Private banking refers to the confidential and private banking service provided to wealthy individuals or families. Such service is usually provided by international financial groups and requires a minimum of $500,000 to open an account. Tempted by the quickly growing wealthy population in China, private banking sectors overseas have in recent years tried to squeeze into the Chinese market by any means possible.

Xinmin Weekly reported on October 2 that with wealthy people as their clients, private banking services earn much higher profits than average banks. According to statistics, the American private banking sectors registered an annual average profit of 35 percent and an annual average income growth rate of 12-15 percent, exceeding by far those of other banking services.

As its core, private banking customizes a comprehensive financial plan for each individual client, explained an official from Citybank, U.S.A. Such services are characterized by their attention to personal relations, confidentiality of clients’ wealth, and security.

Private banking covers helping clients to manage their large assets including investment planning and tax evasion, and preparing proposals and finding targets for mergers and acquisitions. They even go as far as going to auctions on behalf of their clients to bid for antiques. Often times, clients themselves will not show up and, instead, instruct their financial advisors to come to their doorsteps.

At present China does not have these mysterious, low profile and yet status-revealing private banking services. In accordance with the agreement reached when it joined the WTO, China will have to open its market to foreign financial institutions in private banking by the end of 2006. However, private banking sectors of many international financial groups cannot wait any longer.

Quiet Plundering and a Hotbed for Corruption

Along with China’s reforms, opening up, and social development, private wealth has continued to accumulate and, at the same time, has become increasingly concentrated. Statistics show that bank savings from wealthy households account for over 50 percent of China’s overall individual bank savings. The foreign exchanges owned by the wealthy from Beijing, Shanghai, Guangzhou and Shenzhen account for 60 percent of China’s total foreign exchange savings. Needless to say, they constitute a major attraction to private banking services overseas.

Private banking sectors overseas have resorted to various means in a race into the Chinese market seeking new clients. Some of them have hired well-connected agents in China, some have initiated cooperation with wealthy societies such as golf clubs. Some have set up partnerships with China’s investment consulting firms, and even invited the wealthy people through the media to participate in their “tours of overseas investment and financial planning.”

In recent years, more and more private companies have gone public in China as well as overseas. They, too, have become the targets that private banking services are after. As revealed by a board secretary of a publicly listed private company in Zhejiang Province, during the one year the company has been listed, he has been approached no less than five times by people seeking private banking business.

All such activities proceed quietly, and no one knows how many clients they have found and nor does anyone know how much these clients have invested.

The danger of underground private banking is obvious. The funds meant for domestic investment and consumption flow overseas unsupervised, which is bound to affect domestic economic growth. Also, since China exercises control over its foreign exchange, the clients will have to move their funds abroad through illegal channels, which in reality gives rise to underground fund dealings and disrupts normal monetary order.

More notably, private banking, due to its private and confidential nature, has become the major channel for transferring bribes. As revealed by an official from World Bank, each year, approximately $40 billion from poor countries flow into private banks in Europe and America, most of which is illegal income. Funds deposited in Swiss banks by some senior officials from African countries reach $20 billion. Citybank, reportedly due to its lack of careful investigation, once managed $120 million worth of wealth accumulated through corruption by the brother of Mexico’s former president Carlos Salinas.

Sales Site—Think for the Wealthy and Plan for the Wealthy

A journalist from Xinmin Weekly covered a story about how a private banking representative promotes his sales in Beijing. One morning in early August in a well-furnished conference room at a “super six-star” Beijing International Club, a young man named Zhao Jun (not his real name) was eloquently lecturing on investment to his millionaire audience from Beijing.

Zhao Jun was well prepared for this investment seminar. Early this year, with the help of one of his highly sociable friends in Beijing he collected a list of wealthy people who have idle funds, and they included owners of private businesses, senior executives in foreign-funded companies, stars from show business, and individuals from wealthy households. Zhao Jun asked his friend from Beijing to specifically target government officials and high-level executives from state-owned enterprises who have large sums of “gray income,” as, based on experience in the trade, this group in developing countries has a special urgent need for private banking services.

The participants at the seminar showed enthusiastic interests in the idea of private banking repeatedly articulated by Zhao Jun: “If you want to avoid the risk of the single market in China, you should diversify your investment through a global portfolio. If you want to immigrate overseas or your children have plans to study abroad, you should transfer part of your funds to other countries. Do you want to save on expenses in matters of assets’ gains, interest, and inheritance? Do you want more confidentiality on your finances? Do you want to avoid disputes regarding your properties? Do you want your businesses to increase funds and stock shares, or do you want to transfer funds without going through the ordeal of lengthy, complicated, and difficult approval formalities? And do you want to cut overall dealing costs of investment and financing? Who can help you in all of that? The answer lies in transnational private banking.”

While the wealthy were still confused about some of those ideas, they have felt deeply that private banking has been designed to think for the wealthy and plan for the wealthy.

Over the eight years since he graduated from college and joined the group, Zhao Jun, who started as an analyst and now holds the position of a senior vice president, has only over 20 clients. These clients, however, have been more than enough to provide Zhao Jun with an annual income of more than $500,000.

Zhao Jun decided to change the date on his airline ticket to return to the United States, hoping he could pay a personal visit within two days to the wealthy person who expressed an interest at the sales seminar. He is quite confident that he will sign up this wealthy man as his first client in China. This is a typical scenario of underground private banking in China. At present many people seeking private banking businesses are coming into China from everywhere and leave quietly with huge sums of wealth meant to stay in China.