SINGAPORE: For years, private bankers have talked of China as a new El Dorado, where riches would be there for the picking. But in reality the pickings have been slim.

Tight banking regulations meant that foreign banks, when allowed to do anything at all, could offer clients only limited foreign currency products like term-deposits and structured deposits. Furthermore, Chinese residents were restricted from directly investing abroad. Only those who already had money outside China - for example, from an initial public offering on an international stock market - could be provided full services out of places like Hong Kong or Singapore.

Most bankers agreed that the key to unlocking the Chinese market would be the ability to offer clients local-currency denominated products. This year, they finally saw their wish come true.

To meet World Trade Organization requirements, the Chinese government allowed international banks to apply to incorporate their businesses locally, which gives overseas banks the right to offer unlimited renminbi, or local currency, services on the mainland.

Foreign banks including Citigroup, HSBC Holdings, Standard Chartered, Bank of East Asia and ABN AMRO have now received the go-ahead to start locally incorporated businesses and have opened, or are in the process of opening, private banking offices in mainland China.

At the same time, the Chinese government has been increasing the foreign investment options for domestic investors. The scope of the Qualified Domestic Institutional Investor, or QDII plan, which has opened a route since April 2006 for Chinese citizens to invest offshore into fixed income and money markets via qualified domestic banks has recently been widened, in principle, to include equity and equity-linked structured products.

Until the widening, announced in August by the State Administration of Foreign Exchange, the plan had generated little interest from investors because the returns on fixed income and money market instruments were relatively low compared with the prospect of capital gains offered by the booming Shanghai stock market. Still, investors are eagerly awaiting the possibility of investing directly into Hong Kong-listed stocks, giving them access to some of the best-known Chinese companies, many of which not listed on mainland exchanges. Final regulatory approval, however, is pending.

"Everything done before 2007 was basically very standard wealth management at a mass affluent level," Barend Janssens, head of private banking for ABN AMRO in Asia, said. Without the ability to offer local currency products, the bank could previously only "attract a very shallow, small part of the potential client pool.

"Now we're looking at the real private banking, the million dollar-plus accounts, and because we are now a locally incorporated bank we should be in a better position to compete at the same level with Chinese banks."

ABN AMRO, which received its license to incorporate locally in July, will open its first private banking office in Shanghai next month with about 16 people, Janssens said. Initially, "our growth will be restricted by finding the right people and by regulations, as well as the need for the underlying domestic market to develop further.

"But we aim to have, in a period of five years, 50 to 60 bankers, maybe spread over three offices: Shanghai, Beijing and then maybe Shenzhen or Guangzhou."

Nearly 300,000 households in China hold net investment assets worth more than million in total, according to a report by Boston Consulting Group, so the pickings for overseas private banks could be rich indeed. But many private bankers acknowledge that the wealth management market is only at an embryonic stage.

"Whether QDII will really take off, the jury is still out because the banks that are authorized to offer them haven't yet found serious investments that are attractive enough to the domestic investors in China," John Shelley, senior executive vice president at Coutts Bank von Ernst, said. "My personal view is that it eventually will take off, because the government will one day allow the funds to be invested in equities and the Shanghai stock market will not always be at an all-time high.

"There will be corrections, and investors will start to appreciate they need to diversify. The QDII should rapidly change the market, but it will still be the tip of the iceberg."

Coutts, the private banking arm of Royal Bank of Scotland, has a strategic partnership with Bank of China, the first Chinese domestic bank to open private banking branches; in March it opened one in Beijing and one in Shanghai, each staffed with 10 bankers.

"The key challenges for any bank right now are that clients are unaware of what private banking can really offer," Shelley said. Other limiting factors include the embryonic state of the capital market, an illiquid local stock exchange, a lack of private bankers, and poor coordination between different committees within the regulatory system, he added.

Janssens said: "It's a very young, immature market where people are really looking at a quick buck return, playing aggressively and investing in property. That will change as they gain more understanding of what proper portfolio management means, protecting wealth for the next generation, etc. There is a certain education of clients that private banks will have to do."

Andrew Tung, managing director and global market manager for Citi Private Bank in China, said that clients had responded well to structured investments - linked to a broad-based equity index or a basket of stocks - and to mutual funds, which the bank recently introduced through its QDII platform.

"This is still the early stage, but clients are willing to learn more on this type of product, which is relatively new to the market," Tung said.

Regulations and the immaturity of the underlying market still limit the products that banks can offer, Shelley said. In the short term, service, not products, will be what distinguishes one provider from another. "We have done some market research among wealthy individuals," he said. "They've complained about getting product push, discounted concierge-type services, but not the basic services they need. "Wealthy individuals here are still deeply suspicious of the banking industry; they crave international connection and network to get access to the services and products available overseas. They want advisors, not product pushers," Shelley added. "They also want to be treated differently, getting service when they want it and where they want it."

According to people in the industry, wealthy clients will usually spread their money across four or five Chinese banks and probably several foreign bank branches, never keeping more than a couple of hundred thousand dollars in each account, because they want to stay under the radar screen.

That concern is common across Asia, and wealth managers are used to dealing with it, Shelley said. In practice, it means that wealth managers will try to position themselves either as the client's lead account, advising on the selection of other banks for specific purposes, or as niche providers of specialized services.

"I think the winning combination for the next couple of years is service and sound, objective advice that is not self-serving," Shelley said.

Allen Lo, managing director and deputy head of wealth management for the Asia-Pacific region at UBS in Hong Kong said that for the domestic private banking market in China to develop its full potential, the regulatory environment, while already changing fast, "needs to develop further."

Janssens reiterated that in the short term, "finding the right staff is going to be a challenge." The ABN AMRO banker said that "most Chinese banks don't have private-bank-trained staff, but they do have good corporate-trained staff, so I think this will be a good recruitment hunting ground for the foreign private banks as they expand."

So far, competition for clients in China remains relatively mild and most private bankers agree the playing field is pretty level. But Lo said that "as the market opens up it can be expected to intensify." (By Sonia Kolesnikov-Jessop)