China still lacks appropriate succession planning structures

Date: 15 Apr 2015

Citywealth

Wendy Weng, China Representative at Guernsey Finance, talks about the second generation of Chinese UHNWs and their success on global markets.

Is the uncertainty in Europe causing your clients to move or seek to start their businesses in Hong Kong?

In China, wealthy individuals have been starting their business in Hong Kong for about the last 10 years. Hong Kong is a much more mature and global market and people who want to invest in China also choose Hong Kong because it’s a more sophisticated market. This applies not only to individuals but also to businesses and corporations. Another advantage is that people here are more language-friendly.

Where does the wealth of Chinese UHNWs come from, i.e. what kind of businesses?

For about the past 20 years, most of the wealth came from manufacturing which gave birth to the first generation of Chinese UHNWs in the 1970s – 1980s. Now this generation is in process of passing their wealth to the second generation that is significantly different to the first one. Actually, the second generation of Chinese UHNWs build most of their wealth from investment. Investing in China is currently very lucrative: for example, the stock market in Shanghai saw a 200% return on investment in the past year. The Private equity market in China is also an important interest of the wealthy. While returns in EU or US are currently quite low, 10% average, in China the return on investment in private equity is around 30% on average.

Do you see any difference in succession planning in Asia that are different from the Western world?

Now when the first generation seeks to pass their wealth onto their children, more and more people seek a reliable structure. There is no appropriate succession planning structure in China today. As a result, many wealthy people search offshore structures to help them with succession planning. Although some progress is being made and first reforms are planned to be implemented in China in five years’ time, most Chinese UHNWs currently look for advice in other countries, depending on where their business is based. For Asia-based clients, it’s mostly Singapore, while USA-based UHNW’s choose the Caribbean, and the Europe-based go for structures in Channel Islands.

What do the Chinese clients buy in Europe, especially in London, and what do you think is the size of this investment?

The majority of wealthy invest in real estate and one individual can invest in average 1 to 10 million pounds. Many families send their children to study abroad, in Canada, UK or other European countries, and then the mother joins them to look after them and she also starts to invest in the property market. Fathers generally stay in China to look after the business.

Are there any trends you’ve seen in Asia relevant to the private wealth market?

The Chinese government is working on rendering stock markets in China and Hong Kong freer and to create a more business-friendly environment. More recently, the Chinese wealthy were not only looking for markets in Asia, but also in the US, Europe and South Africa. I reckon we will see more and more Chinese wealthy investors in the global market over the next 10 years. The areas of interest for the inverstors are changing too – many UHNWs are increasingly investing in infrastructure, education, technology and innovation, and not only in stock markets or real estate. This is valid for both global and Chinese markets.