The Channel Islands have long maintained the potential of doing business with China, but how have things progressed in recent years, and is that potential any closer to being realised?
Seven years can feel like a lifetime these days. Back in 2010, Donald Trump was merely the host of another reality TV show. The US version of The Apprentice was into season three and he was busy ‘firing’ female wrestler Maria Kanellis for the unsuitable tone of her banter. “This is my boardroom,” he told her. “It’s not a locker room.” How things have changed.
But it seems not everything moves so fast. During that same year, BL (or businesslife.je as it was known at the time) set its sights on China, highlighting how the superpower could present a huge source of business for the Channel Islands.
It made sense – China’s hungry economy was about to overtake Japan’s to become the second largest in the world; the country had an expanding middle class and an assembly line-like approach to producing new billionaires; and its massive sovereign wealth funds were busily brokering deals for natural resources in Africa, Kazakhstan and Venezuela. The only hurdles were the daunting cultural barriers and the country’s overwhelmingly protectionist bent.
But if China was on a mission to go ‘global’, then the Channel Islands were equally bullish about getting involved. Rusal had just become the first Jersey-incorporated company to list on the Hong Kong Stock Exchange, and the Channel Islands were positioning themselves as the ideal partner for listings in London.
Jersey Finance had recently set up a Chinese office, as had the likes of Ogier, Appleby and Vistra Trust, and they weren’t alone in realising that the mass of private wealth being generated in China had to go somewhere.
Yet despite all the talk of opportunity, and those seven years having passed, still only one per cent of Guernsey’s funds business comes from China. Listings remain a low-volume business. And while Jersey managed £109.2bn of assets for Middle Eastern clients in 2014, according to Jersey Finance, that compared with a mere £13.3bn of assets for those from China.
Even now the organisation’s CEO, Geoff Cook, still talks about China in terms of “potential”. “China is by no means our largest market,” he says, “but it’s growing quite quickly, and it will grow to become a very big market.”
If that sounds like a case of a stuck record, it’s worth noting that Cook’s sentiment is shared in Guernsey too. “China is never about short-term returns,” says Kate Clouston, Director of International Business Development at Guernsey Finance, which opened its representative office in Hong Kong early last year.
“If that’s what you’re interested in, you shouldn’t go there. Guernsey Finance took a 20-year view. It began its investment in the Chinese office 10 years ago and it’s now reaching a tipping point and starting to pay off.”
On the front line
And there’s been plenty of concrete business. There are now 50 Jersey-based firms with a presence in Hong Kong, and a further 34 in mainland China. “Go back just a few years and that would be single figures,” says Cook.
The islands have been busy building relationships, signing memoranda of understanding and spreading the word of their wares. Guernsey Finance hosted its own event in Shanghai last November, and the recent STEP Conference in Hong Kong saw Channel Islands delegations holding masterclasses in their specialisms and, crucially, picking up work.
But the action goes beyond loading up the Channel Islands’ caravan and cantering eastwards. China has been heading this way too.
Guernsey has seen funds re-domiciling; Chinese companies listing on the Hong Kong stock exchange using Guernsey trust structures to hold their assets; and a Beijing-based company listing on the Channel Islands Securities Exchange. Clouston talks happily of recently hosting a Chinese family office on Guernsey, where they met local businesses with the aim of working together.
Yet perhaps the most eye-catching Chinese deal of the year took place in Jersey – when Noah Wealth Management, a young and dynamic private wealth manager from mainland China, which has around $15bn of assets under management, set up a managed trust company with JTC Group.
“Noah’s philosophy is that China is way behind in terms of the global mobility of wealth,” says Iain Johns, Head of Private Client Services at JTC. “Only 4.8 per cent of the assets of wealthy Chinese are invested outside China; in Switzerland the equivalent is 39.5 per cent; in the UK it’s 42 per cent.
“Noah president Kenny Lam says China’s total will double by 2020, and naturally the company wants to know how to help its clients to globalise, and how to use structures to help them – not just in wealth planning but the internationalisation of wealth and accessing other markets.”
The result of the partnership is Ark Trust, founded in August, through which Noah can offer its 115,000 clients, most of whom are in mainland China, Jersey discretionary trusts – all approved by the JFSC and, crucially, all with the familiar Noah branding.
According to Johns, Noah is the first Chinese wealth manager to offer its own offshore trust company. “They told us to expect to be approached by copycats – and we have been,” he says, alluding to other Chinese wealth managers seeking to stay in step with their clients’ demands for more sophisticated services.
“I can’t over-emphasise the profile the deal’s had in China and Asia. And we have first-mover advantage, in facilitating the release of this international mobility of wealth from mainland China into the global economy. This is the most compelling link between Jersey and China we could have hoped for. It’d be an opportunity missed if we didn’t capitalise on it.”
The good news for the Channel Islands is that they’ve learned a lot in the past six years. First, the difficult art of self-promotion. The trick here, according to Clouston, is to eschew the hard sell in favour of offering expert aid to the country’s ultra-wealthy clients on the issues they care about.
