As offshore banking becomes ever more challenging, Asia’s traditional bastions of the industry, Hong Kong and Singapore, find themselves in uncharted waters. On one hand, they stand to benefit as regulation dents Switzerland’s stature as the offshore centre of choice for the world’s wealthy. On the other, centres such as Shanghai and Jakarta are emerging as competitors. The new paradigm taking shape in the Asian private banking scene is throwing up some big challenges for the traditional offshore havens. Their ability to meet those challenges will determine whether they retain their dominant position.
The dynamics of private banking in Asia may be changing, but the market can take heart from the fundamentals. According to the Boston Consulting Group (BCG) Global Wealth 2014 report, global private financial wealth jumped 14.6% year on year in 2013, to a total of $152 trillion. The report shows that Asia-Pacific, excluding Japan, was the fastest-growing region worldwide. The private wealth of the region jumped to $37 trillion in 2013, a rise of 30.5% year on year, says the report. The main drivers of the rise were strong nominal GDP growth in China and India, combined with high savings rates in both countries. The jump in private financial wealth ran alongside a global 11% rise in assets under management (AUM) by wealth managers, again with Asia-Pacific seeing some of the strongest growth figures, the report says.
The shake-up in Asian private banking is in no small part due to the effects of a new regulatory environment within the region. Eva Law, founder and chairman of the Association of Private Bankers in the Greater China Region, believes the regulatory approach is tightening and expects to see new regulation on areas such as advisory behaviour.
“In Hong Kong, we are expecting the announcement of the competency benchmark,” she says. “The Hong Kong Monetary Authority together with the Private Wealth Management Association, the Hong Kong Institute of Bankers and the Treasury Markets Association, are currently developing the enhanced competency framework. Obviously, it will shape the regulatory approach for the private wealth management business.”
In China however, Law believes the most significant regulations are new guidelines from the China Banking Regulatory Commission on the trust business, which address the crucial issue of succession management. Previously, wealthy families in China used offshore solutions for succession management, or possibly just left the issue unmanaged. It is now possible to invest in an onshore trust, according to Law.
New versus old
While Singapore and Hong Kong still dominate as locations for private banking in Asia, signs are emerging that new wealth centres are keen to fight them for new business. Law sees Shanghai as the emerging centre for wealth management in North Asia and Indonesia as a new player in Southeast Asia. According to Law, China’s production line of new millionaires is feeding Shanghai’s growth as a private banking centre, with nearby new riches in countries such as Mongolia also adding to its rise, while Indonesia is benefiting from rising wealth in its domestic market.
“Regulators in China are actively managing the industry and their regulatory standards are also catching up with the developed markets,” adds Law. “I see the market operating in an orderly fashion and it is also on a good development track. The key worries are about the shadow banking system and the possible significant downturn of the property market that may cause short-term instability to the market and industry as a whole.”
But, despite the signs of growth in both Shanghai and Indonesia, it will be hard to replicate the history and tradition of Hong Kong and Singapore, where the culture of private banking has been built up over decades.
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| Regulation has definitely had a great impact on how business can be conducted Bassam Salem |
“Citi’s private banking business in Asia began in the early 1980s and therefore Citi has been witness to the evolution of both financial centres for well over 30 years,” says Bassam Salem, Asia Pacific CEO of Citi Private Bank. “Both have grown drastically over the years and those changes can be characterized by a higher level of sophistication and better regulation. This has been extremely beneficial for the wealth management business, setting the stage for increased product availability, a greater pool of talent, highly sophisticated infrastructures, quality premises and working environment and internationalization. An obvious change being internationalization, whereby in the past the business catered to only Asians and that has changed to include a clientele that is more international and diverse.” Salem agrees about the importance of regulation in changing the environment for wealth management in Hong Kong and Singapore, but prefers to highlight the benefits to these two established centres rather than the threat to their business.
“Regulation has definitely had a great impact on how business can be conducted,” he says. “Regulators have stepped up the quality of supervision tremendously and this is necessary as the wealth management business continues to attract a wide range of players as well as clientele in these two key centres. As a result, Hong Kong and Singapore have become more highly regulated locations but more importantly they have also evolved into being more sound and trusted centres as well.”
And, according to Salem, there are key differences between the strategies adopted by Hong Kong and Singapore in the current climate. “Hong Kong operates more like a regional hub for greater China, for companies that are interested in listing, bond issuance or generally for Chinese businesses looking to set up in Hong Kong with the owners of those companies looking to live as well as to work there,” he says. “Singapore, on the other hand, in addition to serving the Asean countries, has emerged as a key centre for non-resident Indians [NRIs] as well as for international wealth coming abroad from the West.”
The boom in private wealth around Asia-Pacific is so strong that the Boston Consulting Group believes, in the long run, mighty Switzerland will be challenged in its position as the world’s largest offshore centre by the rise of Singapore and Hong Kong. According to BCG, assets booked in Singapore and Hong Kong are projected to grow at compound annual growth rates of 10.2% and 11.3%, respectively, to 2018, and are by then expected to account collectively for 20% of global offshore assets.
From Russia with love
The general growth of private wealth and AUM within Asia is an encouraging foundation for development in the region’s private banking sector, but the conflict in Ukraine could also be providing unexpected benefits to Asian wealth centres. Since the fall of the Soviet Union, new Russian money has comfortably parked itself in various welcoming jurisdictions around the globe. But the military conflict in Ukraine has plunged Russia’s rich into uncharted territory where they may be forced to be more selective about the destination of their wealth.
Chris Weafer, senior partner at Macro-Advisory, a Moscow based Russia-CIS macro and business consultancy, tells Euromoney that the flow of Russian money to Asia has certainly picked up this year but the volume remains quite modest. He sees Hong Kong and Singapore as the locations of choice for Russian money for various reasons: the frequency of flights to Moscow; a relaxed visa regime; good shopping, hotels, restaurants and nightlife; well-regulated financial industries and open economies, plus the fact Russians can buy property there.
Weafer cites several reasons for this uptick in interest in Asia from Russia, the first being the fear of sanctions imposed by the US and the G7. “Even though the official sanctions only affect relatively few people at or near the centre of power in Russia there is a fear that sanctions may be extended at any time and affect ‘ordinary’ Russians,” he says. “People fear that their bank accounts might be subject to some restrictions or even suspension and they have been moving some or all of their liquid assets to safer jurisdictions. Russian media has been playing up the sanctions threat with great prominence and that has added to the sense of fear about western banks.”
He also highlights the chatter on a governmental level in Russia about dealing more with Asia, increasing the appeal of the region at a time when the fear about western banks is growing. “It is partly a move to safety but also, because of the talk about increasing trade and investment with Asia, people are moving money to position for possible future investment. For example, if trade and cross-border investment does increase a lot then we will see more Russians travelling in the region more often and owning real estate in the countries where they are allowed.”
Weafer explains that concerns over the implications of the US FATCA legislation and a lingering suspicion over Cyprus, traditionally a favoured safe haven for Russian cash, are also contributing to interest in Asia. “We have probably seen most of the flows already. Sanctions risk is now easing and while money previously diverted to Asia will likely stay there for now, I think the urgency to move from those who have not already done so, is small. People and companies will now likely wait and see what happens next in the US and EU concerning Russia relations before making any further significant moves.”
The fight for new sources of wealth such as that coming out of Russia is just one front in the evolving battle for private banking business in Asia. The traditional offshore locations of Hong Kong and Singapore have had to adapt to a new reality over the past few years, including the emergence of onshore rivals, but there is plenty of evidence that they are both changing and thriving. But as the wealth of Asia continues to rise, the competition for the spoils is only going to become more intense.