Long read: The taxman comes for China’s offshore riches

Earlier this week, in a blog titled ‘Big Winners and Losers from India’s ‘Breakpoint’, our colleagues Nandita Rajahansa and Saurabh Mukherjea wrote about how the benefits of productivity boom in the west and in India over the past few decades have largely accrued to capital than labour i.e, returns for business owners and stock market participants have far exceeded wage growth, underpinning the growing wealth and income inequality across the world. With growing use of AI and automation across services, manufacturing and agriculture, this is likely to only accentuate. This has triggered a debate among policymakers to consider redistribution funded by taxing the rich only to face a backlash from proponents of the free market. However, there is one country which is pushing ahead – China. Paradoxically, a place where the stock market hasn’t gone anywhere despite a sustained economic boom but wage growth has lifted hundreds of millions out of poverty. Yet, it hasn’t escaped the inequality issue completely and its autocratic government is going after the rich to part with some of their wealth in lieu of ‘common prosperity’.

This article in the FT begins by quoting Deng Xiaoping, credited for opening up the Chinese economy to ‘capitalist forces’ triggering a multi decadal economic boom: ‘To get rich is glorious’. Indeed, the Chinese economic boom has created ‘more than 1,000 billionaires and 5mn millionaires.’

But the Chinese rich could see this coming and have been moving money offshore for a while now, triggering property booms from Vancouver to Tokyo. Earlier this summer, the Chinese government decided to go after their offshore assets:

‘From October 22, authorities will begin collecting a 20 per cent tax on dividends and interest earned from offshore trusts, explicitly targeting wealthy Chinese who shelter their assets overseas.’

A prolonged property bust in China has created a fiscal hole in Chinese government finances that this is intended to fill: “Revenue collected by local authorities from land sales has plateaued or fallen, and the central government has been siphoning more funds to provinces in recent years to cover basic services such as education and health and to pay civil servants.’

…besides helping Xi Jinping’s socialist agenda: ‘…the campaign also serves Xi’s long-term desire to redistribute wealth in China, tackle inequality and create a more egalitarian society. Redistribution and taxation are a means of achieving “common prosperity”, he wrote in the fourth of his five-volume collection of speeches and essays, which is “an essential requirement of socialism with Chinese characteristics”.

The campaign has got the rich and their advisors worked up: “…Chinese banks and other financial institutions have been instructed to review overseas investments by wealthy Chinese people to check if income has been declared to authorities. In some cases the authorities’ scrutiny of overseas capital gains and investments went as far back as 2000.

China’s business establishment was caught off guard, as well as the vast industry helping to manage their money inside and outside the country.

One Chinese tech investor, who spoke on the condition of anonymity, says he and friends of similar high net worth were shocked by the precision with which the tax reforms target key offshore holdings and historic income, and the tight deadline set to pay.

“They have the system, they know your investments overseas . . . they can actually break open those trusts,” he says. “I think they’ve been thinking about this for a long time.””

…also in private banking centres like Hong Kong and Singapore. Indeed, last year, Hong Kong overtook Switzerland as the world’s largest private banking centre, largely helped by Chinese wealth.

“…But as Beijing’s authority over Hong Kong has tightened, the city has struggled to maintain its identity as a financial hub independent of China. Singapore, meanwhile, has become a magnet for wealthy Chinese nationals, who set up family offices in the low-tax jurisdiction to manage their fortunes while buying luxury properties and high-end cars.

…Among the highest-profile Chinese expats in Singapore are Zhang Yong and Shu Ping, the married co-founders of Chinese hotpot restaurant chain Haidilao. Forbes estimates that their combined fortune is more than $7bn. The pair have taken up Singaporean citizenship, set up a family office and spent tens of millions of dollars on properties in the city-state in recent years. In September, Shu abruptly sold more than $350mn of stock in the Hong Kong-listed company, sending its shares down 12 per cent. While the company did not disclose the reasons for the sale, equity analysts speculated that Shu was trying to generate cash to pay her tax bill.”

But with even Singapore not being able to help keep these riches from the Chinese government’s reach, an unlikely beneficiary seems to be the US, thanks to it not being a signatory to the OECD’s Common Reporting Standards (CRS). The US is not obliged to share data with the Chinese. So, while the Chinese government isn’t buying US bonds anymore, wealthy Chinese are moving their assets to the US. “…In the US, non-resident foreigners are generally not required to pay capital gains tax on investments there. The bankers say that many Chinese clients using the New York platform also do not report or pay Chinese tax on their US investment gains. The opportunity to avoid paying capital gains tax in the US and in China is a major reason for moving assets from Hong Kong and Singapore to New York. And the absence of US participation in CRS reduces the likelihood that the accounts will be disclosed automatically to Chinese authorities through that system.” 

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