China: Wealth Management

Permanent residents are subject to tax on their world-wide income. Non-residents and residents who have not yet become permanent (the first five years of residence) pay tax on their China-source income; but the residence qualifications are a bit hazy, especially for people of Chinese origin.

Income is defined very broadly, but excludes interest on bank deposits. There are personal allowances, which are higher for foreign individuals. Tax rates vary from 5% to a maximum of 45% on monthly earned income over RMB100,000. There is capital gains tax of 20%, and the same rate applies to many types of unearned income. Employers operate a 'PAYE' withholding tax system for tax on salaries and social security contributions, which bear more heavily on employers (20% of payroll) than on employees (7%).

Withholding tax of 10% applies to dividends, interest, royalties and capital gains.

Clearly this is a taxation environment which is not appealing to richer people. There are plenty of those: there are thought to be more than 900,000 dollar millionaires in China, and the country has more billionaires than any country other than the US.

Although the rapid expansion of China's economy and especially its international links have left the authorities struggling to keep up in terms of tax collection, and have presented richer people with multiple opportunities to transfer or create wealth abroad rather than in China, there is still considerable and growing demand from within the country for legitimate channels to preserve wealth from a government which is after all still nominally socialist or worse, and certainly can't be termed 'wealth-friendly'.

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China: Inheritance Taxes

There are currently no inheritance or gift taxes in China, although they are firmly on the government's wish-list. It is quite likely that some form of inheritance tax will be introduced in the near future, and this is one of the factors that impels rich Chinese to look for ways of protecting their assets.

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China: Banks, Stocks and Real Estate

If the government has wanted to retain wealth inside China, then it has been its own worst enemy for much of the last fifteen years. The litany of counter-productive policies is quite long, certainly including its protection of the domestic banking industry, causing lack of confidence among its potential customers, restrictive foreign exchange rules which have driven people to move money around outside the system, and ambivalent attitudes towards wealth as such which have driven people to locate wealth-generating operations in Hong Kong or other 'offshore' jurisdictions.

Things have gradually improved, although Chinese banks are still a black box despite flotations in Hong Kong, Shanghai and even London. China's entry into the WTO has been a major factor, with foreign banks being allowed to open up in China. The series of CEPA agreements between mainland China and Hong Kong has also been instrumental in encouraging development on the domestic banking sector.

Foreign banks are creating a semblance of normality in Chinese banking, but with that exception the government is both inscrutable and unpredictable, using tax policy in particular to forward its social and economic goals with very little regard for the creation of a stable investment market.

Banking deposits, real estate and securities investments are all subject to highly volatile and occasionally restrictive market conditions which certainly don't encourage wealthy Chinese to keep their money at home.

That said, there are more than 30 Chinese banks currently offering wealth management services, alongside a number of foreign banks, although they still don't really have a level playing field on which to compete.

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China: Alternative Investment

As in so many other areas, the legal framework for asset management in China is lagging behind the demands of the market. The extant laws are as follows:

Obviously, wealthy Chinese don't want to be limited to investing their money in Mainland China. But the lack of convertibility of the currency stands in their way, not to mention restrictions on permitted investments for asset managers>. The result has been that for many years the border between China and Hong Kong has been extremely porous: in legitimate and illegitimate ways, the game has been to get as much of your money out of China and into Hong Kong or American dollars as fast as you can.

In response, the Chinese authorities talked for years about regulations to permit overseas investment by asset managers, known as QDII regulations, and these finally struggled into life on a trial basis in 2007. This is a subject for the next section, on offshore investment, but at least now Chinese asset managers (including those run in practice by minority Western partners) are able to offer a spread of assets.

As just one example of the sort of hybrid that emerged after the 2004 law came into effect permitting joint ventures in asset management between Chinese and Western players, we can instance BOCIM, which is a partnership between Bank of China and Blackrock (Merrill Lynch Investment Managers) which opened its doors in 2004.

In August, 2010, the People's Bank of China published a guide announcing measures to open up the gold market in China. The Central Bank said the gold market would be opened up in stages with the following moves:

The initiatives were reported to be in response to increasing private demand in China, as domestic production is increasingly unable to satisfy domestic demand; China is the world’s leading producer of gold and also the second largest consumer after India.

The improvement in the range of gold-based financial products could reduce the need to increase physical imports. The government itself is not seen to be a gold investment enthusiast, holding less than 2% of its reserves in gold.

In September, 2010, E Fund Management (E Fund) said it was set to launch China's first hedge fund following a change in securities regulations earlier this year allowing investment managers to trade stock index futures on behalf of clients.

