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Hedging on Hedges

There has been much talk recently of a study by China Merchant’s Bank and Bain claiming that a surprisingly large number of China’s wealthier citizens have been moving assets overseas, purchasing property, and obtaining foreign passports. A portion of this is also supported by official government figures. For the most wealthy, the destinations are the Anglo-Saxon countries, as well as Hong Kong and Singapore. Some, according to the report, are even decamping to Russia.

In the ensuing analysis of this, many have put forth the idea that this represents a very troubling brain and wealth drain for China, while others think many of these new rich are merely hedging their assets and keeping their options open, and not really leaving China. And certainly one does not have to leave China to move assets and get another passport.

Both arguments are valid, and it’s probably hard to isolate a single motivation. A good number of high net worth persons from diverse countries have properties in more than one country, and often have more than one passport. Countries like Canada, the US and Australia are immigration cultures with sizeable Chinese communities, and it’s not difficult for a Chinese to fit into these societies- especially for those who had attended university or previously lived there.

At the same time, it is also true that some new HNW Chinese may feel more secure with their assets diversified. I doubt there will be a big exodus only for this reason though. Many Chinese can do well in other societies, though likely feel most comfortable on their own turf, speaking their own language, with their network of family and friends around. Furthermore and importantly, China is where their income is generated.

But maybe we need to look at another angle in all this. There was another much-discussed report that came out in early 2011, from McKinsey, on the potential of China’s luxury goods market. The report basically argues that Chinese consumers will spend a lot more money on luxury items in the coming years- Swiss watches, French wines and bags, and art collection, etc. No doubt this is true, and the trend is already visible. 

This notion is also deceptive- not on McKinsey’s part, but on the idea or implication that Chinese wealthy are going to direct a good amount of their money to luxury items, or “things” in general. Or that such things, however attractive, can capture the imagination or aspiration of this group. The definition of wealthy or high net worth is variable, but even including the lower strata of this group there is a limit that one can spend on luxury items, and while tangible and glamorous these are not the priority.

So what is the priority? Where are China’s new wealthy going to spend their money? Many are now just facing this issue, priorities vary, and this period of sorting-out will take some time. Charity is also slowing coming into the picture- slowly. However, there are several early indications of where aspirations lie, which we can roughly label quality of life and children (not that these are mutually exclusive….).

As a macro grouping, this would include: a healthy environment, good schools for kids, more space, taking care of parents, travel and new experiences, and even a small dose of nature (with or without holes and bunkers). And of course that vague idea of ‘the finer things in life.” This also includes various “things”, though these are a small component of the total mix. Translated into business terms, this means expensive apartments, expensive private schools and all the cash-burning optional services of raising kids in China these days. It also includes exclusive golf clubs, entertainment, cars and other luxury items. And this will soon start to include high-end senior living centers. If grouped by sector, services and real estate dominate.

Are these aspirations achievable in today’s China? “Drawn like moths we drift into the city..” goes the song. This may be true for migrant workers, but most Chinese wealthy grew up in and live in cities- large cities. So how do these aspirations match-up with the reality of China’s cities?

In many ways, very well. A family of even modest wealth can live in a very modern, spacious apartment in a gated compound, with one or more maids, a chauffeured car, a wide range of restaurant and entertainment options. There is a growing private education infrastructure, and more travel options than ever. There are also the list of cosmopolitan attractions : concerts, theatre, museums, newly built parks, and a growing mix of people. And Chinese cities can be exiting places to live. For city living, top Chinese cities are becoming more attractive by the year.

But other aspects of Chinese city life are at odds with these aspirations. Take education for one. While Shanghai students are now famous for having the top test scores in the word, many parents in Shanghai are actually ambivalent about this very same school system, and are paying good money to take their kids out of these schools and into private schools, in Chinese or English. And while cleaner than before, Chinese cities are still rather polluted. And noisy.  And traffic is messy, and getting worse.

And finally, for all the wealth that the new class of Chinese entrepreneurs and executives are generating, there is one thing that is increasingly elusive to purchase: space. We will not even talk about land, because while Chinese citizens can have land rights, they cannot own land. This is the one finite commodity, and its value will continues to increase, despite recent drops in property prices. More modern Chinese cities have single family units called villas (bie shu), though construction of these close to downtown in cities like Shanghai and Beijing is now very restricted, and many look more like army barracks than the suburban houses of Westchester County or Orange County., with manicured lawns and trim hedges.

There are very high-end houses on golf courses like She Shan outside Shanghai, which sell for astronomical prices and are still some distance from the city center. And a villa is just as likely to have factories as neighbors rather than other villas, and factory-style air. Otherwise, it’s an apartment.

Indeed there are no suburbs of Chinese cities, as westerners understand these. The closet term for these in Chinese- jiao wai- just means the space between the cities proper and farmland or natural areas. And that is what they are: jiao wai are typically a combination of factories, warehouses, farming pockets, residential housing, and many barren plots of land waiting to be developed.

But maybe these North American or Australian-style suburbs are exactly what many Chinese want: clean, quiet, spacious, with good schools nearby, and shops and restaurants just beyond a few minutes drive away. They can live there part of the year; the kids have an option to go to school, and they own the land title cleanly. It’s no accident that this is where mainland Chinese are now clustering, in Sydney, Orange County, Vancouver. There has been a Chinese presence in these locations for years, and this has been accelerating.

So it’s possible that in the end, these new wealthy are not fleeing China, but are establishing a hedge both on assets and quality of life- a hedge that includes lawns and hedges. And though they are from the city, many would like now to live a bit outside the city, “Somewhere out of a memory of lighted streets on quiet nights...”

 

About GCiS China Strategic Research

GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.


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