Why China's wealthy elite are losing faith in their country's future: William Stanton

PRC signs of weakness often overlooked

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Beijing skyline (Wikipedia image)

Beijing skyline (Wikipedia image)

While the world too often underestimates or overlooks Taiwan’s achievements, it also often underestimates China’s challenges, exaggerates its strengths, and forgets its weaknesses. Given the extraordinary economic and military growth of the People’s Republic of China (PRC) over the last 30 years -- an achievement that the West enabled and abetted -- many observers at least implicitly assume that continuing PRC economic and military superiority are inevitable and will never falter.

Such observers also tend to argue, given their assumptions that China is an unstoppable rising power and the United States is an inevitably declining power, that the burden is at least implicitly on the United States to accommodate China to ensure it remains peaceful, including -- if necessary -- by abandoning Taiwan and ceding, for starters, East Asia and the South China Sea to PRC suzerainty. Examples include Martin Jacques, When China Rules the World: The End of the Western World and the Birth of a New Global Order (2009); Hugh White, The China Choice: Why America Should Share Power (2013); Kevin Rudd, The Future of U.S.-China Relations Under Xi Jinping: Toward a Framework of Constructive Realism for a Common Purpose (2015); and Graham Allison, Destined for War: Can America and China Escape Thucydides’ Trap? (2017).

The Wealth of China’s Leaders Sensitive and Instructive

Nonetheless, the behavior of many of the wealthiest PRC citizens suggests an underlying lack of confidence in their own country. China’s wealthiest are an important indicator of China’s future because becoming a millionaire or a billionaire within a system established and run by the Chinese Communist Party (CCP) almost certainly means you are either a CCP member or have strong CCP connections.

Wealth is a sensitive matter for the CCP leadership as evidenced most recently by the expulsion on August 30 of the Wall Street Journal journalist who had reported allegations that a cousin of Xi Jinping has been involved in high-stakes gambling and possible money laundering in Australia. Similarly, in 2012, following a New York Times report on the hidden wealth of then-Premier Wen Jiabao’s family businesses and a Bloomberg investigation of Xi Jinping’s family’s hidden wealth, the PRC government refused to accredit journalists working for The Times and delayed approving new visas for Bloomberg journalists.

The main reason for such sensitivity is the striking economic disparity between China’s rich and China’s poor, which is hardly in keeping with Marxist ideology. While China trumpets the number of people lifted out of abject poverty, it does not mention the enormous rise in inequality or the booming number of millionaires and billionaires in China. According to Business Insider on May 16, 2019, China now has 285 billionaires, the second-highest number in the world after the United States' 705. China also has the second-highest number of millionaires -- 3,480,000 – after the United States, which has 17,350,000, according to Credit Suisse's "Global Wealth in 2018."

It is therefore not surprising that the GINI Index, which measures the degree of inequality in the distribution of family income, ranked China 31st worst in the world, according to the 2019 CIA World Factbook based on a 2016 estimate. This puts the PRC in the company of countries like the Dominican Republic (25th), Honduras (26th), Nicaragua (27th), Bolivia (28th), the Seychelles (29th), and Cameroon (30th). In Asia, only Hong Kong ranked worse at 9th in the world. This is also telling because Hong Kong is where so many mainlanders have moved or at least bought residences, driving up housing prices and income inequality, which have been notable contributing causes of the demonstrations that have roiled Hong Kong.

In China’s state-run economy, especially now that it is re-emphasizing Marxist principles, it is hard to imagine growing very rich, much less fabulously wealthy, without the state’s approval or at least the tacit assent and cooperation of some government and CCP officials. It is no wonder China does not advertise its wealthiest citizens. One important way, then, to assess the strength or fragility of the PRC’s achievements is to examine the behavior of the PRC’s wealthiest and what it means.

Indicators of a Lack of Confidence Among the PRC’s Wealthy

In recent years, there have been significant indications of shaky confidence among China’s wealthy elites. At the very least, they are hedging their bets about China’s future and their own security and that of their families. When and if they can, wealthy Chinese as well as many members of the rising middle class: either emigrate or have “golden parachute” plans to do so; often acquire residence status in other countries, most frequently Western democracies, often through the purchase of investor visas; send their children abroad to study, mostly in English-speaking Western democracies; buy homes in these countries; and, to the extent possible, move their money overseas where it can be hidden, although Beijing has made this increasingly difficult.

PRC Emigration Directed to the West

In a March 6, 2015 commentary on “The Coming Chinese Crack Up” in the Wall Street Journal, China expert David Shambaugh first called attention to the fact that in 2014, Shanghai’s Hurun Research Institute, which studies China’s wealthy, found that 64 percent of the ‘high net worth individuals’ (HNWIs) whom it polled -- 393 millionaires and billionaires -- were either emigrating or planning to do so.” In Hurun’s 2017 survey, the Institute reported that 50 percent of China’s HNWIs -- survey respondents with a net worth of more than US$1.5 million -- were either emigrating or planning to do so.

