China’s tycoon fire-sale

Founders selling stakes in their own business? Happens all the time. In fact, isn’t that almost the point? Everybody needs a new Gulfstream, right? Or a Cabo trophy home! Plus how else is Jeff supposed to pay for that wedding?

But when multiple big founders start liquidating their holdings at once? 🤔

Like, say, the founding family behind China’s hit Haidilao hotpot chain, which just sold $350M in shares, citing ✌️personal funding needs✌️? That’s a lot of noodles.

Or Peng Zhao, China’s online recruitment tycoon, selling $110M of his shares?

Then all the market jitters around China’s other founder-held firms like Li Ning’s Viva Goods (footwear and apparel), or Lin Bin’s Xiaomi (EVs), or Wang Yunan’s Guming (boba tea!)??? All reflecting a sense these guys might sell next.

So what — and we cannot stress this enough — is going on?

China’s ultra-rich are racing against a 22 October deadline to settle back taxes on their offshore trusts, long a popular loophole to defer taxes indefinitely.

But Beijing moved to close that loophole back in July, instead treating these trusts as look-throughs — ie, ignore the trust structure and tax the tycoon beneath. Try to say you’re now Singaporean instead? China’s new rules will still follow.

So tycoons have until 22 October to declare and settle all unpaid trust income back to 2023, penalty-free. Miss it, and you soon face surcharges and other penalties.

With Beijing now using AI and auto-data exchanges with 100 countries to find its tycoons abroad, all these big emergency fire-sales in China start to make sense.

Plus there’s a lot at stake: BCG’s consultants recently took time out from telling clients to increase revenues and cut costs to instead do some research suggesting more than half of China’s ultra-high-net-worth families use these trusts.

If ‘half’ sounds low, it’s because the other half often skips any formal trust wrapper and instead disguises wealth via massive insurance policies, or just jumps straight to Cayman shells. But even the trust-half might be hiding $1.2T, aka a Netherlands.

It’s not just offshore trusts now in Beijing’s tax crosshairs, btw. It’s also now…

• Squeezing China’s VAT loopholes while standardising rates and terms

• Ditching a 32-year-old tax exemption for certain expat bonuses, and

• Cracking down on unlicensed cross-border trading (a key tax-evasion channel)

So… did China’s taxman just OD on Adderall?

Maybe, but there are five bigger drivers behind Beijing’s big new tax hunt:

First, it’s a way for China to plug its fiscal deficit: at the ~2021 peak, China’s local governments (~85% of public spending) relied on land-sales for ~half their revenue! But China’s ongoing property crash has shrunk that stream by ~65% — we’re talking ~$600B now missing each year. So taxing your tycoons is how you replace half a trillion dollars of lost property income without crashing basic public services.

Second, President Xi needs to fund his massive new $100B+ reallocation away from non-productive infrastructure to instead back new priorities like AI and chips.

Third, the taxman would also argue this is just righting a wrong: China’s tax-to-GDP ratio has long been almost ~half the OECD average.

Fourth, it also helps stem (though could also conceivably accelerate) China’s ~$900B+ in annual capital flight, forcing tycoons to instead deploy their cash back home in line with Xi’s vision. And speaking of Xi’s vision…

Fifth, this whole crackdown also aligns neatly with his ‘Common Prosperity’ banner (though no word yet on how much tax his own wealthy relatives might pay).

So even in China, dear Intriguer, Benjamin Franklin’s death and taxes edict still holds. It’s just that China’s taxman now packs AI algorithms and an exit ban.

Sound even smarter:

• Some China-watchers are warning an inheritance tax might also be on the cards, though no plans have been announced yet.