Last year, according to the Hurun Report, there were 594 billionaires in China. It’s the world’s highest; 59 more than the number listed by Forbes of US billionaires. But, according to Family Capital’s estimates of 500 family offices, there are only seven from China and that includes Hong Kong. This compared with 157 from the US. Why so few in China?
OK, there’s probably a lot more than the seven in China that Family Capital has found so far. After all, it’s more difficult to find family offices in China than it is the US and Europe. But even if there are at least another 20-plus family offices in China, there are still much less than what its wealth and size would suggest.
Of course, there is one big reason why so few exist. Much of the wealth in China has been created since the 1980s and is predominantly in the hands of first generation entrepreneurs. It’s only beginning to transition to the next generation. Yes, first generation entrepreneurs in the US and Europe set up family offices, but not so much in China.
That’s because there has been no culture around wealth and how to manage it until very recently. Before the 1980s, Communist ideology as practices by China saw the accumulation of individual wealth as the number one evil of a degenerate capitalist society. And, to some extent, there is a residual of that mentality today even with the staggering growth in individual wealth since the 1980s.
But what about Hong Kong, surely that’s a different case, where there has been a culture around wealth for much longer and it has has been passed down for many more years than in mainland China? The lack of family offices in Hong Kong is to do with another big reason why there aren’t many family offices across the whole of China – the preference of holding company structures.
As Family Capital said last week, the Asian family-owned conglomerate is alive and well, whereas, in the US and Europe, the model is much less in favour. China-based entrepreneurs are more likely to use a holding company structure to build their portfolio of businesses and other investments than using a family office structure. And many of these holding companies become very successful conglomerates. Often they have embedded family office structures within their core business.
But what about the future? Will China witness a sharp growth in the number of family offices in the years ahead? There’s unlikely to be a sharp growth, but their numbers will rise over the years ahead, particularly as the next generation gains hold of the businesses set up by their parents.
But, just as the Communist Party allows capitalism to thrive in China through its “socialism with Chinese characteristics”, so too will the family office sector in the world’s most populous country develop its own set of characteristics, differing to what exists in the US and Europe.