China: in search of growth

Written by: Chris Menon Posted: 10/01/2019

BL60_chinaChannel Island businesses have long seen China as a growth opportunity, but as the country seeks to take a bigger role on the global stage, is it time for a renewed focus on the Middle Kingdom?

Since the collapse of the Soviet Union in the 1990s, the global stage has witnessed growing tension between a dominant US superpower and a resurgent China, with many in the US coming to view it as a strategic threat, from both a military and an economic perspective.

Sustained economic growth has made China the second largest economy in the world in terms of gross domestic product. Moreover, through its Made in China 2025 and One Belt, One Road initiatives (see box), observers such as Justin Oliver, Canaccord Genuity’s Deputy Chief Investment Officer, believe it plans to “challenge the US position as the global pre-eminent geopolitical force”. 

Paul Christopher, Managing Partner of the Hong Kong office of offshore law firm Mourant, says China has evolved quickly over the past few years. “When I moved to Hong Kong seven years ago, there was no such phrase as ‘China outbound’. Chinese businesses didn’t really invest outside of China. Now, some of them have bought the most high-profile real estate and businesses going, although that’s curtailed a bit in more recent years. They’re still learning to operate on the international stage in terms of governance.”

For a decade, the Channel Islands has sought to capitalise on a China that was originally touted as the ‘next big opportunity’. Guernsey Finance established a representative office in Shanghai in 2007, led by Guernsey Finance’s China Representative, Wendy Weng. And Jersey Finance has been promoting opportunities for the island’s finance industry in China since November 2005, opening a Hong Kong office in 2009.

Hard market to crack

During this period, they appear to have made some, if not outstanding, progress in what is universally acknowledged to be a hard market to crack. For example, around 50 firms in Jersey have a branch in Hong Kong and 34 have an operation in mainland China.

Marcus Leese, a Partner at law firm Ogier in Guernsey, was recently in Hong Kong to attend the STEP Asia conference, which focuses on the family inheritance and succession planning sector. 

He says: “Ever since Guernsey Finance opened its office in Shanghai over 10 years ago, and members of industry began establishing physical bases in the region and posting staff there or having them visit regularly, Guernsey has shown real commitment to the China market.” Indeed, Guernsey had the largest presence of any of the offshore centres at the STEP Asia conference, he adds.

Building that relationship has required hard work. Kate Clouston, Deputy Chief Executive at Guernsey Finance, explains some of the obstacles that had to be overcome. “There was a lot of education required in the early days, about Guernsey and the services we could offer – Chinese corporates’ need for offshore didn’t really extend beyond the British Virgin Islands. 

“China is still a work in progress for us, but in the past few years we’ve seen business coming through to Guernsey directly from the country. It’s been primarily captive insurance structures, where Guernsey has been seen as attractive, particularly as China’s domestic requirements for captives are a real barrier.” 

However, the island remains interested in funds and private wealth opportunities. The first Guernsey private investment fund was registered from Hong Kong last summer. 

As part of its focus on diversifying its overseas market strategy, Jersey Finance has expanded its programme to include new growth markets in Asia, the Middle East and Africa. However, Amy Bryant, Jersey Finance’s Deputy Chief Executive Officer, says Jersey has remained committed to the Chinese market throughout.

As proof, she stresses Jersey’s role as a gateway into the UK and European markets, which in recent years has seen demand for its services accelerate, driven by a more liberalised approach in China to international investment. 

Bryant cites figures from economic research consultancy Capital Economics revealing that Jersey mediates around £13bn of capital flows from China each year across its private wealth, corporate and funds sectors.

Andrew Weaver, Partner at law firm Appleby, believes the Channel Islands must remain focused on China for a number of reasons. Given Brexit uncertainties, he sees value in the Channel Islands exploring more opportunities outside the UK and the European Union (EU). 

