The last few years have seen explosive growth in the number of Chinese HNW and UHNW individuals looking to ‘offshore’ their wealth – presenting wealth managers and professional services specialists around the world with a once-in-a-lifetime opportunity.
The key, it seems, is two-fold: first, understand the drivers of this push for globalisation; and secondly, be able to source and deliver the assets, solutions and service needed to fulfill the various goals.
This is not a simple task. China’s wealthy are looking beyond their domestic borders – and increasingly globally – for a variety of reasons: diversification of investment portfolios; an appetite for property in London and other key cities to bolster real estate portfolios; direct investments and club deals; business expansion; options to do more effective tax, estate and succession planning; and also residency and citizenship schemes, to give their families more choice in terms of lifestyle and personal security, as well as education for the children or grandchildren.
Further, as it gets more difficult to access higher-return assets in Mainland China, the wealthy are realising the value of wealth preservation and inheritance issues.
As a result, the starting point is to understand their needs and then help them get familiar with the risks of doing nothing.
This is made trickier by two key peculiarities with China: first, many of the HNW and UHNW are younger than in other countries, so might not have the same urgency to plan for a generational shift; and secondly, they can’t invest easily in their own market due to lack of products, so a challenge exists in selecting investment opportunities overseas.
As a result, the opportunity for private banks, family offices and other advisers based offshore is to focus on what they can to help these clients further their global ambitions.
Rising wealth tide
The fifth ‘China Private Wealth Report’ by Bain & Company and China Merchants Bank (CMB) is clear evidence of all this.
The data shows that a steadily increasing number of Chinese HNW individuals are investing overseas.
In 2011, for example, just 19% of those surveyed in an earlier version of the report had investments outside the country. Today, in the 2017 edition, it is at 56%, and rising.
Among HNW individuals who invest overseas, the report said 82% want to diversify investment risk, with 51% seeking investment opportunities globally. While about 60% of overseas assets might be in cash, stocks or bonds at the moment, the next 12 to 24 months should see greater portions of overseas holdings allocated to insurance and investment property.
Creating a compelling offering
The onshore assets of China’s HNW and UHNW are tightly controlled in terms of cross-border capital flows,
But then ‘offshoring’ wealth, Hong Kong is likely to be the first port of call, although Singapore is making more of a dent in this tradition.
In both jurisdictions, while the overseas branches of Chinese larger banks offer a private wealth proposition of sorts, many Chinese HNW and UHNW individuals prefer to tap into foreign expertise.
This has traditionally been private banks, but increasingly multi-family offices are finding favour.
Some Chinese single family offices and multi-family offices are also now offering an alternative overseas.
Indeed, the 2017 Bain and CMB report cited many wealthy business owners as expressing increased interest in leveraging family office services.
While the use of family offices is still very limited in China, the report said that about 40% of UHNW individuals would consider using a family office for asset allocation, wealth preservation and inheritance, and tax, legal and business inheritance planning. Among the entire HNW population, 52% believe a family office can provide valuable planning and investment advice, but 54% said it’s important that the family, not the family office, retain control of decision making.
Meanwhile, an increasing trend is that as Chinese clients slowly go offshore and diversify, the type of firm they are likely to choose to help them varies across different customer segments.
At the top end of the pyramid, clients look for best-in-class international players when they go offshore. By contrast, for customers in the lower-HNW and upper-affluent bands, their relationships remain with local providers.
There is also a growing influence of foreign wealth and asset management firms in bringing overseas capital markets and investment capabilities to local customers.
Another of the options open to offshore wealth managers vying for a slice of the action is to create a cross-border referral network with an onshore partner.
Regardless of approach or type of wealth manager, however, notable about advising China’s wealthy is the longer time it takes to get these clients comfortable with the concept of structures such as trusts and the responsibilities involved, as well as what it means to cede control of their assets.
Capitalising on ‘Swissness’
Beyond Hong Kong and Singapore, Europe is featuring more and more prominently in the globalisation plans of China’s wealthy.
And among the countries that has been working hard to jostle for attention is Switzerland. It is certainly well-positioned to prosper; a mix of corporate- and government-led initiatives are showing what can be achieved via the right type of collaboration.
Not only is there still the attraction for clients of having a booking centre in Zurich or Geneva, for instance.
One of the signs of the interest among the Chinese in Switzerland has been M&A activity.
In 2016, for instance, several notable transactions made the headlines, including the record USD44 billion takeover of Basel agrochemical giant Syngenta by the China National Chemical Corporation (ChemChina).
In general, China’s corporates seem to want to take advantage of Switzerland’s political stability, technical know-how, strong financial system and low corporate tax rates to set up regional headquarters in the country.
Expanding horizons in this way can also facilitate the shift in China’s domestic market from a manufacturing-heavy model to a service-based economy.
Further, a growing number of Chinese now own real estate in Switzerland, including hotels in popular resorts such as Engelberg in the middle of the country.
Only last week, even, the Centre for International Economic and Technological Cooperation, a government unit under the aegis of China’s Ministry of Industry and Information Technology, signed a strategic partnership with the municipal government of Changzhou – not far from Shanghai. It formally kicked off the construction of Sino-Swiss Industrial Park in Changzhou National Hi-Tech District.
The establishment of the park is the upshot of a proactive government initiative to strengthen ties between China and Switzerland. And it includes building a business, science and education zone (in China) based on a Swiss model.
Such corporate success stories offer an interesting angle for wealth managers – providing relevant talking points for them to explore further with Asian clients, starting with this being a good reason to bank in Switzerland.
More broadly, collaboration is an effective way to draw interest from wealth Asians in terms of what Switzerland has to offer.
The swissnex network, for example, focuses on connecting Switzerland with the world in relation to science, education, art and innovation.
It does this by forging relationships with science and technology counsellors based in Swiss embassies around the world, in turn taking an active role in strengthening Switzerland’s leadership as a world-class location.
Chinese companies, too, are supporting young and talented, science-oriented entrepreneurs by taking their expertise global, including to Switzerland.
For example, Huawei, the Chinese telco, entered recently into a cooperation with ETH Zurich, the world-ranked Swiss university, by financing a ‘Pioneer Fellowship Program’. In short, the aim is to help young researchers realise a marketable product and solid business plan out of their research results.