HISTORY shows that a successful offshore jurisdiction is one which is capable of most effectively connecting, and providing a conduit between, 'capital originating markets' and 'destination markets'.
The Far East has been a source of a huge volume of business and revenue (both as a capital originating market and as a destination market) for a wide range of offshore jurisdictions in recent years. If predictions of future growth in inbound investment are to be relied on, this trend looks set to continue, with capital flows into emerging Asian economies now exceeding US$103bn per annum, up from US$50bn in 2016, and private equity and venture capital financing growing by 37.6% since 2016, triple the rate of global growth. Nowhere has this growth been more pronounced or impactful than China. Indeed, to many people in offshore financial centres, looking east for opportunities has often really just meant focusing efforts on China, or a part thereof.
From an offshore structuring perspective, whilst inbound FDI into China has to a large extent been the preserve of the Caribbean jurisdictions, outbound Chinese FDI has involved the use of a wider mix of offshore financial centres. This includes the Channel Islands, which have seen significant capital flow from China destined, in particular, for the UK real estate market, and from within the private capital and asset protection sphere.
In this context, the well-publicised decline in Chinese outbound FDI since the end of 2016 may, at first glance, be a cause of concern. This concern may be further compounded by certain other factors, including an increasingly protectionist geopolitical climate, a more onerous regulatory environment in China including the designation of the foreign real estate market as a 'restricted sector', a prescribed focus by the Beijing government on other 'encouraged' sectors, and a major drive towards the development of the Belt and Road initiative. However, before the alarm bells start ringing too loudly in either the Jersey or Guernsey markets, these issues need to be properly understood and seen in context – the truth is that they are bumps in what is expected to be a road that continues on an upward trajectory for many years to come:
- Chinese outbound FDI has increased year-on-year for a decade, and had it not been for a record year in 2016 (which itself was skewed by a number of mega- deals), 2017 would have (with a 30% increase on investment levels in 2015) been seen in a very positive light
- The drop in Chinese outbound FDI is a function of Beijing seeking to stop what it classes as 'irrational' outbound investment by private investors as part of a broader attempt to reduce risk and debt in the Chinese finance market
- Outbound investment from China into the US has dropped significantly as a result of the trade wars that have been developing between Washington and Beijing in recent months, but outbound investment from China into Europe has increased and is now nearly 10 times that which is invested in the US
- Despite real estate being a restricted sector, Europe's real estate and hospitality sectors received USD3.2bn of Chinese investment in 2017, and the level of Chinese investment into European real estate hit record highs in the first half of 2018
- Whilst China is a very important part of the Asian economy, so too are a number of other jurisdictions, many of which have stepped into the breach created by China having slowed down its outbound investment. These jurisdictions include Singapore, which led Asia outbound investment in the first half of 2018, and South Korea, which is expected to invest over USD4bn into the UK real estate market this year. Over 65% of all Asian investment into the European real estate market in 2018 is expected to go into the UK market
- Jersey and Guernsey remain synonymous with private capital, asset protection and wealth management, and the global volume of net investible assets of highnet- worth individuals is expected to increase by 25% to almost USD70 trillion by 2021.
Asia, and particularly China, continues to represent a wealth of opportunity for the Channel Islands. Indeed, the potential is there for the flow of Asian work that the Channel Islands have already seen and benefited from in previous years to be significantly eclipsed by what is to come. This will only eventuate if those in the market know where in Asia to look for opportunities, appreciate that their products are often in competition with investment products from mid-shore markets such as Hong Kong, Singapore and Dubai (as well as other traditional offshore jurisdictions), and understand the need to educate those in both the capital originating markets as well as those in the destination markets as regards the benefits that using the Channel Islands bring to investment structures.
Previously published in The Guernsey Press.
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