Political and social unrest in Hong Kong may have made the world’s headlines – but this hasn’t unsettled the territory’s key role in structuring and succession planning for wealthy Chinese families
It is now almost 25 years since Britain passed Hong Kong over to China and, as a special administrative region for that country, it has continued to thrive as a financial services centre.
Prior to the handover in 1997, assets were fast moved out of Hong Kong and alternative structures set up overseas. But in the decades since, the trend has very much been for this business to return.
For Hong Kong financial services businesses, change has been a constant – one that continues to present opportunities and challenges for the region’s wealth managers, particularly in the wealth planning and structuring sectors, which tend to look to the longer term.
Hong Kong is in a strategically important position, given the rapid growth of wealth in the Asia region – growth that saw a 17-fold increase between 2001 and the end of 2019, when total Chinese household wealth reached $63.8trn.
As a result, it remains the gateway through which wealthy Chinese families can structure their wealth in other parts of the world, and through which financial services providers elsewhere can gain access to Chinese wealth.
Fighting in the streets
Among recent events impacting Hong Kong and its reputation are the high-profile protests by hundreds of thousands of the territory’s citizens, as well as Covid-19.
Despite the high-profile coverage of these, they appear to have had little impact on financial services in Hong Kong, and trust and private client practitioners are reporting ongoing growth as wealthy Chinese families contemplate structuring and succession planning.
The becalming of Hong Kong, following a series of political changes that caused widespread dissatisfaction, distrust in the government and social unrest – and which shut down offices and public transport – was the result of China imposing a national security law that’s been compared to the US Patriot Act.
This also held some positives for financial services providers. Jacqueline Shek, Executive Director, Trust Services, at Zedra in Hong Kong, says: “In the 1980s, in the lead-up to the handover from Britain to China, we were [actively] planning around political risk. Now, it’s just another facet that people think about.
“The recent change in the political environment made people think in terms of family wealth planning and trust structuring again. Wealth structuring has always been about planning for risks, and it is just one aspect to look at now.
“Political risk is one influencing factor driving demand for our services,” continues Shek. “A far bigger factor in our part of the world is the rapid rate at which wealth is accumulating in Asia, particularly among Chinese entrepreneurs in the fintech and biotech space.”
Covid-19 has also played a part in increasing Asian families’ focus on succession planning, she adds. “When your mortality is at issue, people are called to action more than would be the case if times are good and setting up a trust or writing a will can be put off until another day.”
Trade war troubles
Of more concern than politics on the ground in Hong Kong has been the trade war between the US and China.
Shek says that sanctions, some of which named Hong Kong politicians, left the territory caught in the middle like a pawn.
James Russell, Managing Director at Equiom Asia, agrees – but anticipates that the US election will have improved the situation somewhat.
“The concern was that Trump would go another step further and impose sanctions against anybody who was a member of the Chinese Communist Party. Many in Hong Kong are expecting a more diplomatic approach from Joe Biden,” he says.
One of the issues arising from the US actions had been a conflict for American financial institutions in Hong Kong. Some feared the national security law would have criminalised their directors for carrying out the US sanctions.
But overall, Russell sees the national security law as a stabilising factor for the finance centre, after high-profile media coverage had led some clients to begin to look to Singapore as an alternative safe haven for their business.
“It’s been pretty standard that if you are an individual in Indonesia, the Philippines, China or South East Asia who has collected a large amount of wealth, then you would want to put that somewhere safe and stable, with a good rule of law – and your choices locally would have been Hong Kong or Singapore.”
Despite this, recent Chinese and Hong Kong politics have not been the overriding factor influencing the investment habits of wealthy Asians.
As Shek explains: “The clients we work with are predominantly mainland Chinese families, Hong Kong families or South East Asian families. There’s significant wealth in Hong Kong and no-one’s exiting it. They’ve kept their assets here.
“Capital markets are strong and the financial market is quite strong here. Also, Asians tend to invest quite heavily in real estate and, underneath a global structure, if your real estate is in Hong Kong, your asset is still here and no-one’s selling. People are still bullish about real estate.”
Any adverse factors on trust businesses are far outweighed by the ongoing trend for Asians to pass on wealth through succession planning, she adds.
“The ageing patriarch or matriarch who needs to pass on wealth is driving the business here,” she says.
Global protection
Russell, meanwhile, points out that trust business in Hong Kong is less about tax planning than is the case with structures settled in some European finance centres. Rather, the priority is wealth protection and access to the rest of the world.
Russell also notes that structuring around the listing of Chinese family businesses has refocused recently to be more China-centric.
“That is what’s really driving the market,” he says. “Three years ago, if you were the patriarch of a Chinese family business and you decided it was time to list it, you would have looked to the New York Stock Exchange.
But because Trump has made it so difficult for Chinese people to do business in the US, that business is all coming to Hong Kong and it works for the Chinese. It’s a well-trodden path that lawyers in Beijing and Shanghai have walked dozens of times.”
Ultimately, there is a sense that Hong Kong will prosper as China’s own global finance centre.
Russell believes the ease of doing business with the rest of the world from Hong Kong and its evolution towards becoming a Chinese-orientated financial services centre is in the Chinese government’s interest, as it can control the flow of capital in and out of Hong Kong.
“It’s an enormous space and a very interesting space – China’s got a good chunk of the world’s population and Hong Kong is still very much China’s route in and out for Chinese people doing business abroad and foreign companies looking to move into China,” he says.
However, not everything is clear. With Hong Kong set to become part of China in three decades’ time, there is uncertainty as to how the separate legal system in Hong Kong will evolve. It may no longer be one country with two systems, which could have implications around the judgement of contentious trust issues.
Russell concludes: “I generally say to clients: you can build a trust deed that quite easily enables you to move the trust to another jurisdiction if it later becomes problematic to be in the jurisdiction you’re in now.
"There’s no problem today. But we need to make sure that, if there is a problem in the future, we are able to do something about it.”
• This article was first published in the Asia Edition of Businesslife in December 2020