Harriet Leung and Brian Rowbotham were speakers at the annual Offshore Investment Conference in Shanghai, June 9th and 10th.
Their presentation was about International Tax Planning for Asian Families.
The speakers and attendees for this year's conference came from around the globe to discuss cross border business opportunities being generated by the red hot economy in China. The following comments summarize insights into the Chinese economy from the Investment Conference, from the Shanghai World Expo which was held concurrently, and from several clients and advisors in Shanghai.
1. The Shanghai economy is booming.
The Chinese government invested U.S.$4 billion in Expo alone, and an additional U.S.$58 billion in infrastructure projects in and around the city, including significant upgrades in rail transportation.
Huge amounts of capital have been invested in security. In every Metro station, riders must send their bags through airport like x-ray machines. The government wants to insure that the City is free of any incidents while Expo is in process.
Among the local businessmen, there is a lot of pride in the economic success achieved in Shanghai in such a short time period, along with an attitude of optimism. It's a bit like the dot com period in Silicon Valley in the late 1990s. Due to inflation concerns particularly in the real estate area, there is a degree of reserve about the economy overheating. There is a constant "bubble" or "no bubble" debate in the press, both locally and internationally.
2. China is gearing up for global leadership, reflected in their seriousness about education.
While in Shanghai, the President, Hu Jin Tao unveiled the government's plan to be a center of global innovation. Billions of dollars are being invested in the local universities and think tank centers.
Education is being seen as the key to the country's future. During our stay, the papers were full of the anxiety and anticipation for the 10 million students sitting for the national exams to qualify for the top Universities. The pressure is even more intense due to the "one child" policy where parents see their own well being based on the ability of their only child to perform well in their studies.
It was unusual to see such focus on entrance exams. You don't see Americans get this excited unless it's Super Bowl week. The testing centers were all on high security alerts, metal detectors were in place to prevent cheating devices and the internet was being screened for sales of various software and hardware devices that facilitate cheating. In areas where new construction was in progress, activities would shut down so the noise factor wouldn't interfere with students in testing centers. Last year there were riots, and troops had to be brought into several testing centers to keep the parents from causing problems. The testing period passed this year without incident.
3. Doing business in China is not without its political side.
Our conference was held in the Pudong Shangri La Hotel for three days. On day two, Iran's President Mahmoud Ahmadinejad and his entourage arrived from Tehran. China has emerged in recent years as Iran's main trading partner. Its policy with respect to Iran is to push the diplomatic process rather than imposing sanctions over Tehran's nuclear program. While the Chinese voted to impose sanctions on Iran in the UN Council, both sides need each other, so the practical side of policy prevails. To Westerners, it looks somewhat duplicitous to sanction Iran and then welcome its leader, but to the Asian businessman, the practical side of politics is the approach. In China, Western attitudes in the political arena can at times seem self-righteous.
4. Hong Kong still plays a major role in Shanghai and China.
The financial infrastructure and experience of professionals in Hong Kong are still among the best in the world, giving Hong Kong the capacity to take on the fast paced growth in financial transactions. However, it would be a mistake to underestimate the desire and capability of Shanghai in particular to gain market share as their economy grows.
While Shanghai is gearing up to be a major financial center like New York, much of the financial strategy and planning is still overseen or managed by financial institutions, consultants and trust companies based in Hong Kong.
Chinese investors are still burdened by government regulations and exchange control so it's very typical to see businesses in China either affiliated with, or owned by companies that are headquartered in Hong Kong. When China based businesses expand beyond their borders, it's typically easier for such companies to move capital to the U.S. or Europe or other parts of Asia through a Hong Kong parent or affiliate company, for legal, tax and exchange control reasons. For now, Hong Kong and Shanghai are like business partners although they both compete when it comes to attracting new businesses from abroad.
5. Opportunities for U.S. business expansion are excellent for those who are careful.
The demand for U.S. products and the desire to invest into the U.S. market, and in particular, into U.S. real estate is immense. There is tremendous liquidity in China but due to exchange controls, it's challenging for locals to do a lot of investing outside China without approval from the Central Bank which is controlled by the government. For local businesses, expanding overseas is encouraged and moving capital outside of China is allowed, but for the pure investor, it's hard to do.
Exchange control constraints force much of the investible capital to go into the local stock markets, which aren't overwhelmingly popular, and into the local real estate market which continues to heat up. The government operates like the Federal Reserve in the U.S. but its financial powers are much broader. For second homes, the cash down requirement was recently increased from 40-50%, and for a time, third home purchases were not allowed in an effort to slow down the cost of real estate which is quickly pricing out most middle class people.
The government is currently implementing a number of programs to assist local companies with acquisitions in the U.S. The scale of these programs and the capital being committed is vast when compared to most economies around the world. While all this is good, we'll likely see a "controlled increase" with inbound investments into the U.S. as opposed to a flood, so the American businessman must be very patient.
Doing deals and negotiating terms are complex. Shanghainese are famous for being bargain hunters and this culture plays directly into day to day business. Caveat emptor or buyer beware is an absolute necessity to survive. Due diligence takes much more time and effort than in the U.S., but is an absolute essential ingredient to any undertaking.
