China wealth boom barely flinches at tax crackdown

Standard Chartered

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The author is a Reuters Breakingviews columnist.  The opinions expressed are her own.
By Una Galani
HONG KONG, Oct 30 (Reuters Breakingviews) - China's tax crackdown is no serious match for the forces pushing Chinese money offshore, at least not yet. Beijing has since May stepped up enforcement of claims on its residents' offshore income. Yet the latest quarterly earnings announced this week by HSBC HSBA.L, 0005.HK and Standard Chartered STAN.L, 2888.HK - two global banks which generate the largest share of their operating income in Hong Kong - point to an enduring demand in the wealth business. That could remain the case so long as interest rates in the People's Republic remain low and its asset prices disappoint.
Pam Kaur, HSBC's outgoing CFO, told analysts on Tuesday's earnings call that the $295 billion bank had seen no specific change in product mix or customer behaviour resulting from China's tougher enforcement of existing rules. HSBC added 99,000 customers in Hong Kong in the month of September alone. Her counterpart Manus Costello said that Standard Chartered added the same level of new customers in the September quarter as in the prior three months. Combined, the duo reported $60 billion of net new money inflows - Standard Chartered's showing was a slight contraction from the previous quarter but in HSBC's case was 6% higher - even after stripping out flows related to an Indian government scheme to defend the plunging rupee.
     The picture for insurance, a more seasonal business, looks steady too. Annualised new premiums at HSBC in Hong Kong were flat year-on-year. Standard Chartered's income from bancassurance was up quarter-on-quarter, suggesting a decent performance for its partners. That includes Prudential PRU.L, 2378.HK, whose larger rival, $95 billion AIA 1299.HK, on Friday noted double-digit year-on-year growth in its value of new business in Hong Kong over August and September, while admitting that some mainland visitors to the city were taking "a wait-and-see approach". That caution contributed to a 5% year-on-year decline in the company's quarterly overall value of new business.
That the bottom hasn't fallen out of the wealth industry is a surprise. Investors dumped shares of HSBC, Standard Chartered, AIA and Prudential in just two days in early June, shaving some $30 billion off their combined market value as Chinese authorities tightened disclosure requirements for overseas banking arrangements. That implied an up to 20% hit to the earnings from Hong Kong and mainland China, per Breakingviews estimates. More tax enforcement measures have followed, including a clarification that China's 20% individual income tax applies to offshore trusts. Only Standard Chartered shares have fully recovered, helped on Thursday by an upgrade to its full-year guidance for income growth and return on tangible equity.
The resilient quarterly numbers have a few possible explanations. First, Chinese residents are willing to declare and pay taxes on their offshore assets if that's the price of securing returns: with the local property market and equities in a funk, and interest rates extremely low by historical standards, there are limited places to productively park wealth onshore. Second, contrary to fears, Beijing is not requiring residents to unwind their investments. Third, it may be that China's agencies are still only ramping up enforcement. It may take a few more quarters before investors get comfortable that China won't swing its tax pendulum too far.
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CONTEXT NEWS
     HSBC has seen no specific change in product mix or customer behaviour as a result of China increasing enforcement of regulation including on outbound direct investment, CFO Pam Kaur said in an analyst call following its earnings on October 27.
Standard Chartered has also experienced no change in momentum in its wealth business resulting from China’s tax regulations, CFO Manus Costello told journalists in a media call on October 28, adding that the bank had the same level of new customers during the quarter to the end of September as in the prior three months.
Since May, Chinese authorities have fined offshore brokers including Futu and ordered a wind-down of their mainland clients’ accounts, tightened disclosure requirements for overseas banking arrangements, and sharpened oversight of outbound investments. In July, Beijing clarified that China’s 20% individual income tax applies to offshore trusts. Tax authorities also have begun levying taxes on insurance policy income earned offshore.

(Editing by Antony Currie; Production by Aditya Srivastav)
((For previous columns by the author, Reuters customers can click on GALANI/  una.galani@thomsonreuters.com))