China has long been seen as a vital growth region for wealth management but Western players now face growing competition from domestic rivals.

Just as the world is looking to the Chinese economy to pull it through the recession, so the wealth management industry is looking to wealthy Chinese as the next big growth market.

Nothing new in that, perhaps, except that this time the big western banks are likely to have some serious homegrown opposition as they try and grab a slice of the Chinese wealth management pie.

Chinese lenders are paying increasing attention to their wealth management and private banking operations, and many retail banks are acting as distribution centres for the exploding number of wealth management products being produced by security and asset management firms.

At the same time, the financial crisis which hit western banks hard has limited their ability, and their focus, to move on the Chinese opportunity at a critical moment.

“We’ve got our work cut out, that’s for sure,” says one Shanghai-based western banker.

“The local banks have the relationships but up until now we’ve had the lead in products and expertise. They are evening that up pretty quickly now.”

The statistics, as ever with China, are on a staggering scale and eloquent testimony as to why the country is shaping as such an important market.

China’s population of High Net Worth Individuals  – those with assets of at least $1 million – might have fallen by 11.8 per cent, according to the Merrill Lynch/Capgemini report in June, but there are still 364,000 of them and their combined wealth equals around 25 per cent of China’s GDP. Their numbers surpassed those of the UK last to become the fourth largest HNWI market in the world, largely due to the big fall in the UK numbers.

And while the wealth of those in most countries has slumped, an HSBC survey found that affluent Chinese had either maintained or increased their wealth in the first six months of 2008. The new HSBC Affluent Asian Tracker survey interviewed more than 1500 people aged between 30 and 55 across seven key markets, a sample of the top 10 per cent of the population by income or liquid assets.

As Didier Brizard, of TiarA Groupe, told a Singapore wealth management forum recently, China’s wealth market is expected to continue its exponential growth and surpass Japan, currently the Asia Pacific’s largest market, by 2015.  The current size, according to the China Banking Regulatory Commission, is US$102 billion from around 2.3 million customers investing in just over 4000 wealth management products on the market.

At Barclays Capital, the view is that China’s wealth management market will deliver revenue growth of 15 per cent per annum over the next two years, well ahead of expectations for the other boom markets of India and Singapore.

To service this market, the domestic Chinese banks – saddled with debt from State Owned Enterprises a decade ago and well beyond modern best practice – are now moving aggressively.

The main players in private banking are Bank of China, China Merchants Bank, Industrial and Commercial Bank of China, China CITIC Bank, and the Bank of Communications.

Some are moving faster than others. China Merchants Bank, for example, grew its customer numbers by more than 35 per cent in 2008. China CITIC Bank now has 2000 private banking customers. The bank currently has eight branches of its private bank, but is expected to open another five this year.

HSBC is one of the biggest foreign players in its own right, but also has 19 per cent of Bank of Communications, which recently announced it was expanding its wealth management operations from five cities to ten. Other foreign players with a presence include Bank of East Asia, Standard Chartered and Citi.

All these players, plus the securities and asset management firms, are currently in a frenzy to get new products to market. The total market might have just over 4000 different wealth management products, but more than 2400 new ones have hit the market this year according to Benefit, a professional portal in China. In June alone, another 517 wealth management products were introduced, representing a 26 per cent month on month increase.

The last few decades have seen booms of various kinds in China. Now it is private banking’s turn and, against what might have been expected several years ago, the local providers are catching up fast. Western players may not have the market dominance they once expected once the industry starts to mature.