In the most recent Hurun survey in 2018, some 37 percent of Chinese HNWIs were considering migrating, a drop compared to the previous years, but 12 percent of those polled had already emigrated or were applying to do so. At the same time, it reported that 90 percent of those considering immigration said that they would live in China after retirement or maintain residences both in China and overseas. This is, however, another strong indication that wealthy Chinese are hedging their bets. Many Chinese immigrants, in fact, return to China once their spouses and children are safely installed in homes they have purchased in their target countries.

Nonetheless, tens of thousands of millionaires have left China during the last decade, and an estimated 10,000 quit the country in 2017 alone. The AfrAsia Bank’s Global Wealth Migration Review (GWMR), published in April 2019, reported that the net outflow of migrant Chinese HNWIs in 2018 reached 15,000, higher than any other country in the world. (Russia was in 2nd place with 7,000, and India was in 3rd place with 5,000.) The top destinations in 2018, according to the GWMR, were Australia, the United States, and Canada. Despite the departure of migrants, China still remained one of the top three countries in the world with the most HNWIs, home to an estimated 877,700 millionaires and billionaires in 2017, according to Hurun, which also reported that only the United States and Japan surpassed these numbers.

We should bear in mind that with Beijing beginning to enforce stricter foreign exchange controls in 2016-17 to halt the flight of money from China and with the start of the trade war with the U.S. in March 2018, as well as the Trump administration’s anti-immigration rhetoric and policies, the United States has proven to be a less attractive destination. Nonetheless, according to the Hurun 2018 survey, the United States remained in 2017 the most popular immigration destination for Chinese HNWIs for the fourth year in the row, followed by the United Kingdom, Ireland, Canada, and Australia.

Better education, cleaner air, better investment opportunities, favorable immigration policies, ease of property purchases, fewer restrictions on personal freedom, lower taxation levels, and better medical care are among the many factors Chinese considered in choosing destinations. Undoubtedly, another reason is that wealthy Chinese can lead lavish lifestyles out of the sight of the Chinese Communist Party and Chinese media. (See, for example, “Chinese Kids Driving Supercars: Inside the Secret Southern California Meet-Up,” at https://youtu.be/sH8sSKwS_gU.)

Investment Visas a Key Means of Emigration

Investor visas have been a principal way for many Chinese to emigrate. Since 2008, Chinese nationals received at least 68 percent of all approved residence permits worldwide based on investment (the so-called “golden visas”), according to Investment Migration Insider on February 25, 2018. The principal destinations included the U.S., Quebec, Australia, New Zealand, the United Kingdom, Portugal, and Spain.

In 2014, Canada halted its investor visa program because of the housing bubble caused by so many Chinese visa applicants buying homes. An estimated 100,000 Chinese millionaires, for example, settled in Vancouver. Canada returned the minimum investment payments to some 40,000 waiting Chinese applicants. The United States and other countries have also begun raising the minimum amounts that must be invested to gain admission. With a sharp uptick in Chinese applications for investor visas, however, waiting times for applicants to obtain U.S. residency have also tripled to as long as 15 years.

While it is true that wealthy people in many countries often seek safe foreign harbors to maintain their riches and potentially protect their families, no country in the world besides China so consistently extols its achievements and progress even while so many of its wealthy citizens emigrate or plan to do so.

Wealthy Chinese Students Go Abroad, Mostly to Western Democracies

In the 2017-18 academic year, the 363,341 Chinese students studying in the United States represented 33.2 percent of all foreign students in the U.S., more than from any other country. In fact, China has ranked as the leading source of foreign students in the United States since at least 2012-13, according to the 2018 Open Doors report of the Institute of International Education, which is funded in part by the U.S. Government. (Other top-ranking sending countries were: 2. India: 196,271, 17.9 percent; 3. South Korea: 54,555, 5.0 percent; 4. Saudi Arabia: 44,432, 4.1 percent; 5. Canada: 25,909, 2.4 percent; 6. Vietnam: 24,325, 2.2 percent; 7. Taiwan: 22,454, 2.1 percent; and 8. Japan: 18,753, 1.7 percent.)

The number of Chinese students studying in all foreign countries reached 662,100 in 2018, up 8.83 percent from a year earlier, according to the PRC Ministry of Education. The Ministry also reported that 90 percent of these students were self-funded, a clear indication of family wealth. In addition to studying in the United States, most other Chinese students attended schools in Canada, Australia, the UK, and New Zealand, accounting for over 30 percent of foreign students in these countries.

