CHINA'S NEW WEALTHY

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When the earthquake struck China's Sichuan province on the afternoon of May 12, it was not until late in the evening that the first reports of extensive damage began to filter in. Zhang Xin, the 43-year-old chief executive of property developer Soho China and, according to Forbes Magazine, China's 7th richest person with a fortune estimated at more than $3bn, decided to respond personally.

By the next morning, the company, which she co-founded with her husband, Pan Shiyi, in 1995, had made a donation of RMB2m to the local Red Cross.

As the true extent of the devastation became clearer – the death toll is likely to exceed 80,000 people – the company decided that a much bigger contribution was required. A week later, it increased its total donation to RMB20m.

“Everyone in China has been trying to do something,” says Zhang. “But business in China now has a different platform. Decision-makers can make the decision to donate.”

The Sichuan earthquake has had a number of profound effects on Chinese society. Tens of thousands of volunteers have flocked to the area to help with the relief effort in an unprecedented wave of civic spirit, while the local media have – at times – given an unusually frank portrayal of the destruction and suffering.

Yet one of the more striking developments has been the massive donations from China's new class of wealthy. Zhang's Soho might have been the first, but it was neither the only nor the largest corporate donor to the relief effort.

Within a week of the earthquake, Hurun Report, a group which compiles lists of the wealthiest people in China, estimated that the top 100 richest people in the country had already donated $120m collectively. Of the wealthy entrepreneurs from mainland China, the biggest single donation of $7.9m had come from Zhang Jindong, head of the Suning electronics retail chain. Meanwhile, Huang Guangyu of Gome, another electrical goods company, had donated $7.1m. Since then, even more big donations have been announced publicly.

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Such a reaction represents a substantial shift in both the attitude and role of the wealthy Chinese. Once treated with the utmost suspicion, they now enjoy an almost celebrity-status, often gracing the front covers of glossy magazines. Yet with that new-found fame is now coming a level of responsibility in a country where confidence in the state's ability to provide everything has been dramatically eroded.

“Many companies were feeling that they needed to give something back and the earthquake has brought that feeling to the fore,” says Rupert Hoogewerf, editor of Hurun Report. “But they also realise that being seen to do the right thing is very important, too.”

A few years ago, China's entrepreneurs were almost completely uninvolved in private philanthropy. But even before the earthquake, there were signs that the idea was starting to take hold.

Zhang and Soho China have been at the forefront of that change. The company's first forays into the field were more prosaic than practical. When China was at the sharp end of much US criticism in the wake of 9/11, when a handful of Chinese had been witnessed celebrating, Zhang helped organise a devotional prayer on behalf of the victims that was televised on CN*. And in 2003, when Beijing was paralysed by the Sars epidemic, the company helped organise a day of kite-flying as a morale-boosting exercise for the public.

Since then, Soho has moved onto more substantial initiatives, mostly in education. It sponsors first-year university students from poor families and provides incentives for teachers to work in more remote areas. Zhang's family holiday this year will be a trip around 23 schools in Gansu province, the poor north-western province where her husband comes from. Zhang, who has two children, aged 8 and 10, calls it a “family service project”.

“We encourage everyone at the company to do a service project – not just senior managers,” she says.

The company has always had a modern sheen, bringing in avant-garde foreign architects to design projects while many of its developer rivals were churning out cookie-cutter high-rises. In the airy foyer of its new offices in Beijing, a funky sculpture of three pigs stands alongside a group of table-tennis tables for lunchtime recreation.

A regular visitor to the World Economic Forum's annual meeting at Davos, Zhang says she was impressed by Bill Gates, who spoke about his charity work, and her company has created its own philanthropic foundation. But, she says, the current government regulations in China make it very hard for companies to actually conduct their own charity work.

Private charities and non-governmental organisations are still viewed with suspicion by China's one-party state. They can be created, but only if they go through a complicated process of partnering with a government institution.

“The system is simply not there at the moment,” says Zhang. Soho is planning to hold a small forum of other businesses to lobby for approval of legislation for private charities, which would provide incentives and a simpler legal mechanism for companies to donate money.

