Wealth management of the Chinese Private Family Business

Faced with a changing economic environment and a trend towards a new era of Internet thinking, companies and families are headed towards transition and succession respectively, with a fast-growing demand for investment and financing. As the value of their wealth rises, companies and families must decide how to diversify fund risks, manage cross-border asset allocation, and pass their wealth on. With a growing number of Chinese private companies going global, these needs have attracted much attention. Private banking has been established in China; the issue now is how to combine the long-established private wealth management practices from developed countries with China’s unique circumstances in order to provide excellent services to China’s wealthy.


We have examined the scale and distribution of the wealthy in China in terms of gender, age, academic qualifications, marital status and industry, and analyzed the data on their annual income, assets, overseas investments, and sources of wealth. We have also examined the prospects of the individual, family and business in combination with wealth accumulation and distribution, from the perspectives of decision-making style, investment horizon preference, investment risk preference, and investment earnings forecast. In addition, we have delved into private business owners’ planning for wealth management and inheritance in the Internet age according to their different preferences for charity, family plan and parenting. The mass of statistical data including charts and tables in our report will provide readers with deep insights into Chinese wealth owners’ circumstances and aspirations.

Assets

As the data on business assets indicates, most of the wealthy are at the helm of asset-light businesses, such as trading and financial services, whose sales far outnumber their total assets. The number of employees shows these companies stay small or medium-sized. Entrepreneurs have, on average, a more than 60% stake in their company, giving them a controlling interest. This indicates they have the final say on business development and wealth distribution, with their ideas and preferences directly affecting the wealth distribution and inheritance.

We have divided financial assets into cash and deposits, funds, stocks, bonds, real estate investment, collectibles investment, and others. Relevant data reveal financial assets make up a sizeable portion of total assets, showing an upward trend since last year. Perhaps for the sake of safety and liquidity, for a few entrepreneurs, cash and deposits make up the lion’s share of their financial assets; for others, the investment model accounts for 5%-20%. Popular among the wealthy are funds, stocks and bonds which make up 30% of financial assets on average; for 1/5 of the wealthy, the percentage shoots up to 50%-60%. Real estate investment seems to be one of long-held assets for almost all of the wealthy, whose properties are valued at more than RMB 5 million each and RMB 20 million on average. The collectible items have not been a major investment channel, with the investments averaging more than RMB 3 million only, or 6% of total financial assets.

Source of wealth

The aforesaid personal wealth is derived mainly from business property, dividends and personal income, followed by community property, real estate investment and stock investment in equal proportion. Inherited wealth makes up only a small portion. This implies private business owners have earned most of their wealth through their own hard work and belong to the wealth creation generation.

Among the men surveyed, community property accounts for only 4.6% of personal wealth, as opposed to 26% for women. In this sense, women derive a large portion of income from the family. Business property, salaries and dividends are the major sources of wealth for both men and women, making up a larger proportion for men than for women.

Overseas assets

Our survey reveals that more than 80% of entrepreneurs hold no overseas assets at all. According to our further analysis, overseas asset investment makes up less than 20% of the portfolios for 70% of entrepreneurs, less than 40% for 90% of entrepreneurs, and less than 60% for all entrepreneurs, perhaps due to their feelings about safety and risk management.

We have divided all potential overseas investments into stocks, bonds, financial derivatives, real estate and businesses. As a safe fixed investment option, real estate makes up 48.4% of overseas investments; next come stocks, bonds and financial derivatives; business investments, subject to policies and control, make up a significantly small portion.

Women prefer the relatively stable investment categories, such as bonds, financial derivatives and real estate, while men choose to diversify their overseas investments. Among investment options, stock, which accounts for 42.9%, is a major overseas investment category; for women, the preferred overseas investment option is real estate, which makes up 44.4%. For men, business and other types of investments, which account for 7.1% and 14.3% respectively, incur higher risks.

Overseas assets are concentrated in Hong Kong, Macao and Taiwan as well as North America, perhaps for risk and profitability considerations.


Investment habits


  • Decision-making style

 

Most of the wealthy, both male and female, make investments based on their experience and risk potential. More men than women tend to make a prompt investment decision based on market changes, without regard to experience and risks. This implies, on the one hand, men are better at making investment decisions quickly; on the other hand, their investments may pose greater risks.

  • Investment horizon preference

 

Reserved and conservative, women are inclined toward mid-and-long term investments. Around 53.2% of women prefer the investment horizon of one to three years, while men have a great appetite for mid-and-long-term (one to three years) and mid-and-short-term (six months to one year) investments, and their investments are about evenly split between the two.

The unmarried show a strong preference for short-term (less than six months) and mid-term (six months to one year) investments, which account for 57% and 42.9% of their investments respectively. The married seem more rational, as their mid-and-long-term investments make up 53.8% and mid-term ones account for over one-third of their total investments.


  • Risk preference

 

More than half of the wealthy are disposed towards investments that carry medium risks and bring median earnings. Around 28% of the entrepreneurs lean toward low-risk investments that can preserve and increase in value. Most of the private business owners are inclined toward gradual asset appreciation rather than seeking higher risks for a large potential return on investment (ROI).  On balance, the wealthy are cautious about risks to asset investment; fewer than 10% prefer high-risk investments.

