The words of the Chinese reformist are still enlightening today. Has the world economy really stalled? Not really. It is just experiencing a major restructuring. We need the courage to face the change, the patience for new opportunities and the spirit to rebuild the world.
hina is the youngest nation rather than an old one. On one hand, the pessimistic sentiment toward China is all over and that's not news. On the other hand, the call for reform from both the government and private sectors is like a table of spicy Sichuan foods.
They are a bit hot and not perfect, but everyone wants to have a taste. Change is the premise for a promising future. In 2013, there are significant changes in the wealth management industry. One lawyer in the industry said on his WeChat: "Today's wealth management industry is like the Eight Immortals crossing the sea with each one showing his or her special prowess. But after two to three years, it will be easy to distinguish between the Dragon King and the bit-part player." The market of China's high net worth individuals is indeed very big and is still growing, but the Chinese clients are increasingly in need of professional services in privacy protection, asset succession and preservation. This demand has been growing at a pace that exceeds the expectations of the clients themselves, professionals and the government.
A Large Account
China's low-profile private banking sector only existed for several years, but it has already served as one of the major bridges in the globalization of the wealth of Chinese high net worth households. Although most VIP clients at Chinese banks don't know such a business, the private banking units of several major banks started the business to allow clients to make deposits domestically and extend loans overseas about two years ago. The amount of loans extended overseas is equal to that of the deposits made domestically. It means that several special channels have been set up to bypass the barrier established by the State Administration of Foreign Exchange. These special channels include foreign exchange payment under corporate trade account, "domestic deposits and foreign loans" for overseas property projects, and "domestic deposits and foreign loans" for emigration projects. We should be aware that these channels don't need to gain the SAFE approval.
The Xi Jinping-Li Keqiang government has yet to release more signals for reform, but they indeed take a practical and open-minded approach in the financial industry. From forex scalpers outside Bank of China, to some well-decorated financial institutions, China's forex black market is notorious. Even without the black market, a Chinese aunt can still collect the ID cards of 20 relatives in order to obtain the foreign exchange that is enough to buy an apartment in Canada. Today, everyone has figured out that we should let our banks do this instead of banking on the black market even if the fee charged by the banks is one percentage point higher than that in the black market. Under such a scenario, the money is deposited domestically, which is the best solution. If it is placed in short-term credit market, it can bring about multiple returns. Shun spent years dealing with the floods but failed. However, Dayu succeeded in doing this. What's Dayu's magic code? Dayu used the method of channeling the flood away instead of blocking the water. "Using domestic deposits to extend loans overseas" is a good beginning and shows the Chinese wisdom. Under a broad macroeconomic background, "Going out", including the internationalization of personal assets, is part of China's soft power. Therefore, "using domestic deposits to extend loans overseas" shares the same essence with the "Confucius Institute." Let's imagine if we use the RMB for settlement, aren't we able to print money like the U.S.? Let's imagine if there is a small town full of lends from Chinese banks, aren't we placing the risk of subprime debt overseas and bringing the money back to home?
Take Precautionary Measures
It may be a bit exaggerating to say the earth is a village, but it's appropriate to say there are several villages in it. Like international financial professionals in New York, London and Luxembourg, a growing number of Chinese businessmen and investors fly frequently between the villages on the earth each year. It's not all about jet lag and seasons. Another prominent issue is that he and his family should be taxed in which village. There are few people who can distinguish between the concepts of residents and tax residents. But most of them retain their old habit in terms of taxation: they choose not to file tax reports if possible. The habit has helped accumulate a lot of taxation risks. Nobody knows when the risks could lead to a disaster. Judging from the experience of HNWIs in Taiwan, when the problems suddenly arise, it will be difficult to give up citizenship in the United States. It's the same in China. The Beijing bureau of U.S. Internal Revenue Services needs money to pay their employees.
Another issue wealthy Chinese families have to face is that the ownership of overseas property and other assets may be changed due to their children's marriage. For example, a Chinese couple is still working hard in China while their son is studying in Germany. He recently started to date a girl and they lived together. What may happen?
If, after two years, two young people want to break up, possibly under the Australian law, half of the ownership of the house may be given to the girl. Nobody is willing to accept to such a result. Therefore, they find no solution other than the family trust, which is used by foreigners. But those super-rich people sometimes don't make careful planning. For example, the elder sister of Gu Kailai used her own name to register a house in London. Although it's done trough a BVI shell company, the real identity of the buyer is open to the public.
Of course, for those who are ready to emigrate but have yet to start the process, they should be aware that using the family trust to consolidate family assets must be done well before they emigrate to overseas jurisdictions. If you want to do it after you emigrate, nobody can help you at that time. And for the founders of those growth enterprises, they should be aware that private trusts don't only apply to talents like Li Ka-shing. The growth period of an enterprise is a golden period for wealth planning. I don't want to elaborate on some complex issues. But as the old saying goes, it will be wise to repair the house before it starts to rain.
