Foreign banks struggle to grow in China

Shanghai: 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 (Dh147 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 per cent 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."

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 per cent of their value, with some losing over 70 per cent, 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, said. She said she had lost almost 80 per cent of her 800,000 yuan ($117,000) investment in two QDII products sold by a European bank.

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.

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.