As China’s asset management industry evolves, custodian banks need unique strategies to win a piece of the 142 trillion yuan (US$22.2 trillion) onshore wealth management market. In 2017, 122 Chinese asset management companies paid a total of 12.2 billion yuan of custodian fees, according to financial data firm Wind.

 Chinese banks, as key service providers for local clients, are building international capabilities and networks in Hong Kong, offering one-stop service for Chinese asset managers going global. Bank of Communications set up a custody centre in Hong Kong in 2013, while China Merchants Bank set one up in 2016. Having both onshore and offshore operations allows custodian banks to offer one-stop solutions to Chinese clients.   

 “Few banks are doing cross-border business. Building the offshore infrastructure and hiring professionals are costly,” says the head of custody at a Chinese state-owned bank in an interview with The Asset. Chinese custodian banks offer low prices. According to the banker, Chinese banks are sometimes not allowed to charge any fee to certain clients. “Chinese banks are charging us very low fees. And we prefer to do business with groups we know,” says the head of asset management at a Hong Kong-based Chinese asset manager.

 In 2017, the flagship US dollar money market fund from E Fund Management (Hong Kong) serviced by China Construction Bank (Asia), charged a custodian fee of only 5bps — compared with the 50bps, the industry average. On top of the pricing advantage, the other distinctive feature of Chinese custodian banks is the willingness to customize non-standardized products like pension products.

 “In the past few years, we have seen a lot of customized demand. Chinese banks are keen to expand their business and they provide flexibility at low cost,” says an executive at a Hong Kong-based Chinese asset manager. “New entrants, like the Chinese banks, are ambitious to increase their market share and therefore provide aggressive pricing for the same quality service.”

 In a bid to increase wallet share in China, international banks are also looking to expand their outbound service. The newly granted qualified domestic institutional investor (QDII) quota to onshore asset managers in April boosted demand for cross-border asset servicing. For outbound mandates from insurers and trust companies, Standard Chartered enjoys a big market share in China thanks to its valuation capability in real estate and private equity. For inbound business, HSBC dominates the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) owing to its global network.

 In domestic custody dominated by Chinese banks with an extensive distribution network, competition is intensifying with the participation of securities companies and international banks. Ten international banks are licensed to provide local fund distribution services; Standard Chartered is applying for a domestic fund custody licence   in China.

 In April a unified asset management regulation was issued to clamp down on the shadow banking sector and make the asset management industry more transparent. The more disciplined international banks and state-owned banks, relying less on principal-protected wealth management products, will see more opportunities from greater issuance of standardized net asset value (NAV) type products like mutual funds.

 The opening up of China’s capital market has prompted more opportunities for international custodian banks seeking cross-border business, focussing on inbound flows from international asset managers. “We can provide both global and sub-custodian services. But in Europe and the US, we still need to find a global custodian like HSBC, Standard Chartered, Citi or Brown Brothers Harriman. They have the network,” says the head of custody at the Chinese state-owned bank.

 With low fees and high levels of customization, Chinese banks are competitive in overseas expansion. “Custody business is a game of scale. You cannot make money in the beginning and you have to invest hugely,” says the custody head. “If you do not do it right, there is a significant reputational risk. It is very costly if you violate regulations in overseas markets.”