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China 2.0

How China's Super-Rich Are Managing Their Wealth For Future Generations

Who gets a seat at the banquet?
Who gets a seat at the banquet?
Hu Zhongbin

BEIJING — In October, a tour group of 20 of China’s top tycoons will be paying a different kind of luxury visit to America. The tour is organized by Gopher Asset, an asset management firm, and the aim is for these Chinese super-rich to investigate how Single Family Offices (SFOs) operate in the United States.

A SFO is a private company that manages investments and trusts for very wealthy individuals or families. According to the latest Wealth-X and UBS World Ultra Wealth Report 2013, China has more than 10,000 individuals whose net worth is over $30 million. As the number of ultra-rich grows, and the first generation of entrepreneurs starts to age, the governance of family wealth is an increasing concern.

Seeing a huge demand in this booming market, several wealth management institutions — China Merchants Bank, Ping An Trust and Gopher Asset, among them — have been founded in the past year offering family-office services, mostly in the form of offshore trusts.

Rich men worries

Wang (not his real name) is a 55-year-old entrepreneur. Apart from his legal wife in China, with whom he has a 25-year-old son, Wang also has a second “wife” in America with whom he has a daughter. Wang does not want to get divorced from his wife, nor does he want to give up “the best of both worlds,” as he puts it. Obviously, he realizes that if he doesn’t handle the marital issue properly, every member of the family may end up in a battle for the family wealth.

Following the advice of Rich Link Capital, an international alternative asset fund manager, Wang made a trust arrangement of his assets and assigned them proportionally to each of four family members to guarantee their lives and studies. “The scale of his trust assets is around 500 million RMB ($81.7 million),” says Cheng Jinqiao, chairman of Rich Link Capital. “Everybody has got some share of the cash, some of the properties as well as the company equity.”

Wang has set up his trust offshore in Hong Kong. This means that Wang, as a settler or owner of assets, transfers his assets to a trustee. In turn, the trustee will manage, dispose of and use the assets in accordance with the trust program, and he designates beneficiaries, usually the settler’s family.

Examples such as Wang’s, in which any marital and family changes can make a substantial impact on a rich man’s wealth, are not at all uncommon, Cheng says.

For instance, the inappropriate timing of the divorce of Wang Wei, the founder of Tudou, China’s big video-sharing website, caused a setback in the company’s application for a stock market listing in the United States in 2010. “Had Wang Wei set up a family trust before submitting his listing application, China’s online video industry would probably be very different today,” says Huang Wenhong, managing director of Portcullis TrustNet (PTN), Asia's largest independent trust group.

“Learning from the Wang Wei case, when a venture capital fund invests in a company ready for an overseas listing, it usually makes the request that the founder set up a family trust first so as to avoid any change in marital status having an impact on corporate control,” Huang explains.

Three generations before the cash runs out

Apart from worries over their own marital or family changes, how to successfully pass on the family business and fortune is another very problematic issue. “Every business aims to be sustainable and become a 100-year-old name. However, the harsh reality is, as the Chinese put it, wealth never lasts more than three generations,” says Yin Mingshan, who heads the Lifan Group, which specializes in automobile and motorcycles and is one of China’s top 500 enterprises.

In her constant contact with China’s wealthy families, UBS Wealth Management Director Guo Danyuan finds that many of these tycoons’ offspring have no wish to take over their parents’ business.

Unlike those from Western business families, the typical Chinese mogul doesn’t have a long business history or background. They mostly accumulated their wealth in the past 20 to 30 years. The majority of them are engaged in traditional sectors, and are still working very hard. Also, they tend to have one-child families, and their children often have Western university and post-graduate educations, giving them a very different career outlook, business philosophy and value system than their parents. They are therefore less likely to want to carry on the family business, Huang Wenhong of PTN notes.

China’s family offices have so far remained very low-key. Entrepreneurs who have set up family trust or family offices — Pan Shiyi, China’s largest office real estate developer, and the automobile magnate Yin Mingshan, among them — are mum. Meanwhile, the financial outfits busy promoting family office services regard client information as highly confidential.

But what is clear is that China’s growing set of high-net-worth individuals (HNWI) is arousing much interest among family wealth management professionals. In September, the International Family Office Association also set up an office in Beijing.

The “2013 China Private Wealth Report,” jointly issued by Bain & Company and China Merchants Bank, makes note of the rising interest in family trusts. Not only have more than 50% of wealthy families talked about it, but more than 15% of them are actually in the process of establishing one.

“Family foundations are a new idea in China,” notes Scott MacDonald, executive director and founder of the International Family Office Association. “Since China doesn’t allow the free flow of foreign capital, there are still obstacles in achieving a family foundation’s global asset allocation.”

MacDonald also points out that since trust institutions aren’t yet legally protected in China, families can only set up their trusts overseas.

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