There has been a rapid rise in the number of HNWIs in China and with many IFCs competing for their business, Dax Basdeo highlights how Chinese investors have been using Cayman investment structures for decades
“International Financial Centers (IFCs) play a key role in the international financial system, resulting in a boost in investment in the major economies, which ultimately supports job creation and growth.”
One such IFC is the Cayman Islands, which has developed into a robust, stable international financial services centre over the last few decades. Today, by offering sound investment and financial vehicles, the Cayman Islands facilitates the movement of global capital to emerging economies such as China’s. It has secured its place in the international financial architecture through its effective regulation, modern legislation, professional expertise, and social and political stability.
For the last two decades, international investors in China have been using Cayman investment structures, such as holding companies or special purpose vehicles, to bring foreign capital into China. Although most of Cayman’s business gained is predominantly from the US, Cayman entities are looking to diversify to Asian markets. The Cayman Islands has particular interest in China because of the vast wealth being created: Roughly 10,000 families are worth more than US$30 million, and more than 100 families are US billionaires, as stated in a presentation by Nick Jacob of Lawrence Graham LLP Solicitors at a recent STEP Conference in Asia.
As IFCs keep a close eye on China’s aggressive growth rate – noting an impressive increase of US$2 trillion in Chinese foreign reserves between 2006 and 2010 – the Cayman Islands is keen to develop an even stronger relationship with China, particularly in the areas of company registration, fund domiciliation and trusts.
Chinese Companies in the Cayman Islands
Advantages for establishing a Chinese entity in the Cayman Islands, through its General Registry, include the ability to register companies in a foreign script; reasonable reporting requirements; ability to form a company with only one shareholder, with no minimum capital requirements; and tax neutrality. General Registry has also offered company registration in Cantonese and Mandarin since 1998.
Furthermore, in efforts to enhance its service offerings, General Registry’s new online system – CORIS – enables its subscribers to access an array of services offered via a secure network. Cayman companies with offices in China can access the online registry account and obtain information in real time, without contacting the Registry. This system has allowed the registry to operate with greater efficiency and faster turnaround times, and provided a high level of customer service.
Also, because the Cayman Islands offers a well-regulated IFC – one that has been recognised by independent supranational bodies such as the Financial Stability Board –industry partners say it is becoming a more attractive jurisdiction for the registration of Chinese companies.
Publically traded Chinese companies based in the Cayman Islands include China GrenTech, China Unicom and China Mobile. The Bank of China has had a presence in the Cayman Islands since 1982, and the Industrial and Commercial Bank of China, since 1995.
Another important factor in attracting Chinese business is that Cayman Islands companies are eligible for a listing on the Hong Kong Stock Exchange. In fact, Cayman companies are the preferred listing on the Hong Kong Stock Exchange (HKSE), accounting for 37 per cent of all listings at the end of 2010, and 62 per cent of the latest listings at the time of publication, according to a report commissioned by Offshore Incorporations Ltd (OIL)
The OIL report indicated that the Cayman Islands occupies the top spot for fund management and notes that Cayman is a “widely recognised and mature market with better regulations and infrastructure in place than its competitors”. The jurisdiction was also acknowledged as a leader with a well-developed funds market, and a stable and flexible regulatory system.
Prominent Chinese businesses such as Baidu, Geeley and Alibaba have used funding from Cayman holding companies, and have become highly successful. In addition to inward investment, Cayman investment structures have assisted in China’s increased outward capital investments, as noted in Nick Jacob’s presentation.
Several Cayman Islands investment holding companies that are listed on the HKSE include:
Cayman-China Private Trust Business
Similar to the use of Cayman companies and investment structures as a hub for many Chinese businesses, China’s new generation is moving towards private trusts to hold assets and consolidate family wealth into a single structure. Although the trust industry in mainland China is in its infancy, it is expected to grow dramatically based on the rate of wealth creation in the country. Furthermore, the desire for family businesses to continue with future generations has fuelled the need to preserve business assets and brands.
The Cayman Islands has a well-established trust sector that is supported by strong legal and regulatory frameworks, as well as experienced industry practitioners. Trust service providers are professional, knowledgeable and able to address the complexities of Chinese family wealth. Taken together, these factors attract investors to the Cayman Islands.
As succession planning is becoming more important for Chinese families, it is important to use structures that are stable and flexible. The Cayman Islands introduced the STAR trust to provide non-charitable-purpose trust legislation that can be used in any standard personal scenario, with additional depth to satisfy specific requirements than a traditional trust.  This increased planning flexibility is another example of why Cayman structures are widely used by Chinese businesses.
The Cayman Islands is a strong choice for business in China. Modern business practices, sophisticated professional infrastructure, and global reach have attracted Chinese investors and wealthy families. The depth of expertise available across the company formation, funds, and private trust sectors enhances investor experience and provides flexibility for each individual business case.
Other strengths include its tax-neutral status; no exchange controls on foreign currency and securities; and no restriction on nationality of directors or shareholders of exempted companies. These jurisdictional benefits are advantageous for investors, providing peace of mind and investor confidence.
 Hines Jr., James (2009). International Financial Centres and The World Economy [online]. Available from http://www.step.org/pdf/InternationalFinanceCentresThe%20Hines%20Report.pdf. (Accessed: 10 August 2012).
 Offshore Incorporations Ltd. (2010). Offshore 2020: Insights into future trends and structure of the offshore industry.
 Garnham, R. (2009). Is STAR the Solution? Available from http://www.compasscayman.com/cfr/2009/07/07/Is-STAR-the-solution-/. (Accessed: 15 August 2012).
Dr. Dax Basdeo, Chief Officer Financial Services, Ministry of Finance, Cayman Islands