A quick course on mechanics of a financial escape hatch

A leadership change is prime time for the mainland's new rich to study up on emergency preparations in case of an ill anti-corruption wind

PUBLISHED : Saturday, 02 February, 2013, 12:00am
UPDATED : Saturday, 02 February, 2013, 4:25am

Thanks to a leadership change with an anti-corruption spin, private bankers have been very busy lately.

Take, for example, veteran banker Erica, born and raised in Hong Kong. The former corporate banker has been serving old money for almost a decade. The mainland's new rich have been among her clientele, but never a particularly significant group.

She knew cash-rich mainlanders were eager to move their money to Hong Kong. Yet, finding a client was the last thing she expected in a doctoral programme.

Part-time doctoral courses are a growing business for major Chinese universities. Mainland entrepreneurs love them. A PhD makes them look more credible as a controlling shareholder on a listing prospectus. At 100,000 yuan (HK$123,600) a pop, it's bang for the buck.

But it's more than just vanity. These "students" are not interested in libraries and research. The prime attractions are visits to the Hong Kong stock exchange and meetings with regulators and bankers. They come to town for a few days every term to attend so-called "power meetings".

Erica is a speaker at such a programme. A year ago, she was addressing a group of 40 about the private banking industry in Hong Kong. In the coffee break, a forty-something man introduced himself as a factory owner from Guangxi, an economic backwater.

Our banker casually mentions that she would be more than happy to serve him and that it wouldn't take long to open an account for him. Sure, the man says. The chit-chat over, Erica goes back to her work, forgetting all about it. Yet, the next term, the man shows up at Erica's office and signs the account documents.

Erica is still not ecstatic. She has seen too many empty promises like these. But to her surprise, two days later the promised US$8 million shows up, and not in a suitcase but in the form of a cheque issued by a major bank in town.

Erica finds that too good to be true, and after much struggle with herself, she returns the money. She doesn't want to dirty her hands in possible money laundering.

Yet, more and more of these "student delegations" have been coming to town. On the mainland in past months, the "seminars" that used to be held monthly have become a weekly feature, each packed with 50 to 60 students.

She's being approached by more and more loaded entrepreneurs. It's hard to say no. She now has a "hit rate" of 3 to 5 per cent at each seminar, or about two to three new clients, bringing in no less than US$20 million every two weeks.

Isn't she worried about dirty money any longer? "As long as they have their papers clean, I'm OK," Erica says. Last year, she was the top performer at her bank.

For any private entrepreneur or corrupt official in mainland China, a leadership change is always the time to pack an emergency bag. One can never be too sure who will be in power in his or her province and if and when they will start digging up the dirt on them.

Plus, the anti-graft campaign orchestrated by Xi Jinping has freaked out many this time. It doesn't matter whether it's only a political gesture or it's for real. The money has to leave.

According to central bank data, more than US$9.2 billion of foreign currency was drawn from banks in the first week of December. That is 64 per cent of the US$14.6 billion leaving the banking system in the whole of November. And, this is just money in the banks, not underground.

Erica can't say if that's why her business has been good lately. All she knows is that an increasing number of her new accounts are linked to "investment-based migration" - investments that are not just about returns, but also provide the passport to flee if things get too hot.

Of course, returns still matter. The favoured investment pattern of a regular mainland businessperson goes somewhat like this: US$3 million is put into a mainland bank; the money is transferred to a major bank in Hong Kong, giving it "credibility"; the sum is used to buy blue chips, of which China Mobile and Hutchison are the favourites; the stocks are pledged to the bank for an easy loan of US$1.8 million; this money is used as the premium for investment-linked life insurance of about US$3 million; the insurance policy is used as the collateral for a US$1.3 million loan; the cash then goes into migration-linked investment, be it stocks or bonds.

Thanks to this web of leverage, the mainlander now has US$7.3 million worth of assets - US$3 million worth of blue chips, US$3 million of investment-linked life insurance, and US$1.3 million of migration-linked investment products. Plus, the status of a permanent resident of Hong Kong. The interest expense is negligible.

This may be money "on the run" but the mainland investors' instinct for profit and appetite for risk remain intact.