Can a financial services industry that is just beginning to issue basic consumer loans and offers only a few investment products beyond low-interest savings accounts - while providing only bare-bones customer service - meet the increasingly sophisticated financial needs of a fast-growing population of affluent customers?

China will soon find out.

Long before China formally opened its financial services sector to global competition last December to meet commitments to the World Trade Organization, the nation's mostly State-owned banks and insurance companies knew they would be facing a day of reckoning.

They are now competing against the sharply honed customer-service skills of the world's most sophisticated banking conglomerates - many of them with decades of experience serving well-heeled customers - to maintain their hold on the assets of China's thrifty savers and investors.

Powered by a buoyant economy and a surging stock market, Chinese and international companies are also giving flight to a fledgling asset-management industry. These firms, including many that operate in the large, unregulated "gray market," are scrambling to develop and distribute mutual funds, annuities and other investment products to China's new investor class.

$2 trillion prize

The prize at stake is huge. With more than $2 trillion sitting in low-return bank deposits, Chinese households are hungry for higher-yielding options to finance their increasingly prosperous lifestyles and provide for their own retirements.

The pension system cannot support a population that is aging even more quickly than its prosperity is rising. Absent an abrupt stock market downturn, alternative investments like insurance savings products and equity mutual funds should grow at a sustained double-digit rate.

By some estimates, China's fund-management industry will approach the size of Japan's by 2010, when Bain & Company projects that China will be Asia's most profitable market for all financial services. The richest piece of that business will be the roughly 2 million Chinese households with assets over $100,000 made wealthy by the country's economic boom. China's new rich are likely to be prime candidates for a full complement of banking, insurance and investment products.

China's new investors share one common trait: They are dissatisfied with their financial services providers. And as their awareness and sophistication grows, they may be inclined to defect to institutions they believe can deliver better value.

A recent survey by Bain & Company found that as the incomes of respondents increase, the proportion of those who say they would recommend their current bank to a friend or colleague plunges. In an environment where it is still difficult to objectively rate financial services, investors are apt to depend on referrals from friends and associates in choosing asset managers. New entrants, be they foreign institutions or local fund-management start-ups, hope to be the biggest beneficiaries of such discontent.

Building a loyal customer base is crucial for Chinese fund-management firms. For these untested companies, differentiating themselves from the competition is difficult and attracting and holding onto customers is expensive. They must pay steep commissions to the companies that develop the mutual funds they sell.

No long-term perspective

But the early evidence suggests that Chinese investors, still lacking a long-term perspective, are so quick to switch to newer products that fund managers have been unable to profit from the relationship. Indeed, at nearly 90 percent of open-ended mutual funds we examined, the total assets under management had decreased since their launch. To slow that churn, fund companies will have to learn to target customers carefully and invest patiently in their education.

Domestic institutions can capitalize from their ties to China's upwardly mobile customers by packaging investment products and services with an eye toward reinforcing long-term relationships. That's a strategy embraced by Bank of China (BOC) and China Merchants Bank. Their aim is to fend off encroachment by foreign rivals like Citibank, HSBC, and Standard Chartered Bank, all of which hope to attract China's wealthiest investors with elite private-banking services.

Partnering with the Royal Bank of Scotland, BOC became the first Chinese bank to offer premium asset-management services last June, through a Beijing office serving clients with assets exceeding $1 million. BOC expects to sign up 10,000 clients this year. From its strong retail base in more than 30 cities around the country, China Merchants is building a homegrown wealth-management product called "Sunflower VIP."