Offshore investment has increasingly become a fashion for Chinese HNWI who spend big money in Europe, America and Africa on mines, real estates, businesses as well as stocks, bonds, funds, antiques and artworks.
Excerpts from an article published in Yicai.com
Translation by Ren Zegang
May Day holiday is a popular time for Chinese tourists to visit New York. However to those Chinese high net wealth individuals (HNWI), international travel is no longer about visiting famous places and sightseeing. Offshore investment has increasingly become a fashion for them who spend big money in Europe, America and Africa on mines, real estates, businesses as well as stocks, bonds, funds, antiques and artworks.
Following is a close account of “Prestige NYC finance-art week”, a touring program to New York designed for Chinese HNWI by Prestige Capital, a Chinese leading finical service agency. The article was written by a reporter who participated in this tour from China’s well known financial media Yicai.com.
Solomon R. Guggenheim Museum near central park in New York exhibites a Jackson plollock’s painting along with the paintings of other masters such as Picasso, Monet and Van Gogh. In a 2015 movie <Ex Machina>, which was about artificial intelligence, there was a scene that billionaire Nathan hung a printing of Jackson plollock, known as a major figure in the abstract expressionist movement after the Second World War. The selling price of this real painting is over US$ 100 million.
Li, a Chinese businessman of 34 years old has developed an urgent desire of diversifying his assts as his wealth exceeds 1 billion yuan. Collection of artworks is one of his chosen approaches. To deepen his knowledge on art is one of the objectives of his participation into “Prestige NYC finance-art week”.
“I have made investment in some businesses in China as well as in offshore portfolios through banks ranging from insurance policies, real estate, bond, and to funds; at the same time I have collected some artworks.” Li said. He does not like investing in stocks but in favour of the packages offered by banks. In general, he is fairly open towards wealth management and keen to learn more about offshore investment. Li mentioned that he had some false concepts on hedge funds. Having visited several hedge funds and discussed with fund managers during this New York tour, he is convinced that the risks in association with hedge funds belongs to medium-low range but return is fairly high.
The majority of HNWI participated in this study tour are fairly open in wealth management. Though they are very successful and rich and some of them are experienced in investment, they have demonstrated a strong desire in leaning offshore investment. They are keen to seek advises from experts in the field and excited that the tour has opened new opportunities form them.
In the Chinese definition HNWI are those who have investable finance over 2 million yuan. In accordance with the data of Prestige Capital, the high income family in China whose investable assets exceed 600 million yuan have reached to 2.1 million with a combined pool of investable capital at 54 trillion yuan. It is estimated this figure will grow by 15% in the next few years. While their wealth is on the rise, the age of this high-income class becomes younger as those under 40 are increasing common.
The general manager of Presiding Capital Mr Liang told reporter: with rapid expansion of wealth, Chinese HNWI are eager to diversify their assets so as to minimize the risks in association with their investment. It is in such a background that offshore investment is increasingly becoming popular.
In accordance with Modern Portfolio Theory, delivered by Harry Markowitz, winner of Nobel Prize of economics in 1990, an investor can construct a portfolio with the lowest risk on a desired level of expected return. Basically a portfolio with assets of weak correlation will secure higher return in the long run.
Such theory is of great significance to Chinese HNWI. If they can build a portfolio combining their domestic wealths with overseas assets, it will minimize the risks of their investment and deliver good returns. In accordance with Mr Liang, though there is no free lunch in the world, to construct a reasonable portfolio that delivers good returns can be considered as a “free lunch”.
The overseas assets sought by the Chinese private investors are mainly real estate, stock, bond, foreign exchange, insurance, fund and etc. In accordance with the statistics of Prestige Capital, Chinese citizens account for 89% of China’s total offshore assets. Chinese individuals are mainly investing in offshore assets through commercial and investment banks as well as non banking financial institutions.
A joint report “Mainland China’s luxury spending 2015” between Bain and the assets research branch of Prestige Capital, provides a comparison between the Chinese HNWI and their international counterparts in the construction of portfolio. The combination of international average is stock 32%, hedge fund and private equity 30%, bond 17%, cash 7%, real estate 6%, commodities 5% and others 3%. In the contrast, the combination of Chinese HNWI in average is stock 26%, cash 14%, bank wealth management products 11%, public equity 11%, real estate 10%, trust 10%, bond 5% and insurance 3%.
Chinese all over the world have demonstrated a strong preference for real estate as a tool in investment. This mentality is still evident in the overseas investment by mainland Chinese. In the report “Overseas Property Needs of the Chinese HNWI 2017″ presented by Global House Buyers, the purchase of overseas properties by Chinese HNWI peaked in 2016, up significantly from the level in 2015. The purposes of purchase vary from for their retirement, assets diversification and to provision of accommodation to their children studying overseas.
Apart from property, Chinese HNWI are increasingly placing their money in overseas fund, insurance policies and other types of investment tools.”Investing in hedge fund not only offer an access to experienced fund managers but a well organised and very experienced team in investment” a member of this study tour concluded. They come to recognition that hedge fund is more likely to achieve good returns thanks to their advantages in investment strategy, quick response to challenging circumstances, and rich experience in the field.
However the threshold for the entry into these hedge funds, which require at least US$ 500 million, is too high. In addition a thorough investigation on new client is needed. In general top hedge funds do not accept new members except for those with recommendations from well-known and well connected people.
In the face of barriers, it makes sense for Chinese HNWI to invest in fund of funds (FOF) as an indirect way accessing to top hedge funds.
Commented Yang yuan, head of the insurance department of Prestige Capital, investing in offshore insurance products has increasingly become popular to mainland Chinese. Hong Kong’s official data show that the sum of insurance policies taken up by mainland Chinese reached HK$ 31.6 billion in 2015, sharing 25% of the new policies sold in Hong Kong that year. Having registered HK$ 70 billion, the sum of insurance policies taken by mainland Chinese in 2016 have doubled from the level in 2015.
There are four advantages of insurance policies offered in Hong Kong that make them attractive to mainland Chinese.
Firstly, as the policy is registered in Hong Kong dollar or US dollar it actually provides a buffer to the possible devaluation of the yuan; secondary, there is no tax involved with purchase of such insurance policies; third, as Hong Kong legislation weighs insurance policy over debt, investors can still have their policy intact even though they become bankrupt; fourth, the premium for the policies is relatively cheap in comparison with the similar policies offered in mainland China.
The most welcomed insurance products taken by mainland Chinese are saving, life issuance, severe sickness issuance and high-end medical insurance.
Investing in prospective startups is also on the rise to the Chinese HNWI. Thanks to introduction of new technology, it is possible that new startups can grow into billion dollar businesses in a few years. The catalysts to such expansion are ventral capital and private equity investment. From the experience of Silicon Valley in the last five years, the hot spots for investment of this kind are health, artificial intelligence, energy and education.
Collection of artworks becomes a fashion to Chinese HNWI. In 2016 Beijing Poly Auction recorded total deals on artworks valued at 9.6 billion yuan. In fact, the deals done in auction houses, which are open to public, only represent a portion of the transactions on artworks as many deals are carried out in studios in a relatively private environment.
A consultant from Prestige Capital commented that the demand for artworks from Asian collectors is on the rise. They are no longer only focused at artworks of China and Asia but modern arts from the west. A great portion of such growth is from mainland China.