The 2018 Hurun survey found that for 83 percent of high net worth individuals in China, education was the most important factor in seeking emigration. The overwhelming first choice for schooling was the West. As columnist David Dodwell in the South China Morning Post asked, but could not find a totally satisfying answer, “Why do so many Chinese study abroad, when local universities are already among the world’s best? (26/8/2018). Part of the reason is, of course, the international prestige attached to certain elite schools in the West. Otherwise, why would Xi Jinping, the loving father of contemporary Chinese nationalism, have quietly sent his daughter Xi Mingze (習明澤) -- under a pseudonym -- to Harvard (Class of 2014), a fact not shared with the Chinese people? It also makes you wonder how Xi could afford Harvard for his daughter given his official salary of around US$22,000 per year. (https://qz.com/329584/does-chinese-president-xi-jinping-really-earn-just-22000-a-year/)

Surely, for most other Chinese students, the motive for studying in Western democracies is also their parents’ desire to establish a potential foothold in another country, especially countries where the rule of law governs rather than the caprice of the CCP. After all, even Jack Ma, the founder and chairman of the e-commerce giant Alibaba, suddenly decided at the age of 55 to retire, leading to justifiable speculation that the CCP had forced him out. No one’s future in China is guaranteed.

The Ministry of Education has touted the fact that the number of overseas students returning home after graduation totaled 519,400 in 2018, up 8 percent from the previous year (China Daily 28/3/19). A total of 5.86 million Chinese studied abroad from 1978 to the end of 2018, more than 4.32 million completed their studies, and more than 3.65 million also chose to return to China after completing their studies, according to the Ministry. By the Ministry’s own admission, therefore, some 670,000 students did not return after finishing their studies over that 40-year period.

Rich Chinese Also the Biggest Buyers of Foreign Real Estate

Chinese purchases of U.S. residential property hit a record high of US$ 31.7 billion in 2016, according to the U.S. National Association of Realtors (NAR). Between April 2016 and March 2017, China maintained its top position in terms of dollar sales for the fourth straight year, and Chinese remained the top foreign buyers of U.S. real estate. NAR found that among Chinese buyers, 65% paid cash, while 26% used a U.S. mortgage. (South China Morning Post, 20/7/2017).

Even Chinese leaders bought homes overseas. Bo Xilai, the former Communist Party chief in Chongqing, who is now serving a life sentence, was one of these. His former villa on a hillside overlooking Cannes and the Mediterranean was on the market for $US 8.51 million, according to the International Business Times on Dec. 22, 2014. The 400 square-meter mansion boasted five bedrooms, indoor and outdoor swimming pools, two garages, and a 4,000 square-meter garden.

Illicit Overseas Transfers of Cash

Such real estate purchases require transferring cash overseas in quantities far larger than the Chinese foreign exchange rules allow. The maximum amount of Chinese yuan individuals may convert into other currencies is capped at US$50,000 each year. Various money laundering techniques, however, can sometimes work around the restrictions. Thus, It was not surprising that the December 2015 Global Financial Integrity Report covering the years 2004 to 2013 concluded that “China led the world over the 10-year period with US$1.39 trillion in illicit outflows, followed by Russia, Mexico, India, and Malaysia.”

In an essay published in Forbes on Feb. 22, 2017, Professor Frank Gunter offered an even higher estimate: “Over the last decade, an estimated US$3.8 trillion in capital has left China.” Gunter concluded that “In one generation, China has transitioned from one of the most egalitarian states in the world to one of the most unequal. While Chinese government estimates of income and wealth inequality are state secrets,” Forbes reports on the number of billionaires and millionaires in China indicated that “less than 0.5% of the population controls wealth equal to 25-33% of China’s GDP.”

Gunter observed that Xi Jinping’s crackdown on corruption revealed “many newly rich persons are closely related to high government officials ... In 2011, the Chinese Central Bank estimated that about 18,000 government officials had left the country taking almost US$7 million each.”

Based on the well-documented behavior of the PRC’s richest individuals, we can only conclude they have little confidence in the future security of their families or fortunes in China.

National Yang Ming University appointed William A. Stanton as its vice president on August 16, 2019. He previously served from August 2017 to July 2019 as a professor at the Center for General Education at National Taiwan University. Dr. Stanton earlier worked for four years as the George K.C. Yeh distinguished chair professor and founding director of the Center for Asia Policy at National Tsing Hua University (NTHU). From October 2014 through January 2016, he was also NTHU’s senior vice president for global affairs. Dr. Stanton previously served for 34 years as a U.S. diplomat. His final posting was as director of the American Institute in Taiwan (2009-2012).