China’s New Message to Its Billionaires: Pay Up

SPEAKER_1 (0:02)

Bloomberg Audio Studios, podcasts, radio, news.

David Gura (0:08)

Some of China's wealthiest people are on edge.

Lulu Chen (0:11)

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?

David Gura (0:22)

Some are racing to raise cash.

Lulu Chen (0:25)

People are selling their stocks, taking out loans from banks, and pledging it against their assets overseas, like property, to aircrafts.

David Gura (0:35)

Others are getting foreign passports or fighting back.

Lulu Chen (0:39)

One person basically threatened the local government to say that he was going to uproot his business, his factory and operations to another province.

David Gura (0:48)

Sound familiar? Well, it's all because of a sweeping campaign by Beijing to tax the rich.

Lulu Chen (0:54)

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 and 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 dollars are parked in offshore trusts that have played a huge role in wealth protection. And so now they're being targeted.

David Gura (1:30)

Lulu 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.

Lulu Chen (1:49)

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.

David Gura (2:15)

This is the Big Take from Bloomberg News. I'm David Gura. 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.

In 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.

Lulu Chen (2:59)

In the country alone, there's 50 people worth more than $7 billion and a myriad of smaller billionaires.

David Gura (3:07)

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. One 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.

Lulu Chen (3:32)

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. And 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.

David Gura (4:11)

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.

Lulu Chen (4:28)

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. They really need other avenues of income. So now they're returning 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 trying to never strictly enforce global income payment like the US.

David Gura (5:09)