04/07/23

ASIA: ‘People are nervous’: Taiwan’s wealthy shelter money overseas in fear of China conflict

As published on: ft.com, Tuesday 4 June, 2023.

Lynn, a Taiwanese stock trader, has never been to Europe. But, in February, she spent a large part of her savings on a €420,000 flat in Lisbon — without even seeing the property. Everything was handled through a Portuguese agent, who also submitted the paperwork for a golden visa for her family.

“We had to get the application in before Portugal ended the programme,” explains Lynn, who asked to be identified only by her first name. “It is prudent to put some of our money outside Taiwan and to have a place where we can go, just in case.”

The “just in case” scenario the young banker is referring to is war. As China ratchets up its military intimidation campaign against Taiwan, and foreign governments grow concerned Beijing might attack the island it claims as its own, some Taiwanese are quietly exploring options to protect their wealth and prepare a way out.

“People are nervous,” says C Y Huang, a veteran Taiwanese investment banker and financial adviser. Pointing to US investor Warren Buffett’s move to sell his stake in Taiwanese chipmaker TSMC due to geopolitical concerns, he adds: “Even these rich Americans think that Taiwan is dangerous. People here feel that doesn’t mean there will be war, but you don’t make jokes with your own money.”

Interviews with half a dozen wealth managers reveal that some Taiwanese clients have begun looking for investments in highly portable assets since China held unprecedented military exercises around the island in August last year.

One money manager who looks after Taiwanese wealth says China’s military assertiveness against the country have prompted several clients to purchase assets — such as art and diamonds — that can easily be moved in the event of a war. Wealthy individuals connected to Taiwan’s ruling Democratic Progressive party, which has frosty relations with Beijing, are driving the push to diversify assets, the person points out.

A senior executive at a Taiwanese family office says the fact that the threat of a Chinese attack has become more openly acknowledged in Taiwan’s society over the past year has alerted a larger group of people to the need to think about managing their money in new ways.

“In the past, it was just the ultra-rich who thought that their money was safer overseas,” he observes. “Now, we see the middle-rich talk about this as well.” There’s no panicked rush of outflows: property prices continue to climb, and the Taiex, the Taiwan Stock Exchange benchmark index, was trading in June almost back to historic highs after a correction last autumn in reaction to a chip market downturn.

“It is not at all like when I was growing up in the 1970s,” says Winnie Fang, chair of the Chinese Wealth Heritage Consulting Association, a Taipei-based industry group. UN recognition of the People’s Republic of China, rather than the Republic of China in Taiwan, in 1971 and Washington’s switch of diplomatic recognition in 1979 triggered widespread fears in Taiwan of being overrun by China.

In response, many business owners sent their wives to give birth in the US or transferred their entire families there. “The ultra-rich already have a large part of their assets overseas anyway,” Fang notes.

Exactly how much money wealthy families have moved abroad is hard to say, given a lack of data. But Taiwan has long been among the countries with the highest proportion of wealth held in offshore tax havens.

According to a 2018 research by Gabriel Zucman, an economist at the University of California, Berkeley, Taiwan’s total offshore wealth amounts to 22 per cent of its gross domestic product, compared with a global average of less than 10 per cent.

The root of this imbalance can be traced to the late 1980s and early 1990s, when Taiwanese companies ploughed investment into China, despite Taipei’s ban on such assets, as Beijing began opening up its economy and courting foreign investment.

To avoid detection, many Taiwanese set up shell companies in Hong Kong and global tax havens such as the British Virgin Islands and Cayman Islands. Many of those vehicles have remained in place for decades, holding the profits from China operations out of reach from both Chinese and Taiwanese tax authorities. Many business owners have also managed their private assets in the same jurisdictions.

But several other factors are changing that pattern, making it even harder to detect outflows. First, Taiwanese companies are gradually shifting manufacturing away from China to a range of locations including south-east Asia. In the same move, many are relocating private assets held offshore as well, often from Hong Kong to Singapore. Second, Taipei begins taxing residents on their global income from this year, a policy change that has also resulted in changing financial flows.

“Under the grace period for transferring offshore money home in the past few years, a lot of that capital did indeed come back,” says Rauniei Kuo, a partner and head of the family office business at KPMG, in Taiwan.

According to the Securities Investment Trust and Consulting Association, the country’s wealth management industry group, the total size of Taiwan onshore funds more than doubled from NT$2.3tn (US$75bn) in late 2017 to NT$5.4tn as of April. Offshore funds barely grew during the same period, moving from NT$3.5tn to NT$3.6tn.

However, many of the families that own Taiwan’s small and medium-sized businesses are still keeping much of their wealth abroad. “Their financial statements are intransparent, and they still park earnings in third-country jurisdictions,” Kuo says.

Such family businesses are now being forced to make multiple administrative adjustments. “There has been a sharp increase in demand for setting up trust structures that can help conceal ownership,” comments one financial adviser. “And as they are at it trying to shield their assets from the tax inspector, they are also looking at protecting the assets against the risk of war.”

Tags

Asia Taiwan China Conflict Offshore Investment