The Common Reporting Standard is one particularly hot topic at the moment, as the Chinese are obliged to comply with it by 2018 as part of its commitment to G20. Then simply make sure they know that the advice came from the Channel Islands.
Focused effort
Another learning is that a generalist approach doesn’t get you very far. “Since we’ve been here, we’ve learned to target specific areas – private wealth, for example – rather than trying to do everything we’d normally do in Jersey,” says Nathan Powell, a Partner at the Hong Kong office of Ogier, which advised on the Noah managed trust deal. “We’ve learned that it’s best to focus only on the areas where we have the strongest selling points.”
Ogier also has a representative office in Shanghai, as well as Hong Kong, as much of its client base is on the mainland. But this remains an uncommon choice among Channel Island companies. Hong Kong offers less of a language barrier, and makes it easier to set up a serviced office and negotiate with government locally.
Kate Clouston isn’t alone in describing the task of integration to mainland Chinese culture as an “uphill battle”. Guernsey Finance wound up translating all of its promotional materials, its logo and even the name Guernsey itself, into the local language.
As the name Guernsey has no direct translation in Chinese, it became ‘Honest Friend to China from the West’ – a quote made by the Vice-Mayor of Shanghai on a visit in 2008.
Clouston credits a huge amount of Guernsey Finance’s progress there to its China representative, Wendy Weng, who’s based in Shanghai.
Indeed, another major learning is the value of speaking the language yourself – even if it’s just the smallest amount. “When I presented to Chinese partners and began my speech in Chinese, the reaction was so strong it’s almost like we should have warned them in advance,” says Clouston.
The key lesson, however, seems to be that the magic ‘potential’ is still very much there. According to the 2016 China Wealth Report, the investable assets of high-net-worth families in China are set to hit $31 trillion by 2020.
China’s GDP is projected to grow at 6.5 per cent this year, which may pale in comparison with the jaw-dropping expansion of recent years, but would surely be enough to delight any ailing western economy.
And if the renminbi has taken a hit recently, it’s hardly alone; the dollar and pound have both taken a battering too.
Chinese buyers are still keen on London property, and vehicles such as the Jersey Property Unit Trust are generating interest. Even though recent changes to the UK tax code mean that UK property isn’t such a strong hook as it was, real estate is still the dominant investment class – especially stable big-ticket infrastructure investments like private hospitals and student accommodation – alongside other tangible commodities such as gold.
Yet the Channel Islands are well-placed to hold Chinese investors’ hands as they move towards less tangible alternative assets too, whether that’s private equity or IP (note the increasing ties between Silicon Valley tech developers and Beijing’s entrepreneurs). And then there’s the area with the clearest, most immediate potential: personal wealth management (see box).
“There’s so much business to go for in China that even if the economy slows, there’s still enormous pent-up wealth,” says Johns. “So many people over there have said to us: ‘I’ve got all this money, so what do I do with it?’
"It’s a massive opportunity, and it’d be naive to the extreme to think that China isn’t a market to go for.” Again, that sounds very promising. The big question is whether we’ll still be stuck using terms like ‘opportunity’ in six years’ time.
As for precisely where the Channel Islands caravan is heading, Clouston is clear about where she’d point the horses. “We’d definitely encourage Guernsey businesses to go direct to mainland China if their aim is long-term client services,” she says. “But the advice has to be: please… learn some Chinese.”
The future is wealth management
China is now home to some 596 billionaires – that’s an 80 per cent increase since 2013 – and they’re an increasingly international bunch.
A recent Jersey Finance report, The Internationalisation of Chinese Wealth, recognised a shift: the Chinese market is opening up – not least because the Chinese authorities are keen to prevent asset bubbles in the domestic economy, which is in danger of overheating and bursting. Hence they’re becoming more permissive of overseas investment.
The report identified two key drivers among the high-net-worth Chinese: a hunt for better returns than they can get domestically, and a desire to protect their assets for themselves and for the next generation. Indeed, diversification overseas is sensible at the best of times, but only becomes more so when a guiding philosophy of your government is that the state owns everything.
With Chinese vehicles not sophisticated enough for overseas activity, this promises a gilt-edged chance for Channel Island service providers – whose trusts, foundations and private trust platforms are built to do just that.
Note also that, as part of its G20 commitment, China is obliged to adopt the Common Reporting Standard in 2018. The Channel Islands have been early adopters of the latest transparency and anti-money laundering standards, and China’s high-net-worth clients are increasingly seeking this kind of cast-iron reputation.
Yet the report also identified what’s holding them back – what’s seen as a lack of good advice or options, and where to even start the discussion.
“There’s a massive high-net-worth community in China, and it’s growing at a very fast rate in a very short space of time,” says Nathan Powell, a Partner at Ogier in Hong Kong. “But when it comes to knowledge of available products and structures, there’s work to be done.”