The recent surge in private philanthropy is the latest twist in the rapid emergence of a new class of super-rich in China. The explosion in the country's economy over the last two decades has also produced an explosion in private wealth.

When Hurun published the country's first rich list in 1999, it required a personal fortune of just $6m to make it into the top 50. By the time of the most recent list, which was published last year, it included 500 individuals and the minimum requirement was $100m.

More remarkable than that has been the dramatic rise in the number of billionaires: according to Hurun, the number of mainland Chinese dollar billionaires has jumped from seven in 2004 to 106. (A separate list compiled by Forbes lists 66 Chinese billionaires. The lists differ because many of the figures are based on estimates of the value of private companies and because, in some cases, it is unclear how company ownership is divided among different family members.)

Below the level of the super-rich, there is also a rapidly expanding class of millionaires. According to the 2008 World Wealth Report by Merrill Lynch and Cap Gemini, China has 415,000 people with $1m dollar in disposable assets. This makes the country home to more millionaires in real terms than any other in the world.

“They [the new super-rich] are beginning to dance without their chains,” explains Hoogewerf. He argues that the country's new wealthy have gone through the initial stage of securing their family's financial independence and have established relationships with the government and paid their taxes, so that there is no legal cloud over their heads. “In the next stage, they can really do anything they want, whether it is buying art or land or investing in a mine,” he says.

This growth of private fortunes is the result of several factors. First, China has witnessed a surge in entrepreneurship over the last two decades which has produced a new generation of successful private companies. Over time, a number of these businesspeople and their companies have started to achieve a critical mass that has made them industry leaders. These include manufacturers such as Lu Guanqiu's Wanxiang auto parts group and Zong Qinghou's Wahaha group, one of the biggest producers of soft drinks in China.

Second, there has been the boom in the mainland stock market, which has seen share prices more than triple in two years. A string of entrepreneurs have used the soaring market to list their companies, and in the process have seen their net worth increase by several times.

The top two spots in the 2007 Hurun list are held by women. In first place was Yang Huiyan, whose 59 per cent stake in her family's real estate business, Country Garden, which went public in Hong Kong last year, was worth $17.5bn last October (shares in most Chinese companies have fallen sharply since then). In second place was Zhang Yin of Nine Dragons Paper, the recycling company which also listed recently.

Third, hot property markets in many of China's larger cities have expanded the net wealth of the country's rich, many of whom have a significant share of their investments in the real estate sector.

Given that this new class of super-rich has come from nowhere, it is unsurprising that almost all are first generation businesspeople – there is very little inherited wealth on the list. In the early days of economic reform, to start a private business was still a politically risky thing to do and a few of the first entrepreneurs were from the fringes of society. Some, such as Yin Mingshan, head of motorbike and car group Lifan, had even spent time in jail. So, they felt they had little to lose.

Yet being a successful entrepreneur has started to become more acceptable. An interesting feature of the recent lists has been the number of people who are members of the Chinese Communist Party (CCP) – about one-third. The CCP let businesspeople enter its ranks in 1999, as a way of broadening the party's base and preventing the development of a rival power centre. For canny entrepreneurs, who know that official friends are important for all aspects of business, party membership has become an excellent way of networking and building government relationships.

At this year's annual meetings of the National People's Congress, the legislature, and the China People's Political Consultative Conference, an advisory body, there were about 80 delegates from the 2007 rich list.

Zhang Yin, head of the Nine Dragons group and a delegate to the CPPCC, caused a storm by proposing that income tax rates for top-earners should be slashed by one-third. Xinhua, the state news agency, dismissed her proposals as “pro-rich”.

The rich lists provide other insights into recent shifts in the economy. The double-digit growth of the last five years has been mostly the result of an investment boom which has created a large number of fortunes in the real estate sector. Given that this is an industry where you cannot do business without close relations with local officials – and where there have been several high-profile corruption cases – the emergence of so many real estate moguls has not been uniformly welcomed.

