By Hu Zhongbin (胡中彬)
Issue 638 , Sept 23, 2013
News, page 1
Translated by Elise Zheng
Original article: [Chinese]
Twenty Chinese billionaires with family assets exceeding 10 billion yuan are going to the United States to investigate how family foundations work there. The trip, organized by Gopher Asset Management Company under Noah Private Wealth Management Group, is meant to teach them how to manage their property as they get older.
According to the recent World Ultra Wealth Report in 2013 released by Wealth-X and UBS, China has more than 10,000 people with net assets worth more than $30 million. These “ultra-rich” Chinese are now finding family assets management more appealing.
Not long ago at the International Family Office Association (IFOA), many billionaires were asking about the establishment and operation of overseas trusts. Some Chinese wealth management agencies like China Merchants Bank, Ping An Trust Co., and Gopher have already seen the potential of family foundations.
Although most of the family wealth management business in China still sits at the investment level, family foundations in the form of family trusts are quietly gaining traction. China Merchants Bank, for example, can now offer off-shore trust service for billionaires who wish to pass on their fortune while avoiding taxes.
The Puzzle for Billionaires
A wealthy 55-year-old factory owner in Tianjin has a wife in China and a 25-year-old daughter studying in England. However, he also has an illegal second “wife” in the U.S. whom he has a 3-year-old daughter with. Until recently, the two wives were unaware of one another.
However, his balancing act ran afoul when his legal wife got wind of his second marriage. The man doesn’t want to divorce his wife, nor does he want a dispute over the division of his property between his family members. Upon the advice from Zheng Jinqiao (郑锦桥), the CEO of Richlink Capital, he made a trust fund for his assets that distributes his property four ways so that he can secure the livelihood of his relatives and his daughters’ education. Zheng Jinqiao said that the trust assets are worth about 500 million yuan including cash, estates and company shares. If his wife insists on a divorce, then her portion of the earnings will fall according to a clause he set in the trust.
Zheng told the EO that they implemented this arrangement through an offshore trust in Hong Kong. The rich client transfers his trust fund assets to the trustee and designates a beneficiary. The trustee manages the assets according to an established trust plan.
The factory owner’s case is not unique. In fact, it’s common for marital difficulties to impact the assets of ultra-rich business people. Wang Wei (王微), the founder and CEO of the online video sharing site Tudou, provides a typical cautionary tale. In 2010, Tudou was filing to go public in the U.S., but it was delayed when Wang divorced his wife Yang Lei (杨蕾) and she filed suit for company shares. The divorce and the delayed listing procedure contributed to Tudou’s decline and Youku’s rise.
“If Wang Wei had set a family trust before he filed for a listing, it might have changed the whole Chinese online video industry,” said Huang Wenhong (黄文鸿), CEO of Portcullis Trust in Singapore. “After Wang’s case, a venture capital firm would normally ask the founder to set up a family trust before filing a listing application in an overseas stock market in order to avoid the negative impact from a civil dispute.”
Wu Yajun (吴亚军), the head of Longfor Property and the wealthiest woman in China, settled a similar problem successfully by setting up the ownership structure of shares based on two separate family trust funds in HSBC International Trustee before listing. Wu divorced her husband Cai Kui (蔡奎) at the end of 2012, but it didn’t cause any dispute over equity or any significant fluctuation in stock price.
Make the Fortune Perpetual
There’s an old saying in China: “No riches pass after three generations.” It means that a family’s prosperity usually falters after three generations. Today, this in fact appears to be the reality for many ultra-rich. After getting in touch with a number of Chinese billionaires, Guo Danyuan (郭丹圆), director of wealth management at UBS, found that the children of many billionaires are reluctant to take over the family business.
An entrepreneur client she serves has a son studying finance in the U.S. The client wants his son to inherit the company, but the son has little interest due to their difference in educational background and general view of career and investment philosophy. Therefore, the billionaire asked the UBS Wealth Management Team to help his son cultivate a sense for business and investment by giving him an independent investment account in UBS while offering him training and consultation.
Huang Wenhong from Portcullis says that the typical affluent Chinese businessman doesn’t have an outstanding family history. Most arose in the last two or three decades and prospered in traditional industries. Many of them went through hard times and most have only one child, who has usually received a higher education overseas. This creates a difference in thinking between the family and the child. The ultra-rich now pay more attention to the security of their family property.
Under such circumstances, wealthy businessmen and women have quietly started to adopt a trial and error approach to family foundations. It’s difficult to learn how they do it exactly though because of the scheme’s prominent feature: privacy.
Ultra-rich who have established or are considering family foundations like Pan Shiyi (潘石屹), Cao Dewang (曹德旺), and Yin Mingshan (尹明善) have remained tight-lipped during interviews on the subject. And agents such as Ping An Trust, China Merchants Bank and Noah Wealth, who promote their family foundation services, all keep client related information and cases top secret.
In China, laws make it impossible to set up a private trust to entirely isolate property. The undeveloped legal and tax system, and especially the absence of a trust registration system, greatly affect the advancement of Chinese family trusts. If assets can’t be isolated domestically, then most ultra-rich will set up family foundations overseas. Many like to set up long-term trusts (sometimes up to 100 years) in places like the Cayman Islands.
Some ultra-rich have also adopted off-shore plans via the red chip structure. They create an overseas trust in a place with a well-established system while also establishing an overseas holding corporation to reverse-acquire the property in China. After this they can transfer the interests of that corporation into trust property and give it to a trust agent. The ultra-rich person is usually the “CEO” of the overseas holding corporation so they can secure property and make vital decisions themselves.
Nevertheless, this method still has some limitations and risks. For the Chinese ultra-rich, property that can be transferred abroad is restricted to income acquired legally through avenues like overseas investment or overseas IPO. In some industries that have restrictions on foreign capital, the property cannot be transferred through this structure without fear of legal trouble.
In spite of this, overseas trusts still attract many ultra-rich. They can also help corporations reorganize investment across nations.
At the end of last year, Ping An Trust offered its first family trust service package to a 40-year-old entrepreneur. An insider reports that China Merchants Bank has received over 50 requests since last year for such funds.
Gopher Asset Management Company has also so far offered service to at least six clients with assets ranging from 500 million to 2 billion yuan. They collaborate with family foundations in two ways: acting as an investment consultant and setting up joint asset management companies to operate.
Assets allocation is still difficult in the global market due to restrictions on foreign exchange in China. However, according to Zhang Qiong (张琼), investment service director of UBS Wealth Management, China’s ultra-rich tend to be relatively open to risk in their assets management.
EO journalists Sun Qizi (孙琦子), Wu Haishan (吴海珊) and Shi Yaoyao (史尧尧) also contributed to this report, as did trainee reporter Zhou Yajue (周雅珏).