China's Ultra High Net Worth Individuals (UHNWIs) are still discovering what family offices are, and how they are used for wealth preservation. However, they are taking the effort seriously and exploring strategies for preservation that are uncoventional to their experience.
China has experienced rapid economic and social development in the past 40 years since the beginning of the “reform and opening-up” policy, with GDP growing at an average rate of 10%, far surpassing the global average of 3.1%. Needless to say, this has resulted in a stark increase in the number of ultra-high net worth individuals in China, which necessitates the management of their assets. Thus, emerged the Family Offices in China.
In a study done by Family Capital in 2016, out of 500 family offices globally, only 7 were from China, despite there being more than 500 Chinese billionaires. This is largely due to the fact that there has been no culture around wealth and its management until very recently in China - before the 1980s, Communist ideologies prevalent in China viewed individual wealth as the biggest evil of a degenerate capitalist society.
Although the concept of a Family Office is still unfamiliar to many Chinese, the Family Office scene has been developing fast as the ultra-high net worth are searching for ways to best preserve their wealth. In Asia, Family Offices are used by ultra-high net worth families to address financial and non-financial needs, such as setting up investment strategies, risk management, family governance, legacy preservation, education, philanthropy, and oversight of family owned businesses.
The fast-changing mindset suggests that the future of Family Offices in China is bright. Indeed, 77% of the high net worth individuals in China are interested in setting up a single-Family Office or joining a multi-Family Office, of which 84% are currently actively seeking to do so.
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Establishing new Family Offices does not come without risks and challenges for wealthy families. Many families are finding difficulties in recruiting suitable outside talent that can be trusted with the sensitive family information. Moreover, as Family Offices are still in its nascency in China, the Chinese government has just begun dishing out laws and regulations, which could potentially subject these family offices to regulatory risks, should the government introduce regulations that are unfavourable to them.
The investment strategies used by Chinese families are mostly growth-oriented. However, with China’s slowing economic growth, so have their returns on investment. This has caused many families to shift their focus on preservation of wealth rather than growth, through a diversified portfolio with high allocations in fixed income and private equity. Most families were satisfied with the investment performance in the past 12 months, which averaged at 11%. Private Equity was the top performing asset class, with returns of 19%.
Looking forward, we can expect many more Family Offices to be established in China in the near future, emulating the example set by the U.S. and the European families. While there is a fair amount of uncertainty in this new relatively new and unregulated domain, the overwhelmingly positive benefits of a family office, coupled by the change in mindsets of the Chinese, is likely to herald a trend of Family Offices in China.
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