Despite being the target of frequent scorn in the media and in the online community, the children of China’s super-rich must feel that they are sitting pretty. China has created 100 new billionaires since 2008. As it remains a country famous for doting on its children, it’s a fair bet that China’s new rich will be spending a large portion of their wealth on overseas schools, fast cars and apartments for their kids.
As a result, an increasing number of wealth management companies both at home and abroad are now targeting wealthy Chinese, seeking to persuade the new rich to cut back on their spending onshore and put their money in long-term investment vehicles offshore.
Some are having more success than others. Corporate services providers have found that while there is increasing interest in structures like trusts and foundations – typically used by wealthy individuals as vehicles for tax efficient succession planning – take up has been slow. Others maintain that wealthy Chinese are so busy making money that they have yet to get serious about setting up a nest egg for their kids.
Johnson Chien, Shanghai managing director of Global Consultants and Services, a corporate services provider, admits that the market for offshore family wealth protection is still in its infancy. But as more individuals get rich, he believes they will start to pay closer attention to their financial futures.
"I wouldn’t say there are many people doing this, but the market will grow," Chien said.
Getting money offshore is increasingly easy for wealthy Chinese, and there are a number of methods – both legal and illegal – of moving cash from mainland China to Hong Kong. Once the money is in Hong Kong, investors will find themselves spoilt for choice, with corporate service providers offering structures everywhere from Brunei to Belize.
John Gu, principal at KPMG in Hong Kong, says that trusts and foundations are preferred structures for long-term asset protection among the Chinese. Gu believes that by putting a portion of their worth into one of these vehicles, wealthy Chinese are diversifying their assets, and therefore providing a safety net.
"It’s nice to have your assets spread around the world rather than have them all in one basket, sitting in China," he said.
Foundations are the new kids on the offshore finance block, and the number of jurisdictions offering them has ballooned in the last 12 months. Jersey, in the Channel Islands, recently passed foundation legislation specifically targeted at Chinese investors, and has stepped up marketing in Beijing, Shanghai and Hong Kong.
Corporate service providers in Jersey, as well as in jurisdictions such as Panama where foundations have been available for years, believe this particular structure will become more popular with Chinese investors. The reason is simple: control.
When an individual places a portfolio of assets into a trust or foundation, he or she is effectively giving up ownership of them. This means the individual can’t be taxed personally on the assets in life or on death, so the full proceeds pass directly to one or more named beneficiaries, often younger family members.
The two structures differ in that, with a trust, the individual hands complete control of the assets to a trustee, while a foundation is a legal entity in its own right and can take over the assets directly. The individual doesn’t have to cede ownership to a particular person and this element of retained control is thought likely to appeal to Chinese investors.
"[Foundations] might be more attractive to those who want to keep control within the family – people who would rather stick their money in a hole in the ground than give it away to a trustee to manage," said Chris Brown, director of Lutea Hong Kong, a trust company.
Of course, establishing new products and marketing them towards China only has value if Chinese investors trust them and are willing to save rather than spend. There are those who say that offshore products are failing on both counts.
KPMG’s Gu believes that investors are cautious about new offshore products, and rightly so. Trusts and foundations, and Beijing’s view of them, has never really been tested.
"As far as we can see there are many offshore trusts being established, and we’ve not yet seen an active challenge from the tax authorities. But that doesn’t mean they’re not going to do anything. We are starting to see increasing scrutiny, and these structures could be seen as tax avoidance," he said.
Others, such as Didier Brizard at the Paris-based Tiaré Group, feel that while there are plenty of people getting rich in China, few are planning ahead.
Speaking at a wealth management conference last month, Brizard said China suffered from a "shirtsleeves to shirtsleeves" problem, meaning that wealth accumulated by one generation was not making it on to the next. Unlike the majority of Chinese people, who are aggressive savers, China’s uber-rich appear to be evolving into profligates.
Andy Slevin, Shanghai managing director of property consultancy Knight Frank, agrees with Brizard. He says that Chinese investors tend to be focused on creating new wealth, not protecting existing assets, and few are making long-term plans. "They are thinking: ‘Why save? I made US$10 million today and I’ll make another US$10 million tomorrow.’ They think their kids will have more money than they know what to do with," he said.
While the parents may not be looking to the future, it seems that increasingly their little emperors are. Chinese buyers are purchasing property everywhere from the UK to Australia, and it is often their children who drive the investments.
"There has been a barrier to mainland Chinese historically, partly because of the difficulty in getting money out of the country but also a sense of lack of knowledge of those markets. Chinese investors do not want to be the first movers," Slevin said.
"But we’re starting to see this change. Their sons and daughters have lived [overseas] for a couple of years and they understand how the markets work. They’re now coming back and telling their parents: We should really be getting in on this."
Beijing’s capital controls have long been a barrier to wealthy Chinese wanting to enter foreign markets, but there are an increasing number of methods for those who want to do so.
These methods feature various levels of legality. While businesspeople are often able to use company structures to transfer currency legally, Bank of China recently estimated that the amount of lending coming from informal channels amounts to US$139 billion per year. Shenzhen is said to be rife with "reputable but informal" banks that make cross-border transfers.
Andy Slevin, Shanghai managing director of property consultancy firm Knight Frank, points out that the number of mainlanders buying properties in Hong Kong alone is evidence that China’s rich are managing to bypass capital controls.
Methods such as transfer pricing – buying goods in China, exporting them to Hong Kong and selling them to the US for a profit – as well as setting up dual accounts in China and Hong Kong or having friends or relatives withdraw cash from Chinese banks in Hong Kong are widely used. Some Chinese even use mainland Chinese credit cards to pay for property abroad.
"There are various ways around the mainland capital controls. Not all of them are legal, but there is no question that they are getting their money offshore because we are seeing people buying," he said.