Wealthy Chinese individuals are on edge as China, facing a fiscal crunch amid prolonged economic weakness, has recently launched a sweeping tax investigation into their overseas assets. Most appear resigned, feeling the crackdown was inevitable, though a fair number are reportedly seeking ways to respond.

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A cartoon depicting wealthy Chinese individuals emigrating to the U.S. Moving assets overseas is, naturally, a given for them — but going forward, even those assets could become subject to taxation. / Global Times

According to Beijing sources familiar with global economic developments on the 7th, since the end of the last century, wealthy Chinese individuals moving assets overseas — legally or illegally — has become something close to a "new normal." Among the wealthy, it was even said that anyone who failed to do so was a fool. Over at least the past three decades or so, national wealth has effectively hemorrhaged out of the country.

There's no way authorities weren't aware of this. But finding a specific way to crack down on the wealthy's behavior proved extremely difficult, in part because openly targeting people mostly closely tied to senior party, government, and military officials was no easy task either. In effect, the situation had largely been tolerated. A Beijing-based economic commentator surnamed Gu, speaking on condition of anonymity, remarked with a click of the tongue that hardly anyone moving money abroad lacks some connection to senior party, government, or military figures — naturally, they whistled their way through moving vast sums overseas, he said, and with good reason.

But this stance from Chinese authorities has suddenly shifted as the fiscal crunch from the ongoing economic downturn has deepened. Authorities have begun trying to ease the crisis by collecting unpaid taxes on the wealthy's overseas assets. According to recent reports from foreign outlets including the Financial Times (FT), authorities have indeed launched a sweeping tax investigation into these assets.

According to the sources, as of the first half of this year, the overseas assets of wealthy Chinese individuals that have escaped taxation are estimated to total in the trillions of yuan (hundreds of trillions of won). The categories are wide-ranging — real estate and stocks come first, followed by precious metals and cryptocurrency investment gains. Income generated from offshore trusts should also not be overlooked.

The tax rate is expected to be around 20%. Rough calculations suggest additional collections could range anywhere from a minimum of 200 billion yuan to as much as 1-2 trillion yuan. Some unpaid taxes are expected to be traced back and collected from as far back as 25 years ago. Authorities are unlikely to face major difficulty in investigation and collection, since AI can now be used to analyze the wealthy's overseas asset records with far greater speed than before, at relatively little cost.

In short, the wealthy — for whom moral hazard has long been the default — have been caught off guard by an unexpected blow from the authorities. As the saying goes, "when there's a policy from above, there's a countermeasure from below," so it's likely they too will seek ways to respond. The most obvious option that comes to mind is simply turning their backs on China altogether — and a fair number of wealthy individuals are reportedly already acting on it. China's wealthy, long said to have had it easy, now appear to be facing an unprecedented crisis.

                                                                                                           Hong Soon-do