Western banks are determined to capture wealth management business in China, but the country's row with Google over censorship and surveillance shows continuing challenges and problems for firms seeking to operate in the Asian giant.

In recent years, China has burned brightly as one of the BRIC economies that are seen as providing much of the driving force for wealth management. Almost every week, this publication carries news of a joint venture between a Western firm and a Chinese counterpart or a report on how banks are optimistic about the Asian giant’s prospects.

And yet recent events should encourage wealth managers to be cautious. The recent threats by internet titan Google to quit China over a row about security should be heeded by bankers as well as internet firms. As far as I can tell at the moment from those who track the sector, however, bankers are unlikely to abandon their pro-China growth strategies.

Google said this week that it would end self-censorship of its product in China and that depending on how the Chinese authorities react, the firm may have to leave the country – a potentially big blow to commercial relations between the US and China.

The controversy is not confined just to this Silicon Valley firm: Yahoo!, Google’s main US rival, was targeted by a Chinese attack similar to the one that affected Google, Bloomberg reported, citing unnamed sources. Google estimates that at least 20 other companies were targeted in a series of attacks in December and has notified these companies, which reports say span technology, media, chemicals – and significantly for wealth managers – financials. Google has not, however, identified these companies.

There may be implications for wealth managers seeking to build business on the Chinese mainland. First of all, such businesses may be so keen to claim the custom of a rising affluent middle class in China that they will be prepared to hold their noses and put up with whatever restrictions, and possibly surveillance activity, that the Chinese government seeks to enforce. A crucial issue is privacy and client confidentiality. I suspect that banks may be so keen to grab business that they will put up with quite a good deal of interference as an annoying but unavoidable issue. After all, it is not as if the behaviour of the Communist-ruled country is unique. Around the world, client privacy is under assault from governments, including liberal democracies, which claim to be hunting after alleged tax dodgers. And as we have seen in the cases of the German and UK governments, Western democracies are not above using stolen client data in their investigations, as in the case of material taken from Liechtenstein’s LGT. (Such governments claim the ends justify the means, not surprisingly). So it is well to put China’s own conduct into some perspective.

Even so, Google’s threat to quit may prove significant if it encourages managers of non-Chinese banks to think harder about how they intend to do business there and what sort of strategy to adopt. Robert Ellis, a consultant in the wealth management industry, told WealthBriefing this week that the rule of law, as Westerners might understand it, does not exist in China. “The law is what the government says it is this week and can change it next week,” he says.

There is another angle to the Google affair: rising protectionism and worries about free trade. The row will hardly deepen the love between the US and China. The US has already taken a dangerous step by deciding late last year to slap tariffs on tyre imports from China – a clear sop by Barack Obama to the auto unions in the US industrial belt that traditionally form a bedrock of support for the Democrat Party. If China were to retaliate, by tightening controls on Western firms seeking to enter the Chinese banking market, for example, this would clearly be bad news in the long term. Another point to consider, as I noted over a year ago, is that Chinese banks have been increasingly looking to tap into Western markets. If trade barriers rise, this will obviously be less likely to happen.

So the Google affair may, at least for now, be a purely internet-related spat between a hugely successful firm and a country still wedded to the practices of communism. But when a firm as large as Google threatens to pull out of a rapidly expanding economy over a matter as significant as state surveillance, it surely fires a warning message to any business. China is, hopefully, going to be one of the great economic success stories of our century. But as the Google story shows, the journey could be bumpy.