China’s HNWI Growth Provides Opportunities for the BVI Financial Sector

Intergenerational wealth transfer, particularly in China, has become a hot topic recently. The sheer scale of China’s population and the growing numbers of high net worth and ultra high net worth individuals has made headlines worldwide.  

Wealth and the growing middle class is a relatively new development in China’s history.   In Tianjin recently, I was given a tour of a huge underground mall in the new Pilot Free Trade Zone, easily accessible from the bullet train station, a 45-minute ride from Beijing. The aim: to attract international luxury goods and high end brands into the mall so that the middle classes from Beijing spend their money (duty free) in Tianjin instead of travelling overseas. Foreign investors are being actively encouraged particularly those in the finance, technology and cross-border trade industries; a sign that times really have changed in China.

Whilst the Chinese middle class is expanding, it’s still fair to say that many businesses in China started as a small operation often run by members of the same family. Where things differ from the West, is that these businesses continue to be run by the same person, almost always the patriarch or matriarch. In my experience, the family hierarchy in China is such that the patriarch/matriarch is the dominant person to whom everyone in the family defers.

China has had a one-child policy in place for over 30 years which was relaxed in 2014 to allow parents who were only children themselves to have a second child. The relaxation of the policy did not lead to a sudden increase in second children, in fact only one million of the 11 million eligible to do so actually applied to have a second child[1], which suggests that the Chinese are not keen to expand their families.

In November 2015, the one-child policy was completely abandoned in the hope of boosting the birth rate and staving off problems with an aging population in the future. The reality of this policy is that a very significant proportion of the population is an only child. One child per family has been ingrained for decades and it will take some time for the ‘one child is normal’ mindset to change. The Chinese way of life, with small apartments and both parents working long hours is not conducive to large families, so it remains to be seen whether there will be a significant increase in the birth rate.  

Where does this leave us in terms of intergenerational wealth planning? I don’t believe wealth planning and wealth transfer will be markedly different whether there is one, or more dependents. I don’t believe we will see any significant changes in terms of the tools we use (and in particular the use of the family trust) – although the considerations will likely change over time depending on the number of children and how the patriarch/matriarch wishes to provide for them – not all the children may want to be involved in the family business. Additionally, the years of austerity have left their mark. A lot of the new wealthy have come from relatively poor circumstances and therefore did not have the chance to learn from their own parents how to handle increased wealth. Also, in my experience, the newly wealthy class generally don’t talk about money with their children.   This can lead to problems when their children (or more likely, child) grow up.

As wealth planners the key is not so much to focus on the change to the one-child policy but to get families to focus on succession planning generally – and the issues that they will face: are the children capable of looking after the money, are all the children interested in the business?   Even if the birth rate does increase, it will be a generation before the changes are felt.

So what should we be getting families to focus on? One of the big differences between the closely held family business compared to a business with more diverse ownership is that the family business tends to employ more family members in management positions who are often paid more than the market rate! In addition there is significantly more potential for family disputes to arise over the direction of the business. This is an area where succession planning can be very useful to diffuse tensions.  

For those of us doing business in China, you will invariably deal most frequently with the client’s ‘trusted advisor’; more often than not his accountant, who then may involve lawyers and investment advisors. It will be rare to have frequent direct contact with the Chinese patriarch/matriarch but it is important that you have some meetings where you are able to directly establish their wishes and get a feel for the family dynamic. It is important to develop a shared vision, one that both the patriarch/matriarch and the next generation buy into so that there is a clear path for the future.

The beauty of trusts is that they can cater for this shared vision. Trusts are a very flexible vehicle and can be set up with specific purposes to satisfy the requirements of the whole family. Trusts can be set up to pay for the overseas college education of children or for wider purposes for anticipated future generations. In addition the settlor can be very specific about matters such as what age the child inherits, or receives shares in the family business. Where there is more than one child, a trust can assist where some children work in the business and some do not, spreading the benefit to those who do not.

The BVI has very flexible trust legislation which can be utilized to provide effective intergenerational wealth transfer in the Chinese context, particularly VISTA trusts – which are proving very popular in Asia.

[1] (http://edition.cnn.com/2015/10/29/asia/china-one-child-policy/)