China Family Finance

Expat families in China are understandably nervous about the headlines from the business & investing section. Global equity markets are experiencing record losses. It may have started in the US, but the bear market has spread to the rest of the world. For some of you, this is the first time you are losing money in financial markets. For others, this is a case of ‘been there, seen that’. Separating fact from rumor and analysis from emotion is going to be difficult over the next few weeks.

The bad news? Your portfolio has probably suffered some pretty significant damage. A classic bear market is characterized by a 20% drop – and many indices are already approaching that. The last few weeks have been highly volatile and investments not directly related to mortgage risk or other fundamentals are being hit just as hard as unhealthy companies.

The good news – or at least the silver lining? The entire stock market is suddenly on sale. Companies and markets that you liked at $100 are even more attractive at $80 – provided the fundamentals haven’t changed. What’s more, a recession can actually have a beneficial effect on certain economic problems. Inflation - particularly oil prices - is acually eased by economic slowdowns.

The reality? The worst of news is probably mostly over. That doesn’t mean that a bull market is upon us – we may be stuck in a ‘sideways trend’ for a while. It does mean, however, that what is done is done. Don’t make any sudden moves to try to save the situation. Now is a great time to sit down to calmly, rationally plan out your future.

What can you do now?

1) Perspective and long term viewpoint. During the bull market when stocks and funds set new highs every day, it was easy to invest for the sake of investing. Now that we understand market risk a little differently, it is important to make some hard decisions about what your most important goals really are. Devote at least a portion of your funds to long term (10 years + )

2) Form a plan. If you don’t understand the difference between planning, savings and investing, then this is a great time to look into it. Financial planning is long term and puts a premium on stability and meeting specific goals. If you have been blindly following someone else’s advice, this is a great time to do a little research and develop your own knowledge base.

3) Look on the bright side. The market is on sale. Inflation is dropping. There is great potential for you to capitalize on the next big market move. It will come soon enough, so be ready.

4) Listen to experts. Everyone is a genius in the bull market. The time for insider tips and fancy advice from friends of investment banker friends is over. CFOs of Fortune 500 firms can employ hedging strategies and other sophisticated trading techniques. Household decision-makers should be focusing on stable, long term strategies that will help you retire comfortably and meet major household obligations. Personal financial planning isn’t watered down investment banking – it’s a completely separate discipline.

5) Live to fight another day. This time next month we will be looking at a very different market environment. Some cautious investors will go to cash or safer investments. Great. But if you make any rash moves that lock your funds in to stable but low-yielding instruments, you will feel pain from the sidelines of the next bull move.

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Expats in China face the same basic financial problems that they did before they left home – but now they lack the support network and ready-access to professional advice that they used to take for granted.  One basic question that people often don’t think to ask is:  What is the difference between Investing, Saving and Financial Planning?

The key differences between the investing, saving and financial planning can be seen in the areas of:

Time
Risk-Return
Tax

Time:

Investing is simply the act of putting money to work for you.  You can invest for a few days or for many decades.  While many of us associate the phrase ‘investment’ with well-considered, rigorously analyzed, long term planning, it simply isn’t so.  You can invest in the safest government-backed treasury bonds or in uranium mines on Pluto. 

Saving in banking accounts is extremely ‘liquid’, or flexible.  Most banks offer passbook savings (do we say ATM savings now?) that give you maximize freedom to withdraw money whenever you wish – but pay minimal interest.  You aren’t really making any money in a day-to-day savings account, but are actually paying the bank for the security and convenience of leaving your money there.  Banks also offer Certificates of Deposit (CDs) or fixed term accounts (90, 180 or 360 days are common) that pay a bit more – but severely limit your access to funds.

Financial planning is based on long-term commitments.  Most professional financial planners start work with time horizons of 10+ years, since they tend to focus on retirement and education funding. 

Risk-Return:

Investing is a broad term that covers every possible risk-return scenario – including those that don’t make much sense for the average household.  Investing in rock-solid treasury bonds is very safe – but pays what is referred to as the “risk –free rate” that should just keep you ahead of the inflation rate in the long term (if you’re fortunate).  Many of your friends have probably told you about the fortunes they’ve made in heroic stock market maneuvers.  What they don’t tell you is that the risks they take will eventually wipe them out if they keep following the speculative road.

Savings plans are very safe, but the return is very low.  They are designed for safety and convenience – not profit.  In an economic environment where inflation is gradually decreasing, you will make a small net profit in a savings bank.  If inflation is rising, you will probably suffer a small net loss.

Financial Planning should focus on instruments and techniques that offer moderate risk with relatively high returns.  A reasonable financial plan will start with assumptions of long term returns of 5% to 9% — but in reality any plan showing from 8 – 12% returns can probably fit the category of “moderate risk, high return”.  A professional financial planner beats the odds in two ways:  1) By working with a long planning horizon of ten years or more, the investment has time to ride out rough times and bearish economic moves, and 2) Professional management and a diversified portfolio will maximize returns while limiting risk in any market environment.

