HSBC and the Research Center for Global Family Business, PBC School of Finance, Tsinghua University jointly published a new study this week on wealth succession and family trusts in mainland China.

A new study on wealth succession and family trusts, jointly published by HSBC and the Research Center for Global Family Business, PBC School of Finance, Tsinghua University, reveals that family trusts are the most preferred succession planning tool among surveyed centimillionaires in mainland China.

This is because of the benefits of risk isolation, asset appreciation, will continuity, taxation planning and philanthropy. About one-fifth of the respondents have set up family trusts, the study finds.

It also indicates that more than half of respondents hope to achieve risk isolation through family trusts whilst 44 per cent believe that a proper trust design can help start a new business. Thirty-nine per cent of respondents also said that amid uncertainties in business succession, they hope to help their heirs develop personal abilities and good character through the design of family trusts, so that they can have more career options and independent development pathways.

The study finds that China’s family trust business entered the stage of rapid growth in three years from 2019 to 2022, with assets under management increasing from more than RMB$100 billion ($14 billion) to over RMB$400 billion. The new regulations for trust classification announced by the China Banking and Insurance Regulatory Commission will take effect from this June, the firm said, indicating that the regulatory environment and legal system for family trusts is improving to better serve the public needs for wealth management, succession, education and elderly care.

The study also reveals that young second-generation entrepreneurs are more willing to participate in new economy industries in response to market trends.

The “2023 China Family Wealth Management – Beyond Uncertainty: The New Wave of Succession Planning and Family Trust” examined the wealth transfer needs and application of succession tools of Chinese ultra-high net worth entrepreneurs from the perspectives of cross-generational wealth transfer, corporate governance, family governance and philanthropy.

Jackie Mau (pictured), head of global private banking, HSBC China, said: “China’s economy has experienced exponential growth and massive wealth creation in the past few decades and, as a result, we expect significant waves of wealth transfer, particularly from private entrepreneurs, within 10 to 20 years.”

“Data shows that the proportion of entrepreneurs aged 50 or above in China’s largest private enterprises has reached 82 per cent. From passing on wealth to managing the business, identifying the right talent and leaving long-lasting values behind, succession is complicated and therefore requires a systematic process. Developing succession plans with support from professional institutions will help entrepreneurs better realise their succession goals and create positive wealth results for themselves, their families, their businesses, and society,” he continued.

The study also finds that Chinese entrepreneurs create wealth faster than their counterparts in overseas markets and are currently undergoing or will soon begin their first cross-generational transfer. They tend to start their planning relatively late and place a greater emphasis on business growth, and the process is commonly led by the wealth creators themselves.

Despite these findings, the study also discovered that in China, where there is strong economic growth and an increasingly innovative culture, the second generation is usually introduced to innovation and transformation during the succession process.

In addition, the study shows that Chinese entrepreneurs not only focus on the succession of business and financial capital, and other forms of tangible wealth, but also value the succession of spiritual wealth, such as positive values. Over 40 per cent of respondents indicated that they attached great importance to fostering the entrepreneurial spirit of the next generation and passing on the value of giving back to society. Some respondents said they would set incentives and limitations in their succession plans, requiring their heirs to contribute to their businesses, families and society.

The study also finds that the principle of directing wealth to a good cause has taken hold and become an important part of cross-generational transfer. Almost 80 per cent of respondents indicated their willingness to take part in achieving common prosperity. They may create jobs and tax revenues through the development of their businesses, or actively assume their social responsibilities through donations and impact investments.

Source: Wealth Briefing Asia