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China’s wealthy increasingly looking West
Whether it is through investments in property, rare stamps and coins or in traditional tax neutral trust structures – Hong Kong and China’s high-net-worth individuals (HNWIs) are increasingly looking to Europe to invest their assets, says Richard Corrigan, deputy chief executive at Jersey Finance
Richard Corrigan 16 Sep 2014
 
   
Whether it is through investments in property, rare stamps and coins or in traditional tax neutral trust structures – Hong Kong and China’s high-net-worth individuals (HNWIs) are increasingly looking to Europe to invest their assets. 
 
The slowdown in growth in Asia, regulatory environment and the desire to protect their family’s wealth has led Chinese investors to look outside the region for investment and planning advice. 
 
Chinese HNWIs are typically first or second-generation wealth, unlike in Europe and US, where the HNWI market is much more mature. The HNWI population in China is growing rapidly. The HNWI population in China saw annualized growth of 15.8% between 2003 and 2013, according to Capgemini.
 
The Chinese wealth management industry is unfortunately unable to keep up with this surge of wealth creation. This has created an opportunity for wealth managers in the West to step in and help China’s wealthy structure their assets and investments.
 
Chinese HNWIs have previously been successful investing in Chinese property and the stock market. The slowdown in growth in China and the need to diversify their asset base means that Chinese HNWIs are now open to investments outside their home market.
 
Prime property locations attract investment
 
One of the most popular asset classes for Chinese HNWIs is property. W.A Ellis estimates that Chinese investors spent £3.5 billion (US$5.9 billion) on UK property last year. The current strength of the renminbi means that the cost of buying property in prime locations such as central London is 8% cheaper than it was six years ago. 
 
Chinese buyers accounted for a nearly a third (27%) of purchases of new homes in London in 2012, and last year, they became the city’s number one buyer, according to Knight Frank, noting they are drawn to the UK capital by robust property laws and British university places.
 
Chinese buyers who bought in prime London locations a year ago have seen their assets appreciate by 18%. This comes as fears of a housing bubble in China and an introduction of new 15% tax on foreigners buying property in Hong Kong. In Hong Kong, sales of luxury houses to mainland Chinese investors had fallen to a four year low, says Centaline.
 
Looking for an alternative
 
The Chinese penchant for luxury is well documented, but now Chinese interest in luxury goods is now apparent in their investment choices. Increasingly, Chinese HNWIs are putting assets to work in alternative asset classes such as art, wine and classic automobiles, as they offer the opportunity to combine personal interest with stable, high returns.
 
Jersey-based vintage and classic car restoration and sales specialist La Riche Automobiles Restorers and Jersey-based rare stamp and coin investment specialist Stanley Gibbons have seen a surge in interest from Chinese investors who want to diversify their portfolio out of property and equities.
 
According to Hurun’s China Passion Investments report, more than half (56%) of Chinese HNWIs indicated an interest in alternative investments, making it the third most popular asset class after property (76%) and equities (65%).
 
Structuring wealth for generations to come
 
Given the majority of China’s wealth is currently in the first few generations, HNWIs have not had experience in structuring assets and investors are much more hands on. Whereas in the West, family offices that have been around for generations are fluent in using trusts and tax efficient structures to make sure their families assets are safe and will be around for generations to come.
 
Private wealth managers are now educating Chinese HNWIs on the benefits of using tax efficient structures in international finance centres, such as Jersey. The UK crown dependency has nearly US$11 billion of banking deposits derived from the Far East and as witnessed an increase in the use of its private discretionary trust vehicle by Asia’s wealthy.
 
Trusts are an effective way of protecting family wealth for future generations. Often wealth disputes can arise from marriage breakdown or frivolous children who may be tempted to buy yachts or expensive gifts. Trusts are a way to make sure that the Chinese proverb – wealth does not pass three generations – does not come true.
 
Chinese HNWIs are looking for jurisdictions to structure their trusts which offer high quality service, innovation and client confidentiality. Jersey has been a beneficiary of this migration of assets to the west because of its experience, political stability and tax neutrality.
 
Even with the slowdown in the Chinese economy, there is no denying the fact that the HNWI population is set to grow and wealth will need to be structured and invested for the future. Companies that can become trusted advisers to Chinese clients and domiciles that offer competitive advantages and innovative products for wealth management are set to benefit from this trend.
 

Richard Corrigan is the deputy chief executive at Jersey Finance 

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