China’s super-rich head abroad

November 11, 2013 by Mitch Moxley

Last year, Zhang Lan, founder of the upmarket restaurant chain South Beauty and one of China’s richest women, sparked a bout of national soul-searching when she renounced her Chinese passport and Communist Party membership to become a citizen of an unknown foreign country. In one news cycle, Zhang went from being a media darling and symbol of China’s economic miracle, to a symbol of a surprising new trend: the emigration of China’s super-rich.

While the world looks to China and sees the future, China’s wealthiest – a cohort growing in riches and numbers – are looking overseas and seeking security for their fortunes and a better quality of life for themselves and their families. One third of Chinese with a net worth of more than $16m have already emigrated overseas, according first annual Report of International Chinese Migration. Moreover, another third have investments abroad, nearly double the number that reported making similar investments in 2011, according to a study this year by China Merchants Bank and Bain & Company. Of those who have invested abroad, about 60% plan to increase their foreign holdings. They come not just from China’s major cities, such as Beijing and Shanghai, but also some second-tier cities, including Chongqing and Dalian.

Why are so many of China’s wealthy moving and investing abroad? Zhang, who was previously an outspoken critic of rich Chinese who moved abroad, did not provide a reason – “It’s a private issue,” her spokesperson told China Daily. But according to a number of surveys, while the reasons for the flight of the one percent are many, they can best be summarized with one word: security.

The number of high-net worth Chinese – those with a minimum of $1.6m in investible assets – has more than doubled in the last four years to 700,000. Bain expects the number of super-rich to grow another 20% by the end of the year. Many were early benefactors of former premier Deng Xiaoping’s Reform and Opening Up policy, and began accumulating their wealth during the 1980s, when China’s economy opened to the world.

According to a 2012 report by the Center for China and Globalization and the Beijing Institute of Technology, the majority of emigrants made their fortunes in real estate, foreign currency markets and stocks. Today, many have reached or surpassed middle age, and they are more focused on preserving wealth rather than creating it, as well as passing their fortunes on to their families. Many rich mainlanders want to establish family trusts, the Bain study found, something rarely offered by Chinese banks.

About 150,000 Chinese emigrated aboard in 2011, many of them wealthy, according to the Center for China and Globalization and the Beijing Institute of Technology report. Others are looking to secure their wealth abroad. Officially, Chinese are only allowed to move $50,000 offshore every year. But many skirt the rules by moving money to overseas accounts, or buying property, art, wine and other assets overseas. The Wall Street Journal estimated that more than $225bn flowed out of China between September 2011 and September 2012.

Many wealthy Chinese nationals are also looking to buy homes abroad, driven by domestic limits on home purchases, a strong yuan, higher investment returns, asset diversification and migration. This year, outbound property investment by wealthy individuals is expected to grow by 30%, according to estimates by real-estate consultancy Jones Lang LaSalle. The most popular destinations, according to the firm, include the US, Canada, Australia and the UK. Outbound property investment deals in 2013 reached $2.7bn as of September, compared with $1.6bn during the same period last year, according to Dealogic, a data tracker.

The number of wealthy Chinese emigrating abroad is expected to grow, and many countries welcome them with open arms. The US, Canada and Australia, for example, offer residency programs in exchange for investment. The United States granted 87,000 permanent residents’ visas to Chinese nationals in 2011. Of those, 3,340 were approved through special investment visas, which allows foreigners to apply for US citizenship with they invest more than $500,000 on job creation projects. More than two-thirds of visas granted under the program go to wealthy Chinese.

Rich Chinese emigrants said their top priorities were improved quality of life, education and wealth preservation, according to the Bain study. (In 2009, the top reason was wealth creation.) But some experts have suggested the reasons are more all encompassing. Food safety, pollution, education, infrastructure and overall quality of life are all issues that dominate news headlines in China and that top Chinese people’s list of concerns.

Ren Zhiqiang, a real estate tycoon and influential public commentator in China, recently wrote: “There are so many reasons for emigration, but the most important one is the sense of security. Safety in life, wealth, food, air, education and rights. The lack of a sense of security is one of the important reasons why there is social instability. Only by giving a handful of citizens a sense of security can a stable society be established.”

Considering that roughly 80% of China’s wealth is in the hands of 20% of people, and that some 70% of China’s wealthy have already emigrated or want to emigrate, the implications of this trend are tremendous: wealth loss, diminished national preside, shaken public confidence.

The flight of China’s richest individuals, and the offshoring of their wealth, could cost the country jobs and economic growth. “The private economy contributes more than 60% of China’s GDP and it absorbs a majority of employees. So if private business owners emigrate with their capital, it would mean less investment in the domestic market, so fewer jobs would be created,” Wang Huiyao, director of the Center for China and Globalization, told China Daily.

The government has taken notice. In November 2011, the state-rune People’s Daily published an editorial titled, “We Should Make It Harder for the Wealthy to Emigrate,” which went viral on Chinese social media sites. The article proposed an “exit tax” on wealthy Chinese leaving the country. The government should indeed be alarmed, because the flight of the one percent suggests a shaken faith in the very system that made them wealthy.

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