22 April 2019

Trust China’s upper crust to protect the family pie

A group of Chinese billionaires, who can easily muster more than 10 billion yuan (US$1.64 billion) in combined wealth, reportedly paid a visit to the United States this month. But their trip wasn’t to see the sights or snap up more villas or townhouses – they are keen to get a first-hand look at the way family funds work in the US.

Many of China’s first generation of well-to-do entrepreneurs are getting on in years and are seeing the wealth of the younger elite being eroded by bitter legal wrangles over extramarital affairs or divorces.

This has given rise to growing demand for family funds and trusts, the more private, professional and secure way to manage their immense fortunes.

If Wang Wei {王微}, founder of video hosting site Tudou, had had a family trust before his company’s flotation in the US back in 2010, the landscape of China’s online video sharing market could have been dramatically different. Just at the most critical stage of Tudou’s initial public offering, Wang’s wife filed for divorce and demanded a substantial part of the company’s shares. Tudou’s IPO was put on hold and rival Youku gained the upper hand in the capital market, setting Tudou up to be swallowed by Youku two years later.

Longfor Properties (00960.HK) chairwoman Wu Yajun {吳亞軍}, also mainland China’s richest businesswoman, has set an example in this area. Wu had the foresight to set up two independent family trusts for her husband and herself through HSBC International Trustees. Both parties agreed to terms and conditions on splitting the family’s assets, and the couple’s subsequent breakup didn’t make any waves on the stock market.

There are reports that some celebrated billionaires like SOHO China’s (00410.HK) Pan Shiyi {潘石屹}, Nine Dragons Paper Holdings’ (02689.HK) Zhang Yin {張茵} and automaker Lifan Industry’s (601777.CN) Yin Mingshan {尹明善} have for years safeguarded their massive fortunes via family funds and trusts. More members of the affluent will no doubt follow suit.

Trust fund players such as China Merchants Bank (03968.HK) and Ping An Bank (000001.CN) as well as overseas rivals like HSBC (00005.HK), UBS and Bank of East Asia (00023.HK) will certainly ramp up their offerings to meet the growing demand.

But there are obstacles. Setting aside the lack of diversified and relevant services, analysts say China’s rigid restrictions on the full convertibility of the renminbi could impede asset allocation of trust assets on a global scale. Other legal and tax pitfalls in the country, such as the inability to make non-capital contributions to a private trust fund, can only make the process more complicated.

But the country’s savvy upper crust are bound to find a way around these obstacles, with many already taking a detour through Hong Kong. The Economic Observer reports that one well-trodden workaround is to register an overseas family trust and a shell company in Hong Kong and use the company as a vehicle to inject assets into the overseas trust.

– Contact the writer at [email protected]


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