What is the age we are in now? We might say that it is the age of the Internet, an age short of resources, or we can argue that it is an age of excessive consumption; it is an age in which people are in conflict with one other. We want to understand each other, but sometimes have to challenge each other.But the trend is towards integration. We might recognize, understand, master, and promote this age from the perspective of "Chinese Globalization".
One hot topic in the development of Chinese globalization is migration. Why is there such upsurge of migration? There is one reasonat its core: family. Family requires peace of mind and safety, and peace of mind and safety require the proper planning and implementation of business, studies, health and mentality. Traditionally, during the Chinese New Year, the words "Achieve the Five Elements of Happiness" can frequently be seen. They refer to abundance, good health, longevity, a natural, painless death, and good morals. Abundance, good health, longevity, and a natural, painless death are consequences where good morals are the key for transformation. As for mentality, being of good or bad morals and being kind or evil imperceptibly (or sometimes directly) affect the other four elements. Mentality, business, studies, and health accumulatively affect wealth. Thus, mentality has a close, inseparable connection with abundance, good health, longevity and a natural, painless death. Migration– namely, choosing a permanent residence elsewhere –will affect one’s business, studies, good health, and mentality, whether directly or indirectly. So, there are important decisions to make regarding the Five Elements of Happiness. Migration is, by its nature, exercising free will, but it is not yet conclusive whether it is a good or a bad thing.
In terms of wealth being the basis for a family’s happiness, in the process of creating, managing and inheriting wealth, do you want to let wealth nourish life or, instead,spend life maintaining wealth? The obvious answer is the former; we cannot spend our lives supporting our wealth. But why does the conduct of so many people violate such common knowledge? This shall be left for another discussion. We can only hope that wealth grows in healthy ways, instead of bumping up and down with our own lives and finances. We all create wealth along with interesting things, but we can only hope that our free hearts and life experiences are not tied down by financial worries.
In mid-August 2015, the median price of the Chinese renminbi suffered a sudden devaluation after losing regulation on its floating range. The force of the market directed the renminbi towards devaluation. The amplitude of this drop shocked investors, along with the world. We need to be aware that,in future,currency exchange rates will become more volatile and more unpredictable because the economic and political powers of the world– along with internal and external factors varying these –have entered a more unstable period. The ruble, the euro, the Canadian dollar and the Australian dollar, for example, have all been in a restless state since last year. So what do we do to convert such a disadvantageous situation into an advantageous one?
Even if we cannot fully complete such a conversion, we at least have some means to try. Hedging portfolios is one of the key strategies. These utilize cross-variety, cross-region, and multi-currency asset allocation strategies, thereby constituting a globalized asset portfolio allocation strategy. We can arrange and conduct specific tactics on the basis of such a strategy.
For example: A Chinese citizen with permanent residence in Canada can live in both China and Canada permanently and are entitled to enjoy certain Canadian benefits, including education, job opportunities, social welfare, and its cultural environment. Once the investable assets of such an individual reach a certain amount, he or she will need global asset allocation. Asset allocation may include cash assets (comprising of renminbi, US dollars and Canadian dollars) for expenditure related to living expenses and education, real estate in Beijing and Toronto respectively, and perhaps a house in a small Canadian town. In addition, such an individual might create a portfolio that includes insurance, financial management products, trust plans, and so on. The business might be extended to Canada, while remaining capable of retrieving resources from China.He or she may also have a cross-regional PE/VC layout, and even philanthropy or charity arrangements. Regardless, when the assets reach certain amount, plans for cross-border wealth management will become necessary.
Now let's have a look at the following interesting investment estimate. Assuming that a family has USD 50 million in investable assets, how would they plan for it? Let’s assume that the gains and losses of investment in the stock market varies significantly (as with the specific parameter below), annual return on investment in CNY fixed income products is 8%, and annual return on investment in USD and CAD fixed income products is 6%. Let’s assume that USD 50 million is fully invested in the Chinese stock market, and that the gains and losses from the first year to the fifth year are +50%, -30%, +10%, -10%, and +5% respectively. By the end of these five years, the balance would be USD 54.57 million. Indeed, this is decent performance in the stock market.But after five years, the assets increased from USD 50 million to USD 54.57 million, and the total gains and losses for these five years is nearly 10% - this is a very low annual gain, which is below CPI.It's an even bigger loss when taking interest into consideration.