Grasp the Rules
As the Chinese saying goes, "if one has no long-term considerations, he can hardly avoid troubles every now and then." BVI has been envied by people in the offshore financial circles these years. Many people used BVI to represent offshore companies and China's rich people and investors also rushed to use the jurisdiction. However, too much water drowned the miller. Nowadays, the obstacle BVI meets in the global banking industry is because it's the one who stands out. If OECD and other big countries want to clamp down on the offshore world, it must single out one jurisdiction to warn the others. Therefore, the mistake is not with BVI. It's not important to define who is right or who is wrong. What's more important is which jurisdiction people should choose to make an offshore structure. Apart from BVI, Cyprus is also a troubling place. The Germans forced Cyprus to have a haircut for 100,000 euro clients. The EU is satisfied, but it almost ruined the future of Cyprus in China. The clients who experienced the haircut still feel weird that the largest bank in an international financial center had forfeited clients' money. There is also a place in Europe that is being criticized by politicians. It's Luxembourg. Luxembourg has the advantage of being more mature and stable. Unlike Cyprus, it didn't place all the eggs in one basket. Therefore, its own economic situation is fine. There are both rises and falls. It's natural for people to seek stability and growth for their wealth. The ups and downs of China's Ordos offer us a profound lesson. It's a gold filed for adventurers rather than a solid base for "old money". There is a saying that "we are only able to grasp the rules of chess, but not winning or losing." Here are some principles I want to share with you:
- Economic stability: If a jurisdiction relies on coal or oil, we have to consider how long it can last. Even if it can be dug out, will it be able to sell well? Economic stability of a country involves many factors, but adequate diversification and sustainability are crucial. Guan Zhong of the State of Qi motivated the neighboring countries to develop the silk industry and then suddenly stopped importing. Therefore, the neighboring countries faced difficulties and had to buy foods from the State of Qi, which made a lot of money. Today, you should be careful if some jurisdictions with economic instability wish to help you manage your wealth.
- Professional experience: There are a lot of places claiming that they can do all sorts of structures and investment. But you need to be careful that these jurisdictions might just release related laws. The professionals themselves have not any experience. Are you willing to let the guy do a test on your wealth?
- Judicial system: You may find laws in various jurisdictions similar but they are actually quite different. You can not expect a civil law jurisdiction to offer products under the common law.
- People are the key: You have to get a full understanding of the people who work for you, including their culture, their background, and their mindset. That's because everything should ultimately be done by people.
In addition to requiring "rich" companies to pay full tax, the Chinese government has another card under its sleeve. That is a card designed to narrow the gap between the rich and the poor: the inheritance tax. China's first-generation rich people may potentially contribute to a massive amount of tax to the government. It looks so righteous, and is even in line with international practice. However, it's just like the "crying wolf" story, as was mentioned too many times. People do not know whether the inheritance tax will be enforced.
When inheritance tax is mentioned, people will also raise the issue of large-sum policy and suggest, as insurance, it should not be subject to taxation. However, nobody knows whether the large-sum policy bought in China will be exempted from the inheritance tax in both the legal and practical level. In addition, as the family trust started to develop in China, the domestic private banking industry is actively planning to use the Chinese trust law to help manage family assets and deal with succession issues. However, as the domestic trust law stipulates that "public information disclosure" is the prerequisite for the set-up of the trust, this makes it hard for the domestic trust to play a big role in avoiding inheritance tax and keeping confidentiality.
Indeed, as for the succession of family wealth, using insurance policy or trusts to ave the tax seems to be the focus. But from a broader perspective, the importance of the handover of family business and the distribution of interests among family members is higher than saving the tax. Data showed that the value of listed companies has lost more than 50% on average when the cross-generation succession was completed, let alone the internal conflicts and battles for family wealth after the death of the first-generation founders of the business. To tackle these issues, it's better to combine trusts with multi-jurisdiction legal tools, such as foundations, private trust companies, and limited partnerships.
With the capital allocation goes global, any single-jurisdiction legal structure is not enough to optimize the asset distribution in a global perspective. The optimization of legal structures under a global perspective will become a trend for family wealth management. For example, Longfor Properties Chairwoman Wu Yajun, SOHO China Chairman Pan Shiyi and his wife Zhang Xin, and Nine Dragons Paper Chairwoman Zhang Yin are all the forerunners in the globalization of family wealth structuring.
Conclusion: The year 2013 is interesting for the Chinese wealth management market. Some of the flowers shipped from the Europe and the US have died while others are set to blossom. For those ready to break the ground in the yard, we will see whether they are monsters or saviors !
