China’s New Message to Its Billionaires: Pay Up

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1:32Bloomberg Audio Studios. Podcasts, radio, news. Some of China's wealthiest people are on edge. In Hong Kong, this is the talk of town. If you go to any dinner meeting, people are talking about, hey, did you get a call from your tax officials and what are you doing about it? Some are racing to raise cash. People are selling their stocks, taking out loans from banks and pledging it against their assets overseas, like property to aircrafts. Others are getting foreign passports or fighting back. One person basically threatened the local government to say that he was going to uproot his business, his factory and operations to another province.

2:19Sound familiar? Well, it's all because of a sweeping campaign by Beijing to tax the rich. So right now, tax officials in China are in overdrive to boost levy income from the country's richest people. They've rewritten the rules about offshore trusts. They've also launched these big raids for back taxes on local companies in years. They've set their sights on money parked offshore, especially in places like Hong Kong and Singapore. In Hong Kong alone, it's estimated that more than$1.7 trillion are parked in offshore trusts that have played a huge role in wealth protection. And so now they're being targeted.

3:00Lulu Chen covers finance for Bloomberg in Asia, and she says as China ramps up an ongoing effort to shore up local government budgets and fund AI data centers with tax revenue, billionaires across the country are seeing bills hit their doorstep. And one major deadline to pay up is just weeks away. The government is essentially saying that overseas structures will no longer shield these uber-rich people from China. And that spread fear among the wealthy who are quickly trying to figure out how much they owe, whether they can get away with it, whether they can negotiate their taxes, and also finding the money to pay their taxes.

3:45This is The Big Take from Bloomberg News. I'm David Gurai. Today on the show, China's epic tax grab. Why Beijing is cracking down on the rich more than ever and how the rich are responding.

4:01In the past few decades, China's economy has undergone a remarkable boom. The average income of its citizens went from just over$1 ,000 to more than$14 ,000 today. It also created an entirely new class of billionaires, from property developers who rode the housing boom to tech founders who built some of the world's largest internet companies. And now, a new generation of entrepreneurs betting on artificial intelligence. In the country alone, there's 50 people worth more than$7 billion and a myriad of smaller billionaires. As those fortunes grew, many wealthy families looked offshore to diversify their investments, access higher returns in global stock markets, and protect their wealth from economic and political uncertainty at home.

4:50One of the more popular ways wealthy families have parked their money is through offshore trusts, particularly in Hong Kong, Singapore, and the Cayman Islands, to protect and pass on fortunes across generations. Technically, they're not supposed to have money parked offshore. China does have capital controls, right? So you're only allowed the$50 ,000 quota every year. The reason that these Uber rich were able to get their money offshore is because they listed their companies. And through the listings, after they cash out from the IPOs, the money is left offshore. And then they put it into offshore trusts.

5:28And those trusts managed to hold their stocks and also dividend payouts, capital gains. So it's all put into these trusts that help with wealth preservation, but also succession planning. China, at least on paper, taxes its citizens on income earned anywhere in the world, even if they live overseas. But when the economy was booming, enforcement was often lax. Now that's changing. China's local governments are under growing financial pressure. So revenue is a huge part of it. in the past, the government could rely on land sales to generate a huge chunk of local government income. And now Goldman estimates that the income from that segment could tank as much as 90 % from peak days.

6:17They really need other avenues of income. So now they're turning and saying, here's a whole class of affluent billionaires who were supposed to pay taxes based on global income. It is the letter of the law that they needed to do this, except China never strictly enforced global income payment like the U.S. So break down for me, if you could, sort of who is being taxed and what exactly is being taxed? So when the tax crackdown first started, it was affluent people who were making capital gains, trading U.S. stocks and not paying the 20 percent capital gains. And then in July, China issued its most sweeping rules regarding tax payments for offshore trusts.

7:00Now, local residents who transferred assets into these offshore trusts after 2023 will be required to report and pay their income tax on gains generated by those structures. And they have a deadline. It's a 90-day deadline starting from the day they announced it, which was on July 24th. So sometime around late October is the deadline. If they do not meet that deadline and they get caught, then the government says they could be facing extra penalties down the road. That's why everyone is rushing to find money to pay taxes and trying to negotiate and sort out how much money they need to pay for these levies.

