China risks swinging the tax pendulum too far
BREAKINGVIEWS-China risks swinging the tax pendulum too far The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Ka Sing Chan
HONG KONG, Sept 29 (Reuters Breakingviews) - Traditional Chinese wisdom warns against showing off wealth. For decades, the country’s entrepreneurs followed that advice by quietly parking assets offshore in Hong Kong and beyond. Now Beijing looks determined to bring those riches into the tax net to shore up government revenue. But the crackdown also risks crushing animal spirits in a fragile economy.
Although Beijing says its recent actions merely bring existing tax laws into effect and address ambiguities, in practical terms they mark a significant shift in the treatment of overseas assets.
The timing is hardly accidental. Since the property market bubble burst in 2021, local governments have lost roughly 4.5 trillion yuan ($630 billion) of annual land-sale revenue. At the same time, ever larger sums of Chinese wealth have accumulated offshore, creating an obvious potential tax base.
Since May, authorities have fined offshore brokers including Futu 6FHAy.F, FUTU.O and ordered a wind-down of their mainland clients' accounts, tightened disclosure requirements for overseas banking arrangements, and sharpened oversight of outbound investments. Beijing has also clarified that China’s 20% individual income tax applies to offshore trusts, and tax authorities have begun levying taxes on insurance policy income earned offshore.
Taken together, what unnerves China’s wealthy is not any single measure but the pace of change and the fear it can upend an implicit bargain under which business owners could make money at home and protect it overseas and a potential blurring of the line between tax collection and capital controls.
The campaign comes just as offshore Chinese wealth has reached unprecedented levels. Hong Kong has overtaken Switzerland as the world's largest cross-border wealth hub, with $2.9 trillion under management, about 60% tied to mainland money, according to a Boston Consulting Group report published in April.
Mainland Chinese and Hong Kong investors' holdings of US equities have roughly doubled in five years. HSBC Life, Hong Kong's largest life insurer, collected HK$24 billion from just 1,516 single-premium policies in the first half of this year. The average ticket size of over $2 million reflects strong demand from affluent clients for products often used for succession planning and investment diversification. Meanwhile, China's capital and financial-account deficit, a broad measure of capital outflow, exceeded $800 billion in 2025, reflecting that a growing share of wealth is being stored abroad.
The bigger problem is uncertainty. Wealthy families are scrambling to assess the impact of the new trust rules, including how far Beijing will look back and how assets in them will be valued. A broader question looms if this marks the start of a new tax era under President Xi Jinping’s ‘Common Prosperity’ drive. Several advisers, including former central-bank chief Guo Shuqing, have recently advocated for the introduction of an inheritance tax, for example.
Markets are offering a preview of the impact. Besides a slump in shares of insurers including AIA 1299.HK and Prudential PRU.L, this month hotpot chain Haidilao International's 6862.HK shares fell after co-founder Shu Ping sold about HK$2.75 billion, roughly $350 million, of stock through a family trust vehicle. The company said the disposal reflected personal financial needs. As well as stock sales, Chinese entrepreneurs are also looking to borrow against their shares to fund tax bills, bankers have told Breakingviews.
Advances in data sharing, reporting requirements and artificial-intelligence tools have made offshore assets far easier to identify and trace. Still, Beijing’s crackdown may raise large sums of money without yielding all the benefits policymakers hope for.
Assets held under trusts in Hong Kong reached HK$6.2 trillion in 2025, according to Hong Kong’s Securities and Futures Commission. If these are taxed at 20%, authorities will pocket $159 billion. That’s impressive but only a fraction of the lost annual land sales revenue. And if authorities also hope to convince people to invest their money onshore, they may be disappointed too: China's stock market remains one of the world's chronic underperformers.
The biggest danger is that an abrupt shift in taxing wealth could reduce the incentive to create it in the first place.
Beijing has long tolerated legal grey zones when they served broader economic goals. For example, offshore listings of China’s internet tech champions Tencent 0700.HK and Alibaba 9988.HK relied on variable-interest-entity structures that allowed foreign investors to gain economic exposure to a Chinese company without owning the Chinese operating business. It gave founders access to foreign capital and hard currency, though it sat awkwardly alongside foreign ownership restrictions.
But that bargain, and the exit door it offered, appears to be narrowing. Beijing told the co-founders of Manus not to leave China this year before forcing the AI startup to unwind its agreed $2 billion sale to Meta Platforms META.O. As well as tightening oversight of outbound investment, authorities have tightened rules on cross-border movement by individuals deemed to threaten national security or violate technology-export controls.
One number to watch will be the exodus of wealthy individuals attempting to move beyond China's tax net. Investment-migration consultancy Henley & Partners estimates that China saw a net outflow of 7,800 millionaires carrying roughly $55.9 billion of investable wealth last year, even as the United States attracted a net inflow of 7,500.
Ultimately Beijing may be less concerned about where money goes than ensuring it does not disappear from view. Officials have reiterated Hong Kong's role as an international financial centre and continue to call for further opening of China's financial system. That would imply capital can continue to move, provided officials can see where it goes and claim a share.
Most entrepreneurs can live with a 20% tax, but the sudden increased scrutiny of the well-heeled and uncertainty over where Beijing will draw the final lines on issues from offshore wealth to mobility will keep many on their guard.
CONTEXT NEWS
Chinese residents will have to pay a 20% income tax on income derived from transferring assets into offshore trusts, as well as income generated during the lifetime of such trusts, the Ministry of Finance and the State Taxation Administration jointly announced on July 24.
(Editing by Una Galani; Production by Aditya Srivastav)
((For previous columns by the author, Reuters customers can click on CHAN/ KaSing.Chan@thomsonreuters.com))