E Fund is currently in the process of seeking regulatory approval from the China Securities Regulatory Commission (CSRC) to offer its hedge fund to high-net-worth individuals through separately managed accounts. The fund has said that its new fund would seek to "hedge market risk through stock index futures and other tools" and will charge the familiar '2-20' fee structure used by most hedge founds elsewhere in the world.

In July, the Chinese authorities announced that rules would be relaxed to allow separately managed accounts to trade stock index futures, permitting fund managers to hedge against declines in the CSI 300 stock market index, which replicates the performance of the top 300 companies listed on the Shanghai and Shenzhen stock exchanges. It is understood, however, that the CSRC will only loosely regulate hedge funds targeted at wealthy individuals.

Founded in April 2001, E Fund is owned by five Guangdong-based shareholders, including Guangdong Finance Trust Company and GF Securities Co., Ltd. As at the end of March 2010, E Fund had in excess of RMB200bn (USD30bn) under management, making it one of the largest asset managers in China.

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China: Use of 'Offshore' to Protect Wealth

Since 2005, Chinese insurance companies have been able to invest their foreign currency assets in offshore jurisdictions, which includes funds raised through overseas listing. The companies are issued with 'quotas' for permitted investment, of which up to 10% may be invested in shares of Chinese companies that are issued offshore and listed in stock exchanges in New York, London, Frankfurt, Tokyo, Singapore or Hong Kong.

Until recently there were very few, if any, ways in which individual wealthy Chinese were legitimately able to make investments in Hong Kong, Singapore or other 'offshore' markets, although banks and trust companies had some limited permissions to do so. This situation changed to some extent with the introduction by the China Securities Regulatory Commission (CSRC) in 2007 of the Since the Trial Measures for the Administration of Overseas Securities Investment by Qualified Domestic Institutional Investors (Trial QDII Measures).

Fund Management Companies (FMCs) licensed under the Measures need to have net assets of not less than RMB200 million, and have been engaged in securities investment fund management business for at least two years. The CSRC is said to have expected about 20 FMCs to gain authorization. They are allowed to invest in equities, debt securities, bonds, bank deposits and derivatives. Property investment is not however permitted, nor is participation in the underwriting of securities.

Although the FDII scheme allows overseas investment in general terms, here also has to be an agreement between China and any specific overseas jurisdictional target.

Thus, for instance, in February, 2010, Malta’s Financial Services Authority (MFSA) announced the signing of a Memorandum of Understanding with the CSRC.

The signing of the MoU is the result of negotiations that started in 2008, and places Malta’s funds industry at the same level with the major fund domiciles particularly in the European Union. It will most importantly facilitate business for financial institutions doing business between the two countries.

Apart from the QDII initiative, the Chinese authorities have been showing increased interest in working with low-tax jurisdictions worldwide. In June, 2010, for instance, a team of seven delegates from the Tianjin municipality in China visited Jersey to discover how the jurisdiction operates as a major international finance centre in terms of policy, regulation, tax, foreign exchange, trade and finance.

Led by Wu Dong, Deputy Director of Dongjian Free Trade Port Zone of Tianjin, the group met with representatives from the States of Jersey, the Jersey Financial Services Commission and the finance industry during their two day visit to the island.

Located in north-east China, Tianjin is the fifth largest city in China in terms of urban land area, behind only Beijing, Shanghai, Guangzhou and Shenzhen.

The visit was arranged by Zhaoan Li, Jersey Finance’s Head of Greater China Business Development, who commented:

“Jersey has made great strides in successfully building its reputation in China over the past few years and this latest visit by key business representatives from Tianjin further reinforces this. Tianjin is one of the fastest growing finance centres in China, and in recent years the private equity fund sector has been developing very fast. The delegates have been keen to learn how they can work with Jersey to foster a strong business relationship especially in the ship and aircraft leasing and financing area, which has seen a phenomenal development since 2009. The delegates were impressed with what Jersey has to offer as a diverse and sophisticated finance centre.”

In order to continue to strengthen relationships between Jersey and China this year, the States of Jersey Treasury Minister, Senator Philip Ozouf, and the Director General of the Jersey Financial Services Commission, John Harris, accompanied by Jersey Finance’s Head of Greater China Business Development, Zhaoan Li, plan to visit Shanghai at the end of June to participate in the Lujiazui Forum. Involving government officials, business leaders, financial institution principals and academics, the Forum aims to develop governmental and regulatory relationships in a post-economic crisis world. Jersey Finance also has a visit to Beijing and Shanghai planned for early November.

Although such relationships are directed more at institutional and inward investment than at individual wealth management, needless to say they betoken growing interest in and awareness of the classical low-tax jurisdictions such as Jersey, Guernsey and the British Virgin Islands, which is said to have been the venue of choice for Chinese to set up offshore companies for many years now.