7:44In many ways, this tax hunt is a window into the state of China's economy. For years, local governments relied on a seemingly endless stream of revenue from land sales. But with the property market in a prolonged slump, that cash machine has broken down. Last year, China's central and local government spent nearly $2 trillion more than they brought in. How much in taxes does the Chinese government hope to generate through this? China hasn't said how much it wants to generate from all of this, but But Barclays estimates that at the extreme, China's tax grab could lead to as much as$100 billion being charged on assets held by wealthy people in Hong Kong.

8:29So just how are China's wealthiest reacting? And will that potential revenue bolster China's competitiveness in the AI race? That's after the break.

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10:58I am curious in broad terms, what has the reaction been to this from from wealthy individuals, the reaction to this crackdown? A little bit of a mixed bag. I would say that obviously you have the people who are trying to fight this, hiring very expensive tax consultants and lawyers. You have people who are now asking, in hindsight, that they park their money with banks that were too high profile and now asking their wealth advisors to move their money into banks that are less known. So maybe it's not on the government's radar. And then I also have talked to people who are just very compliant. And one source basically said, all the money that I own belongs to the government.

11:45And so the natural instinct is because I think a huge part of it is because these people are still making money. Their revenue is still being generated from China, which is why they have that relationship to maintain or their business operations still need to go on. So they are taking the bigger picture here and deciding, well, maybe they just pay this lump sum tax and get over it. Has there been any kind of emotional reaction, I think, here in the States when this has floated, that there'd be a crackdown on the rich here in the U.S.? There's often a lot of outrage. Have you seen that there as well?

12:20Social media is fairly censored in China, so it's not something that you're seeing that's creating massive buzz on your traditional social media platforms. And even if the rich are angry about this, they wouldn't say this openly in public forums. One of the biggest areas of dispute that we're seeing right now is people do not agree with how some officials are using the stock valuations during the peak valuation to decide how much they need to pay. Because they argue now the shares have tanked and or in some cases they never actually sold or took profit on those stocks. Some notable cases we've seen include Heidi Lau's co-founder, Shuping, selling about$350 million of their company's share to pay taxes.

13:15Heidi Lau is a famous hot pot chain in China. How difficult is it to get money back into the country? So if you've parked or put money overseas, you have one of these tax bills. How hard is it to get that money back into China? Is it difficult? It's very ironic because most of the past two decades, I would say, people have been focusing on moving their money offshore. So right now you see cities offering to create green channels to help these taxpayers quickly move their money back onshore. And in one case, in the city of Shijiazhuang, they created this special squad to help one taxpayer move about$150 ,000 back on shore and transferring it from his Hong Kong bank account.

14:04You know, in the U.S., I think in Europe as well, there's this whole economy that's built up around wealthy people trying to reduce their tax bills or preclude them from paying taxes. And I'm curious sort of how that economy has developed, maybe is evolving in China as a result of this. Well, it's definitely kept bankers and lawyers, tax advisors, very busy. Business is booming for them. Right now, they're working around the clock to help the clients get the documents in order to help them make sure that they're, first of all, being compliant. And then the bigger question that private bankers have is, apart from this being a very busy season, is whether, you know, further down the line, this means that business is going to dwindle because Chinese affluent have less reason to create offshore trusts or park their money overseas, given it makes no difference now.

15:01I know we're at a point at which China's locked in this AI race with the U.S. Is that playing any role here in this broader tax grab that we're seeing? We reported that the country is planning to spend about$300 billion over the next five years to build data centers. It's a key part of its ambition to match the U.S. in the AI race. And that's putting more pressure on the country's local governments to get their houses in order. In the U.S., taxing the rich as a government policy is sometimes seen as a response to inequality. There's this push to redistribute wealth. How would you contrast what's happening in China with a conversation that's happening in the U.S.?

15:43Is it a similar conversation, do you think, or a different one? So I haven't seen much rhetoric coming from the government where they are portraying this as a tax the rich to create an equal society. Even though this theme has been one of the things for this government and I would say the past few years, specifically for this campaign, it's been very technical. So all the regulatory requirements, the regulatory announcements that came out of July, it was very matter of fact, focusing on the technicalities. And, you know, by law, you know, these billionaires have no moral high ground, right? They can't complain and say this is unfair because they're required.

16:33And this has always been the law. And so that's why they're doing it right now.

16:43This is The Big Take from Bloomberg News. I'm David Gura. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at bloomberg.com slash podcast offer. Thanks for listening. We'll be back tomorrow.

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