Commentary
Net outflows from China reached a record $780 billion last year, according to Barclays. The regime in Beijing responded with new capital controls that are leading wealthy mainland Chinese to look for new ways to move assets out of the country.
The United States has major advantages over other developed-country destinations. Most importantly, Washington does not engage in significant automatic financial reporting to Beijing on Chinese tax residents.
In May, the regime initiated a crackdown on assets flowing from the country, including new measures to stop “illegal cross-border securities, futures, and fund management activities.” This led to investigations into several brokers in Hong Kong, the top offshore investment destination for wealthy mainland Chinese.
The regime levied fines of more than $300 million across three brokerages, including one in New Zealand. Likely at the behest of Beijing, Hong Kong tightened controls over the accounts of mainland Chinese customers, closed some that lacked documentation, and introduced increased reporting requirements on the source of funds for existing and new accounts. If the source were mainland China, accounts were often closed or unapproved.
The new enforcement practices likely also took a toll on insurance products purchased by wealthy mainlanders. The share prices of Standard Chartered, HSBC, Prudential, and AIA dipped. UBS postponed its mid-year wealth outlook in China, and HSBC discouraged unnecessary travel to the mainland by its private wealth bankers based in Hong Kong.
In July, Beijing announced a 20 percent tax on the offshore trusts of mainland tax residents. That tax is retroactive and likely just the beginning of larger and more comprehensive Chinese taxes on the offshore assets of wealthy Chinese tax residents.
In August, the tax was extended to earnings related to Hong Kong insurance products, including payouts and interest earned on advance premium payments.
China’s wealthy are taking notice and asking their lawyers and bankers for new ways to move money out of the country.
China’s enforcement of taxes on the wealthy is not the only cause of capital outflows. Chinese returns on equities, real estate, and fixed income are relatively low, leading Chinese investors to seek higher yields abroad. A countervailing effect is likely the appreciation of the yuan relative to the dollar and other peer currencies since June. The last time outflows reached such high levels was in 2015 and 2016, due to yuan devaluation.
Most of the offshore assets taxed by Beijing are held in places such as Hong Kong and Singapore. These and other low-tax jurisdictions are thought to hold as much as $1.2 trillion in assets owned by ultra-high-net-worth mainland Chinese.
One of the reasons for capital outflows from these jurisdictions is that they, and many more around the world, automatically report the assets of Chinese tax residents abroad to Beijing according to the Organisation for Economic Co-operation and Development’s common reporting standard (CRS). The CRS automates reports to home jurisdictions (in this case China) on the overseas wealth of tax residents wherever they have invested their assets.
The regime in Beijing has received CRS data since 2018. Thankfully, the United States does not participate in sending such data to China.
This likely explains why private bankers and lawyers have seen an uptick in inquiries from wealthy Chinese about transferring their assets to the United States, according to a CNBC report last month. The United States is the only major economy—and the only country with a relatively high gross domestic product (GDP) per capita (above $50,000)—that has not signed onto the CRS.
Few other good options exist. The European Union, Japan, the UK, Canada, and Australia are all part of the CRS. Taiwan and Puerto Rico do not exchange CRS-type financial data with Beijing, but compared with the United States, they are smaller economies with less GDP per capita.
Traditional tax shelters, such as Switzerland, the Cayman Islands, the British Virgin Islands, Jersey, Guernsey, the Isle of Man, Liechtenstein, and Monaco, all automatically report financial data to Beijing.
The United States is uniquely advantaged as a large and relatively safe destination for mainland Chinese wealth. Democracies around the world should follow the United States’ lead and stop automatically reporting financial data to the regime in China. Many have already stopped sharing CRS data with Russia because of its invasion of Ukraine. So there is a reasonable precedent for this approach.
No democracy should send the regime in Beijing the sensitive financial data of Chinese seeking to send their assets abroad, even if they have not yet been able to move their persons. Cutting Beijing off from the flow of their sensitive data will weaken the Chinese Communist Party. That is good for the world, good for free markets, and good for democracy.
The less the Chinese Communist Party can tax, the less it can devote to its authoritarian purposes.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