Assuming that this USD 50 million is invested in fixed income investment products instead of the stock market, the annual income would be 8%. It would be USD 54 million after the first year and USD 58 million after the second. By the end of the fifth year, the balance would be USD 73.46 million, totaling a 40-50% gain. Of course, such a figure is not absolute for each person, but its possibility is reasonable.
Let's calculate even further. It's inconsistent with the asset allocation theory to invest USD 50 million into the stock market, due to unit variety. Diversified asset allocation strategies should be used, including different regions and currency types. I believe that we cannot be fortune-tellers on the Forex market, so what is the effect that we expect when setting out to manage the allocation of our assets? We should not expect excess income by betting on the correct products, but instead, we should hope that the wealth does not shrink due to dramatic change in the currency market.So the expectation is that multi-currency asset allocation enables stable wealth with only minor fluctuation of the total value.
If such an investor has the same arrangement with multi-currency asset allocation, comprising several sets of houses in China (worth USD 5 million), real estate in the U.S. and Canada (worth USD 1 million each), USD and CAD deposits totaling USD 1 million, Chinese stock market assets (USD 1 million) and PE assets (USD 1 million), CNY trust and fund products which are similar to fixed income products (USD 30 million), and USD funds and CAD funds (USD 5 million each). By the end of the fifth year, his assets will total USD 73.06 million according to an above yield calculation.
The above two figures, after comparison, are very close. So, which strategy is better? CNY-only asset allocation achieves a little bit more income over five years, but the multi-currency strategy of the latter is more reasonable. The multi-currency portfolio is conducive for restraining the potential volatility of asset value caused by Forex rates. We can relax and voyage without worries, instead of interrupting normal activities every now and then to monitor the stock market, Forex rates, to call brokers or to make a deal as soon as possible.No–such an anxious and busy life is not desirable.
I have an opinion on social wealth structures.There will be 3 key phenomena for future wealth, which shall especially be noted when there are lots of assets available for investment: 1) frequent, non-linear and volatile wealth value; 2) multi-level wealth management; 3) professional wealth inheritance.
1) Frequent, non-linear and volatile wealth value: An individual with few resources can become rich in three years, while it's common as well for a middle class individual, or even a high-net-worth individual to become poor. So, considering the normalization of non-linear and volatile wealth value, wealth management must be well-planned and grow healthily. This will be more satisfying than experiencing big ups and downs.
2) Multi-level wealth management: This is an important trend in the future. Wealth management for most people in the past, and even now, focuses only on the annual yield or the operational profits. As an overall system for a family, your family enterprise, financial management and investment, global layout, physical health, mental health, all of the above should be taken into consideration on a multi-level basis. Wise wealth management is no longer confined to changes in balance, nor to the profit of an enterprise for this year. Instead, professional and systematic methods, as well as comprehensive multi-directional management are introduced.
3) Professional wealth inheritance: Inheritance from generation to generation should be planned on a time axis. Is there any professional planning available for your family enterprise, asset allocation, insurance, trust or will arrangement? For example, migration and nationality strategies: which country or region shall be chosen to live in? The family inheritance will affect the second and the third –or even further– generations. For example, when considering an investment plan, have the effects of taxes, geopolitics, family members’ changes and others been considered comprehensively to properly protect the inheritance? Other factors like marriage and family businesses, which involve numerous and complicated factors such as dynamic changes, policies, laws, family relationships, etc., require professional advice, tools, and services to enable smooth and healthy inheritance process.
We are currently in the middle of the process of Chinese globalization. This is a process in which Chinese achieve both overseas development and self-improvement. Communications and integration will inevitably result in such a process. Also, this is a process of rejuvenating one’s own culture and recognition of being Chinese. In this process, global asset allocation and internationalized lifestyles are becoming some of the key strategies for high-net-worth individuals. It is worth continuing this line of thinking in order to master its features and key elements, to carry out planning and structuring at multiple levels and on a professional basis by establishing a clear understanding of the age of Chinese globalization, making both Chinese and the world better.
Derick holds the degrees of Master of Finance and Bachelor of Applied Mathematics. Derick took the position as General Manager and Branch General Manager of several renowned wealth management and investment immigration agencies as well as some IT enterprises.