Around 13.3% of male entrepreneurs are interested in high-risk investments that have a potentially high yield, compared with 4.3% of female entrepreneurs. Around 21.7% of the men surveyed prefer low-risk investments that can preserve and increase value, as opposed to more than one-third of women. Overall, women entrepreneurs have a preference for low-risk investments.

Unmarried entrepreneurs are focused on high-risk and high-yield investments, which fit in well with the thinking of the younger generation. Fewer married entrepreneurs, by contrast, are in search of risky high-yield investments. Divorced entrepreneurs seem to be more conservative, they are interested in low-risk investments that can preserve and increase their value.


  • Expect Investment Return

 

Among the wealthy, men have a significantly higher expect investment return than women. Around 38.3% of men have an expect investment return of 15% or more, compared with 14.9% of women. Over 85% of women have an expect investment return of no more than 10%.


Wealth-management service

More than half of the entrepreneurs manage their wealth themselves or have a family member manage it; 40.2% of them engage a wealth-management agency; others turn personal wealth over to their company’s investment team to manage. Women are more inclined to entrust their wealth to a wealth-management agency; men tend to do it themselves or leave it in a family member’s hands.

In this sense, entrepreneurs prefer to take care of personal wealth on their own. Most of them value their own judgment or the advice of family members and friends more than that of financial planners, accountants and lawyers. This implies that the wealthy rely more on personal judgment and connections during financial planning, and have little confidence in wealth-management agencies.

Regardless of their gender, 77.6% of the wealthy lean toward a state-owned wealth-management agency. More men than women prefer a foreign-funded or privately-run wealth-management agency.

Among 73% of the entrepreneurs who have partnered with a wealth-management agency, 43% have turned to two or more agencies to spread the risk, instead of putting all their eggs in one basket. When these agencies offer the same investment portfolio, however, investment risks are not reduced.

Regarding the qualifications of wealth-management agencies, 29% of the entrepreneurs think asset safety is a top concern; 19% regard risk control as critical; 6% consider the confidentiality of property most important; 20% see the reputation of the agency as significant. Therefore, most of the entrepreneurs see risk management and safety as the greatest consideration. Around 42% of them rate proper financial planning as least important; 27% view purchasing overseas financial products as less important. This has something to do with their inclination to make a decision on their own and their mistrust toward wealth-management agencies.

The wealthy believe the main problems facing asset management in China are ever-changing policies and regulations and poorly-run wealth-management agencies as well as taxation and ROI. As for overseas asset management, they find an array of challenges, including risk potential, unfamiliar laws, and information asymmetry; the ROI is not seen as really important. Thus, most of the entrepreneurs take a conservative approach towards overseas asset investment.


Charity


On the charity front, the wealthy contribute funds mostly to the Project Hope primary schools through an official route. Their investments in education make up half of all charitable donations. This indicates the wealthy and the public pay great attention to the educational sector. The wealthy serve as a role model for others, by virtue of their long-term commitment to education, either through their donations to the Project Hope primary schools, giving to their alma maters or creating scholarships.


The charity options available to the public leave much to be desired. Over 60% of donations are made through the traditional Red Cross and Project Hope. Nevertheless, we have also noticed that the number of foundations is on the rise. Independent of public donations, the charity foundation runs like an investment company, a model that can avoid eating into charity funds. This will go a long way toward improving the credibility of charity and inspiring more people to join the ranks of philanthropists.


Family plan and children’s education


As personal wealth in the hands of private business owners remains based within the family, the entire family plan will have some direct bearing on their wealth management. Data shows that 67% of the wealthy have not thought about immigration at all. Therefore, wealth will remain concentrated on the Chinese mainland for the foreseeable future.
Although private business owners may have no plan for immigration, 82% of them consider sending their children abroad to study in regions that align with the preferred immigration destinations. North America is a top choice, followed by Europe and Hong Kong, Macao and Taiwan.

Around 70.8% of private business owners choose to pass on financial knowledge to their children by word and deed.

Wealth inheritance

Chinese private business owners try to avoid inheritance taxes mainly through pricy insurance policies. Although 68.9% of private business owners opt for using a trust agency, 83.7% of them do so for investment purposes. This implies domestic trust services trail far behind their counterparts in Europe and the US.

To conclude, regardless of the value and type of their assets, entrepreneurs are generally cautious about investing and inclined toward traditional domestic investments, with an emphasis on safety and ROI. In terms of investment habits, they trust themselves as well as their family and friends, more than advice from professionals. However, they will still turn to a reliable wealth-management agency, such as large banks and securities companies, for asset management; this fits in with their investor psychology.

In addition, they don’t focus much on charity. They put a premium on children’s education, and have plans to send their children abroad for schooling. They think differently regarding the distribution of wealth.

We expect the wealthy will hand down their property to their children in a planned and orderly manner, and learn about wealth distribution and planning by themselves and through a special agency in order to put family wealth in perspective and using it to help boost  the family and business development rather than letting it languish unproductively.