Guernsey set up a Representative Office in China years ago, and in October, 2010, began dialogue with key government and regulatory officials in China to create relationships for the benefit of the island's financial services industry.

Peter Niven, Chief Executive of Guernsey Finance, the promotional agency for the Island’s finance industry, joined the Lord Mayor of the City of London, Alderman Nick Anstee, for the Beijing and Shanghai legs of the visit.

The trip included meeting again with Tu Guangshao, the Vice-Mayor of Shanghai, who has hosted Guernsey’s Chief Minister, Lyndon Trott, on several occasions, and visited the island towards the end of 2008.

“Travelling with Anstee provided us with another opportunity to strengthen our relationships in Beijing and Shanghai and also reinforced our strong connections with the City of London,” said Niven.

“Indeed, this visit enabled us to show our hosts the complementary nature of the relationship between Guernsey and London and at the same time we yet further developed our contacts in the City," he added. "For example, as well as with Anstee, I was able to build on friendships with Chris Gibson-Smith, Chairman of the London Stock Exchange and Miles Templeman, Director General of the Institute of Directors, and also initiate new relationships with other members of the delegation, including leading practitioners from London law firms.”

Guernsey has had a representative office in Shanghai led by Wendy Weng since the end of 2007.

“Having Wendy on the ground in Shanghai also gave us the opportunity to set-up our own parallel itinerary. This meant that when not attending official appointments as part of the Lord Mayor’s delegation then Wendy and I were able to hold separate meetings with government and regulatory officials,” said Niven.

This included meeting with Dr Fang Xinghai, Director General of the Shanghai Municipal Financial Services Office, as well as meeting with government tax officials and representatives from the China Banking Regulatory Commission (CBRC), the China Securities Regulatory Commission (CSRC) and the China Insurance Regulatory Commission (CIRC).

“I also know that Wendy had arranged itineraries for Gerald Hough from State Street, and Alan Chick from the Richmond Group, from Guernsey, to visit finance industry practitioners in the region at the same time I was in China, and it was very useful to meet up with them and exchange ideas about our trips. It is extremely encouraging to see Gerald and Alan utilising the resource that is available to anyone from the island to make their own visits, develop their knowledge base and build contacts.”

Concluding, Niven said: “Guernsey has already built strong relationships with government and regulatory officials in Beijing and Shanghai and this visit was extremely useful in reinforcing them ahead of what we anticipate to be a busy and productive autumn.”

As part of Guernsey’s commitment to tax transparency, the Island’s government and the government of China are making arrangements for a Tax Information Exchange Agreement to be signed between the two jurisdictions in the near future.

In addition, Guernsey’s Chief Minister, Lyndon Trott, will travel to China in early November to sign a Memorandum of Understanding (MoU) with the Shanghai Municipal Financial Services Office.

Guernsey is also continuing to seek approval for its companies to list on the Hong Kong Stock Exchange, has progressed the signing of a MoU with the CBRC and is starting the ball rolling on signing a similar MoU with the CSRC.

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China: The Wealth Management Industry

To put the opportunities for wealth management into context, Boston Consulting Group predicts that the annual household financial asset growth in China will be around 17.4% over the next several years, and the personal assets under management will reach an estimated US$5.5 trillion by 2011. The BCG says that less than 1% of households in China hold more than 67% of the nation’s personal wealth. Most of the wealthy individuals are living in Beijing, Shanghai, Shenzhen and the east coast cities, and many are entrepreneurs in the real estate, manufacturing, retailing and information technology sectors. BCG thinks that as little as 8% of the pool of HINWI wealth (USD2.5 trillion) is currently invested offshore, with much of it remaining in cash and represented by physical assets, as wealthy Chinese only gradually come to trust banks or asset managers to look after their wealth.

The China Banking Regulatory Commission (CBRC) issued the Regulations on Commercial Banks Personal Wealth Management Business and the Guidelines on Risk Management for Commercial Banks Personal Wealth Management Business in 2005. These two sets of regulations apply equally to Chinese and foreign-owned banks, and cover both advisory services and direct investment activities on behalf of clients.

Funds available for wealth management include massive slabs of bank deposits which are fleeing the low interest-rate environment of Chinese bank deposits; actually they are negative in real terms. This also partly accounts for the pressure on real estate; no-one wants to be in cash.

CBRC issued Provisional Administrative Rules on Overseas Wealth Management Business by Trust Companies in 2007. The CBRC said it welcomed applications from foreign investors to invest in trust management companies.

One problem faced by wealth managers in China is that regulation is divided strictly by sector, so that any kind of complex product may require authorization by two or more different regulators. The main regulators are: