Global financial networks confront headwinds: China’s shifting offshore relationship with the British Virgin Islands

Abstract

China’s economic ties with the British Virgin Islands (BVI) exemplified global finance beyond national borders in the post-cold war period. This relationship now serves as an example of global finance’s more tenuous foundations as social and political forces coalesce against the offshore economy. The article establishes the defining conflict as the tension between national/global regulations and an Asian-headquartered network that coordinates offshore financial flows. The analysis outlines how the global network connecting Asia to the Caribbean has receded. Several factors are decisive. First, global and national forces are now aligned. Because global regulatory change is predicated on minimum standards only, domestic commitment to global regulatory norms is critical. Domestic commitment to the new international taxation regime is variable but a key development is that many large emerging markets have committed to the effort. China has forcefully imposed new restrictions on the offshore economy, including closing down routes for capital exit. One result is that the BVI–China relationship, after deep financial interconnections, is on a downward trajectory. The larger pattern than deserves further analysis is how action by China—along with India and Indonesia—suggests that substantive reform of the global offshore economy, led by Asian actors, is possible.

Keywords:

• Global offshore network
• post-crisis financial regulation
• China
• British Virgin Islands (BVI)
• emerging markets
• global wealth chains

Notes

Acknowledgements

Neville Li and Michael Tyrala provided helpful research assistance in the preparation of this manuscript.

Notes

1 I calculated this statistic using the Offshore Leaks Database of the International Consortium of Investigative Journalists (ICIJ). I summed up the addresses associated with the 48 countries and dependencies defined as part of Asia by the United Nations. This amounted to 44,245 addresses among the 93,454 total addresses found in the Panama Papers, or 47%.

2 This example highlights inconsistencies found in the global economy. At the China Offshore Summit in Shanghai during 2018, I met a disenchanted Panamanian practitioner who spoke of the grievous harm inflicted on Panama by the Panama Papers, with his own offshore business falling by more than half. The pushback against the BVI has paled in comparison to the shunning of Panama.

3 I attended offshore industry conferences in Hong Kong, Shanghai, Shenzhen and Dubai as part of the research for this project.

4 A non-Asian example of such power relations is the central position of advanced European countries in offshore chains, epitomized by the outsized role of the Netherlands (Garcia-Bernardo et al., 2017).

5 Harrington’s (2015) is evocative on this point: ‘Particularly in the offshore locales, wealth managers sat in shabby rooms that looked for all the world like something out of a Somerset Maugham tale, desks piled high with dusty files sporting labels such as Rainy Day Trust’.

6 Crown dependencies—Jersey, Guernsey and the Isle of Man—are excluded at this moment since there is a debate as to whether the UK government has the powers to impose legislation on them. UK parliamentarians maintain that the government can pass legislation covering the Crown Dependencies if it is deemed a national security matter that requires emergency measures, or pertains to considerations of ‘good government’. The dependencies contend that such action would be unconstitutional.

7 However, it should be pointed out that the Bank of Asia is a niche product for which many Asian clients may feel apprehensive about shifting to online banking with a relatively unknown provider.

8 The fact that these China Offshore Summits are still held every year illustrates that the Chinese government has not altogether foreclosed offshore channels and permits the offshore industry to gather in its major cities.

9 Maltese services providers are aggressively seeking to build on the their market lead and even as a clearly identified academic, I was approached by a well-established group at the China Offshore Summit with an offer to sign a deal whereby I would earn commissions for Chinese clients introduced to them.

10 The head of the Seychelles Financial Services Authority defends the country’s revised position through the lens of competition: ‘At the time, it was thought that this would become the norm . . . but today we see that other countries, which are competing with us, have not introduced this measure, so we decided to bring it back to what it was’ (Seychelles News Agency, 2018).

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Justin Robertson

Justin Robertson is an Associate Professor in the Department of Asian and International Studies at the City University of Hong Kong.  He is the author of Localizing Global Finance: The Rise of Western-Style Private Equity in China and US-Asia Economic Relations: A Political Economy of Crisis and the Rise of New Business Actors. He has had articles published in Asian Survey, Globalizations, International Political Sociology, Journal of the Asia Pacific Economy, New Political Economy and Review of International Political Economy.  His most recent research explores the extent to which hedge funds, private equity funds and offshore structures are materializing in emerging markets.