China's booming economy is creating more than 70 millionaires a day, but foreign banks don't have enough products, client managers or offices to tap into the market for top-end private wealth services.
Banks including Citigroup Inc and Standard Chartered Plc know the world's fourth-largest economy holds huge potential for private banking, but weak industry rules, strict foreign exchange controls, too few branches and a lack of expertise mean it will take years to reap profits.
Market conditions for private banking business in China are still very immature, Shanghai Pudong Development Bank President Fu Jianhua told the Reuters China Century Summit.
Almost every bank wants to get top-end customers, but no matter whether the banks are Chinese or foreign, the problem is whether we have enough professional private bank client managers to offer top-end services to customers, he said.
The limited range of products on offer due to China's highly regulated foreign exchange system is another obstacle.
We are just in the start-up stage, Christine Ip, head of China consumer banking at Standard Chartered, said at the summit.
There are not too many products we can offer, unlike in a mature market like Hong Kong, Singapore, or even Korea.
Some private banking units of foreign lenders in China act more as representative offices, as overseas lenders are not yet allowed to help individual Chinese clients invest directly in overseas capital markets.
Foreign private bankers can approach rich Chinese financial services consumers and lure them to invest in overseas stocks, but no legal contracts for private banking business involving investments in foreign assets can be signed on the mainland.
As a result, mainland Chinese typically travel to Hong Kong to do their private banking business.
China is likely to surpass Japan by 2015 as the Asian country with the highest number of wealthy individuals, predicted Johnson Chng, head of the Greater China financial services practice at Bain and Co, a global management consultancy.
Japan was home to 1.4 million high net-worth individuals -- with more than $1 million in financial assets excluding their homes -- worth a combined $3.5 trillion in 2005, according to a report by Merrill Lynch and consultants Capgemini.
By comparison, mainland China was home to 320,000 such wealthy individuals, together worth about $1.59 trillion.
Many foreign banks, including Citigroup and Standard Chartered, set minimum asset levels for their private bank clients in China at $1 million -- a typical global threshold.
Some banks such as BNP Paribas and Royal Bank of Scotland, however, now only operate private banking offices in one or two major cities such as Beijing and Shanghai, as Chinese regulators are keen to limit aggressive network expansions.
If they can get 20-30 millionaires per office, that's already good enough, said Fu of Pudong Bank, a local partner of Citigroup.
The biggest cost for private banking services is human. If you can get enough fairly paid financial experts, the profit margin contributed by these millionaires can be much bigger than you expect, Fu said.
In mature markets such as Hong Kong and Singapore, competition is fierce for private bankers and job-hopping is rampant.
Chinese regulators are finalizing regulations to boost the private banking business in China as demand for advanced and diversified wealth management services is growing rapidly.
Since the start of 2006, Chinese stocks have risen nearly five-fold, powered by double-digit economic growth.
You can start to imagine the number of billionaires being created from the stock market. The other market is property, said Chng.
The new rules, expected to be announced in the next few months, could accelerate the rollout of private banking services in China. They may also add clarity on foreign exchange matters by giving China's foreign exchange watchdog a well-defined role in capital flows, bankers said.
We are told that by the end of this year there will be a set of rules and guidelines, said Ip.
So we want to set the groundwork, build the system, hire the expertise, train them up ... then we will have a clearer understanding of exactly what we can do and what we cannot do.
Chng said foreign players should focus on two key areas to win business in China: bolstering their brand, in a market where even many of the world's largest banks are unknown, and providing better service than their Chinese counterparts.
It's not as easy as opening an outlet and telling people: 'This is our private bank', said Pudong Bank's Fu. You have to work hard, prepare and have patience before you begin to make profits, maybe several years later.
(Additional reporting by Tony Munroe, Kim Soyoung and Steven Bian in SHANGHAI and Jeffrey Hodgson in HONG KONG)