asia head of private wealth management at Morgan Stanley, said in reply to questions on opening operations on the mainland.

The number of billionaires on the mainland is expected to grow by 80 per cent between 2013 and 2023, according to property firm Knight Frank's 2014 Wealth Report.

At the same time, the mainland's high-net-worth individuals - anyone with more than of US$1 million in investable assets - have a strong demand for private banks with offshore asset-allocation capabilities, according to a Bain & Co report on private wealth in China.

Bain expects overseas investment among the mainland's wealthy to have increased by 30 per cent last year. According to a 2013 survey, 37 per cent of mainland high-net-worth people are interested in offshore investment and 30 per cent already have such investments.

That business could be enough to keep private banks busy offshore for years to come. Speculation on the liberalisation of the yuan or cross-border capital flows was not a sound basis for a private banking strategy on the mainland, Chui said.

Newcomers to the regional wealth market, such as Bank of New York Mellon, the world's largest custodian bank, have placed their bets on wealth management operations in Hong Kong as well.

BNY Mellon, which launched a wealth management service in Hong Kong last week, told theSouth China Morning Postthat while it was interested in managing the mainland's wealth, it would seek to access that wealth from Hong Kong.

"Hong Kong is a gateway into China without some of the challenges of working in China. If you look at it now, we pretty much have to partner to go into China. I think partnerships are very hard to do," said Chuck Long, BNY Mellon's head of wealth management for greater China. "I think it makes more sense for us to say that we want to go into China when we can serve clients the way we serve them here in Hong Kong."

Several global banks including UBS, Citibank, Standard Chartered and HSBC have set up onshore wealth management operations, with mixed success.

Shanghai's pilot free trade zone has attracted a wave of international attention since it opened last year on the promise of major - yet encapsulated - financial deregulation. Several global banks have opened offices there but questions still remain on when true financial operations in the zone will take off.

Bank wealth management operations will not necessarily transfer to mainland hubs such as Shanghai in the future, despite the central government's plan to transform it into one of Asia's premier financial centres.

Tokyo was a prime example of how aspirations for global financial importance are not always met, Chui said.

Global financial institutions in the 1980s opened their Asia headquarters in the city en masse on the expectation that its global financial importance would rise. Yet, as Tokyo's financial sector remained largely closed to outsiders, the vast majority relocated to more open hubs, such as Hong Kong and Singapore.

Chui said many of those firms may stay put.