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How China is transferring wealth

How China is transferring wealth

One could say that Deng Xiaoping’s economic reforms have been astoundingly successful as China reportedly churns out one billionaire every five days, a product of the privatisation wave that took place in the 1980s.

But high-net-worth businessmen are running into the problem of reluctant heirs and devising a number of solutions for wealth planning after the intergenerational transfer.

‘The next generation works for private equity firms and big banks of the world and when they come out, they want to start their own businesses of managing private funds,’ said Roger King.

‘These are often the ones who don’t want to take on the family business,’ the founder and director of Tanoto Center for Asian Family Business and Entrepreneurship Studies at Hong Kong University of Science and Technology told Citywire Asia.

There is an emerging trend of private funds, which includes wealth from the family and close friends, among wealthy Chinese families as they sell off businesses, and many of which are in ‘sunset industries’ in the manufacturing sector.

‘The young generation went overseas to study. So many have learnt new skill-sets and many would like to start their own businesses rather than move into what is in their eyes, perhaps, very traditional businesses,’ King said.

As an extension, some Chinese families are also putting together small funds for their children as seed capital in cases where the children have a passion for a certain field or want to start their own businesses.

‘We also suggest that the parents have ownership in it so the individual gets family support. That’s financial capital from the family; human capital where some family members can help; and social capital relationships that leverage off the family,’ he added.

Both kinds of funds are usually managed within a family office structure, which are mostly informal among Chinese families, which own 90% of the 21.6 million private businesses.

Currently, what is called the ‘family office’ focuses on asset management but as the Western educated next generation takes over, there is growing popularity of proper governance structures such as assemblies and constitutions.

King would like to see the services expanded to include concierge services, such as planning family events.

Business restructuring

A 2016 PwC Global Family Business Survey found that only 10% of the family businesses in China and Hong Kong have a robust, documented and communicated succession plan in place. And many issues facing these family businesses boil down to the lack of strategic planning in managing both the family and business.

‘For those businesses that will pass the mantle to the younger generation, ownership pruning and diversification are key,’ King said.

In the past, families were passing on wealth to sons in equal proportions, leading to too many owners and, hence big conflicts.

However, a study by HKUST found that the successful businesses that have survived three generations usually prune the ownership down to a single entity or individual and simplify the ownership structure.

Singapore’s Eu Yan Sang family and Hong Kong’s Fung Group have survived 100 years of business by reportedly reducing the number of family owners and senior managers.

‘They also have to think of the original business and diversify into other fields because many of the original businesses could be classified as sunset industries.

‘For example, China’s Lee Kum Kee started out with sauce. But today their traditional Chinese medicine business is better known than their sauce business,’ King concluded.

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