ANALYSIS-Foreign banks struggle in China fund market

SHANGHAI, Nov 14 (Thomson IM) – The global credit crisis threatens foreign banks’ drive to expand in China, as sagging world markets dent their efforts to invest Chinese money abroad.

Top foreign institutions, from Standard Chartered and HSBC to Citibank, have scrambled to sell wealth management products under China’s Qualified Domestic Institutional Investor (QDII) scheme, launched in 2006.

The scheme has channelled over $40 billion of China’s estimated $2 trillion of household savings into overseas financial markets, offering a new source of revenue for foreign banks and an opportunity to woo wealthy Chinese customers.

But heavy losses on QDII products due to the global market turmoil, approaching 80 percent in some cases, have now saddled the banks with angry customers and could hurt the longer-term growth of the QDII programme.

‘This will surely have a negative impact on foreign banks’ reputations in China,’ said Zhang Xing, analyst at Shanghai Benefit Wealth Management Consulting Co.

He and others said foreign banks were partly the victims of unlucky timing.

They began selling QDII products shortly before global markets started to weaken and the appreciation of China’s yuan accelerated, which caused additional currency losses.

‘But banks risk being blamed for using aggressive marketing and promises of high yields,’ said Jin Lin, banking analyst at Everbright Securities. ‘Some clients may not have been aware of the high risks involved.’

GLOBAL NETWORKS

Foreign banks, eager to expand their fledgling retail business in China, have sold over 200 QDII products so far, more than four times the number marketed by Chinese banks, according to Benefit Wealth Management.

Client money is typically invested in overseas mutual funds, often through structured notes. The mutual funds invest in both equities and fixed income around the world.

The foreign banks were able to attract customers partly by touting their overseas branch networks and global expertise, which far exceeded competitors in the QDII scheme such as Chinese banks, insurers, brokerages and fund management companies.

But since this year’s plunge in global equity markets, about half the QDII products sold by foreign banks have lost more than 50 percent of their value, with some losing over 70 percent, according to data compiled by Benefit Wealth Management.

That has created a public relations debacle.

In the last few months, the Shanghai-based National Business Daily newspaper has published articles in which disgruntled clients criticise foreign banks and call their QDII products ‘toxic’.

‘The sales people never warned me against such high risks. I was cheated,’ Zhang Fa, 38, a construction company employee, told Reuters. She said she had lost almost 80 percent of her 800,000 yuan ($117,000) investment in two QDII products sold by a European bank.

‘I thought it would be much safer putting money in the hands of a foreign bank, rather than local fund managers.’

Foreign banks say they can’t be blamed for the losses.

‘As in any market, product performance is inevitably affected by the current financial crisis,’ said an HSBC China spokeswoman.

‘We focus on ensuring a professional sales process and adequate risk disclosure in line with our stringent guidelines,’ she said, adding HSBC was stepping up efforts to educate its customers about investing.

A Standard Chartered spokeswoman in Shanghai said it had followed proper sales procedures, but would work to improve communication with clients to help them fully understand investment risks.

BAD TIME

Sales of new QDII products have slowed to a trickle in recent months, and foreign banks may have trouble reviving them even when global market conditions improve.

An online survey by social networking website tianya.cn last month found 63 percent of respondents saying they would avoid wealth management products from foreign banks in the future.

When QDII sales do eventually pick up, they may face tighter regulation by Chinese authorities. Wang Xinzhe, an official at the China Banking Regulatory Commission’s Shanghai bureau, told Reuters the watchdog had been increasing its supervision of banks’ QDII products in recent months.

Foreign banks’ earnings in China are unlikely to suffer much direct damage from weak QDII business because fees for managing the fund products account for only a small fraction of revenues.

But the banks’ hopes of using QDII to attract wealthy Chinese individuals as customers, boosting their yuan retail deposit business and sales of other financial products, may have suffered a major setback.

Everbright Securities’ Jin said in the very long term, QDII would be a promising business area for foreign banks as Chinese shift more of their savings abroad.

‘(But) QDII products could remain sluggish in the market for several years.’

($1=6.82 yuan)

(Editing by Andrew Torchia and Lincoln Feast) Keywords: CHINA BANK/QDII