Deregulation slowdown poses biggest challenge to UBS in China

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[March 17, 2016]  By Engen Tham

SHANGHAI (Reuters) - A slowdown in the pace of deregulation is the biggest challenge facing UBS AG in China, an executive at the Swiss bank said as it opened a branch of its wealth management business in Shanghai on Thursday.

China's attempts to stem capital outflows as a result of a depreciating yuan have led Beijing to backtrack on plans for greater market liberalization, such as the temporary suspension of initiatives designed to open up outbound investment.

"The biggest challenge here is the pace of deregulation," Kathryn Shih, Asia pacific president at the world's largest wealth manager, told Reuters.

Shih noted a slowdown in the Qualified Domestic Institutional Investor (QDII) program, which allows Chinese banks, insurers and mutual funds to buy offshore stocks and other securities on behalf of clients and is one of the ways Chinese firms and individuals can get money out of the country legally.

"There was a lot of deregulation last year, people were talking about QDII2, but with the market volatility some of that has slowed down, so that's challenging for us," Shih said.

UBS wants more of the QDII quota made available in the market so that the Swiss bank can offer products from global markets, she added.

Sources told Reuters in January that Chinese regulators had asked several domestic funds to postpone issuing new outbound investment products to stem capital flight which was undermining the value of the yuan and worrying global investors.

The push by UBS into China comes against a backdrop of challenging conditions such as interest rate pressure and lower activity in investment banking advisory business, highlighted by its chief executive Sergio Ermotti on Wednesday.

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These headwinds have not deterred the bank, which said in January it was planning a hiring spree for its China wealth management business.

And despite the strong domestic competitors UBS plans to invest long-term in the Chinese market, deciding that in order to get its name known it had chosen a strategic location in the middle of Shanghai's commercial center to plant its flag.

The plush new premises, with tastefully exposed brick-work and a heated toilet seat for its VIPs, is situated in the affluent Xintiandi area.

UBS already has wealth management offices in 10 locations across six countries in Asia Pacific, with assets under management of 272 billion Swiss francs ($281 billion)at the end of 2015.

(Editing by Alexander Smith)

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