New opportunities

He also believes the China-US trade war, coupled with a slowing economy, means China is willing to explore new co-operation opportunities with other countries and jurisdictions. “In a recent visit to China, feedback provided by PRC [People’s Republic of China] lawyers and professionals in respect of exploring more opportunities in the Channel Islands was very positive,” he says.

Weaver contends that for investment from China to the EU and the UK, or vice versa, the Channel Islands are ideal domiciles in which to set up holding companies. In addition, the islands’ financial sector “can provide valuable opportunities for Chinese companies to access international investments (in the form of debt or equity) at different stages”.

Warwick Long, Head of Commercial Banking for HSBC Channel Islands and Isle of Man, agrees that given the One Belt, One Road initiative, it’s an opportune time for the islands to harness these outward investment trends from China. 

He stresses: “While historically, China has mostly been focused on the blue-collar [manufacturing] industry, its sights have moved to the open-collar [services] area. 

“Notably, we’re seeing more consumption, urbanisation and ‘greening’ of the Chinese economy, in addition to the move towards higher-tech manufacturing. 

“These certainly play to the Channel Islands’ strengths, particularly in terms of international financial services and digital expertise, and we’re looking to further strengthen ties between China and the islands in the coming years.”

The attractions of China for offshore financial service providers remains undiminished too. Ogier’s Leese explains: “China generates more new high-net-worth individuals (HNWIs) than most, if not all, western countries, and those HNWIs increasingly understand the need for offshore structuring for their personal and business assets around the world. 

“The newly announced change in the People’s Republic of China’s personal tax regime, a rise in the divorce rate and migration overseas have all increased this,” he says.

Beyond financial services

Aside from private wealth management, Appleby’s Weaver believes sectors well placed to take advantage of the opportunities in China include shipping, logistics, warehousing and transportation, particularly if the Channel Islands is included in the One Belt, One Road initiative. 

The islands offer a tax-neutral environment and have harbours that can provide marine services. They could also “become ‘free trade zone’ for goods imported from China that enjoy the tax-neutral position until further delivery to the UK or, subject to Brexit, the EU”, says Weaver.

The islands’ location and size also mean they can be used to develop, test and launch new tech products from China, he adds. “Testing the core technologies in the Channel Islands (instead of in the UK or an EU country) will generate equivalently useful data, but significantly reduce the cost for such tests and avoid the complex legal, government and regulatory barriers at the testing stage,” he says.

Nevertheless, he does acknowledge that, particularly compared with neighbours such as the UK, France and Germany, the Channel Islands “still lack experience and resources”. “To balance the future benefits and current costs, cooperation between Jersey and Guernsey, cooperation between public and private sector, cooperation between different organisations (for-profit or non-profits) are critical. We believe such cooperation will make the journey shorter and more sustainable.” 

China’s initiatives for growth

Made in China 2025 
Launched by Beijing in 2015, Made in China 2025 is a strategic plan to transform China into an innovative, hi-tech powerhouse by 2025. It aims for increased self-sufficiency in hi-tech across 10 key sectors: information technology; numerical control tools and robotics; aerospace equipment; ocean engineering equipment and high-tech ships; railway equipment; energy saving and new energy vehicles; power equipment; new materials; medicine and medical devices; and agricultural machinery.

BL60 One Belt mapOne Belt, One Road (OBOR)
Launched in 2013 by President Xi Jinping, this is a China-backed initiative to improve infrastructure development and support long-term economic growth. The intention is to build roads, ports and railway tracks along ancient trading routes to Asia, Europe, the Middle East and Africa.
   Justin Oliver, Canaccord Genuity Deputy Chief Investment Officer, explains the initiative’s true purpose. “Its role in supporting China’s Asian and global ambitions are manifold. At a base level, China is keen to find new sources of growth abroad, partly to utilise resources from industries suffering from excess capacity, and the OBOR will help achieve this objective. 
   “Its intention is also to increase prosperity for the under-developed parts of China, as well as secure China’s energy supply and, by default, minimise social tension and keep the ruling Communist party in power.”

 


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