Public attitudes to the rich have also shifted sharply in recent years. In the early days of the reform period, the conventional wisdom among many Chinese was that anyone who had amassed a significant amount of capital must have done so through some dodgy deal with the authorities. Even in 1999, when Hoogewerf first started publishing rich lists, many of the new wealthy were keen to keep their names off them for fear that it would attract the attention of the tax authorities or other government officials. Indeed, several of the most prominent early tycoons ended up being investigated by the authorities.

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Yet, within a few years, Chinese society had begun to glamorise wealth and the most ostentatious forms of consumption. Successful entrepreneurs were treated as modern-day heroes and bookshops in China were lined with volumes about successful businessmen and guides on how to get rich quick.

Wealth has become more accepted, but in the last two years the super-rich have started to re-adopt a lower profile, as once again the political climate has started to change. With income inequalities rising sharply, President Hu Jintao has begun promoting the concept of a “Harmonious Society” with substantially increased social spending in rural areas. So, while the new rich could be found regularly in magazines a couple of years ago talking about their lavish lifestyles, such interviews are much rarer now. They still appear as celebrities on the covers of the glossy magazines, but now it is less by choice.

The flood of money going into charity is partly a reflection of this new political mood. And the earthquake has shown that there can still be a lot of finger-pointing towards the new rich, as Wang Shi, chairman of property developer Vanke, found out to his cost.

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Even though Wang went to Sichuan to personally direct disaster relief efforts paid for by his company, his personal blog was inundated by critical comments. He later apologised for appearing insensitive and the company increased its donation to RMB100m.

Many of China's new rich are embracing charity because they genuinely want to make a contribution to society. But they also do not really have a choice.

Profiting from China's new wealthy

A big beneficiary of the boom in Chinese wealth has been the luxury goods industry, as newly-rich consumers have developed a passion for high-end brands, writes Geoff Dyer.

Louis Vuitton, for example, has 19 stores around the country, while luxury car brands such as Rolls-Royce and Hummer have also found strong audiences.

China is already the third largest market in the world of luxury goods, according to Goldman Sachs, and will overtake Japan by 2015. “Luxury brands have only touched the tip of the iceberg in China,” says Radha Chadha, an industry consultant and author of The Cult of the Luxury Brand. In a country where the traditional signals of social status were swept away by the communist revolution, luxury brands are a new way of signalling where you stand in society, she explains.

There are also signs that China is developing a market for expensive toys – private jets, helicopters and yachts. “We are starting to get a lot of interest from businessmen,” says Cui Ying, an executive at Wuhan Helicopter Group Corporation. “They are willing to pay RMB15m for a helicopter.”

Qingdao Rongsea Yacht Company, an agent for Azimut, the Italian luxury motor yacht brand, says it has started to find customers for its exclusive power boats in mainland China. “Compared to our foreign clients, the Chinese customers tend to use their boats for business purposes,” explains Vicky Ren, marketing manager.”

Companies operating in China are also finding that there are pockets of wealth in unexpected places. Beyond the obvious centres, such as Beijing and Shanghai, there are the heartlands of private sector entrepreneurs – Zhejiang province, south-west of Shanghai, and Guangdong province just over the border from Hong Kong. Hangzhou, the capital of Zhejiang, has a European luxury shopping complex that includes Giorgio Armani, Dolce & Gabbana and a Ferrari showroom. Bulgari, the luxury watch and jewellery brand, has opened its biggest Chinese store in Shenyang, a city in the country's rust-belt northern region which has suffered from heavy factory closures in recent years.

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Beyond the luxury market, China's new rich are also eagerly in search of people to help manage their money. “The luxury goods people will do well… but the real winners will be the private bankers,” says Hoogewerf.

This prospect has set off a scramble among foreign banks to establish wealth management services in mainland China. But they face a number of challenges. For a start, there is a shortage of staff qualified to offer such services, which has led to an escalation of salaries. And given that the Chinese currency is predicted to become stronger in the next few years, most customers are more focused on renminbi investments.

In any case, to offer such products, foreign banks have to go through the cumbersome and expensive process of incorporating their local Chinese business – and so far, around 12 banks have done so.