Taxation:

Traditional investments tend to be tax-blind.  In other words, return rates are calculated independent of tax considerations, and it is up to the investor to deal with the tax people later.  Be aware that profitable investments can incur several different types of tax consequences – including income tax, capital gains tax and estate tax.

Savings accounts yield interest that is also subject to tax – but the amounts involved are usually so low as to make it a minor consideration. 

Financial planning can include estate planning – which is all about avoiding unnecessary tax.  While financial planners are not necessarily tax experts, they should be well versed in the area of tax havens and tax-advantaged financial products that are designed to minimize tax obligations.
A final consideration for China expats is the ease with which you can find qualified professional advisors.  Many foreigners in China have found that local branches of international banks don’t deliver the kinds of services they are accustomed to, and professional investment advice is extremely difficult to come by.  There are plenty of people calling themselves ‘financial advisors’, but finding a qualified one can be a bit of a challenge.  

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Health insurance for expats living in China can get very expensive very fast.  Let’s look at a few numbers.

Let’s say you are a family of 4 living in Shanghai, and you want to buy some comprehensive medical insurance that covers both inpatient and outpatient services.   One leading international insurance provider offers coverage to China expats at 3 levels of service.  The mid-priced package provides hospitalization, outpatient services, health checks, emergency medical evacuation, and a variety of other features that expat families in China would care about.  It does NOT cover the US, except for emergencies.

How much can you expect to pay for this kind of coverage?

If you were a single 34 year old living in China, your annual premiums would be just a bit over US $1500 (as of November 2007).  You first child would cost you an extra $700 or so, and your second child would add another $ 550.  So for the whole family, you can expect to shell out around US$ 4,250 for a year’s worth of comprehensive medical insurance in China.  (Being in China will cost you around 10% more.)  It’s worth it to have piece of mind – but even better if you can get your company to foot at least part of the bill!

BUT, you can lower your premiums significantly by opting for a “deductible” or “excess”.  (US providers say deductible, UK and international say excess.  Same thing.)
If you select a $100 deductible, then the first $100 in medical expenses each year are your responsibility, and you must pay out of your own pocket.

In the case of this fictional company, a $100 excess will save you around 5%, a $400 excess will cut your premium by 15%, and a $1,600 excess will save you 30%.

Every company is different, and you will have to sit down with an advisor to get the facts for your unique situation.  But expats and international Chinese in China can expect to see these kinds of premiums for high-quality comprehensive medical insurance. 

For more information, click here.

Next:  Direct Billing vs. Reimbursement 
 

Expats in China looking at comprehensive insurance policies are going to quickly encounter the phrases Inpatient and Outpatient. What’s the difference, and what does it mean in China?

‘Inpatient’ refers to the admission process. If you are admitted to the hospital for an overnight stay, you are an “inpatient”, and all of the procedures you undergo are considered inpatient procedures.

‘Outpatient’ or ‘ambulatory’ procedures involve walking in and walking out the same day. This kind of medical attention does not always require hospital facilities.

Example: Larry is having trouble with stomach ulcers. The doctor’s visit, diagnostic tests and prescription are all ‘outpatient’ procedures. A month later, he is admitted to the hospital for a surgical procedure and will have to spend 2 nights there under observation. The hospital stay, surgery and associated expenses are all considered ‘inpatient’.

China expats have a few things to consider to understand how this applies to their particular situations.

1. Hospitals in China are getting better – and more expensive. Financial advisors used to be quite skeptical about international healthcare policies that covered outpatient care because it was so cheap — and of questionable effectiveness – in China. Nowadays the major cities in China offer international-style clinics for outpatient care that rivals (or surpasses) US HMOs. Unfortunately, the advances in care have been accompanied by advances in pricing.

2. Chinese inpatient care still doesn’t make the grade for many people. Prescribing, diagnosing, bandaging and setting in plaster are one thing – cutting things open and messing around in there are different. If you don’t have confidence in Chinese hospitals, you will want a policy that includes “medical evacuation”, medical travel, and choice of hospital and doctor. These features are expensive, but if you (or your firm) are willing to foot the bill then you can choose the doctor and hospital anywhere in the world for your procedure.

3. Does it cover the US? Expect to pay 200 – 300% more in premiums for policies that include coverage in the US. Don’t blame the Chinese or the international carrier for this – the US healthcare system is so expensive and Byzantine that you’ll have to pay through the nose. Many international policies include (or offer) provisions for emergency cover in the US for a limited time period.

 Contact us for more information about healthcare and insurance in China.

Next: The finances of healthcare for Expats in China.

You’ve been here in China for a while at the same job for over 18 months now. Maybe you are thinking of negotiating for more money at the start of the New Year.

You may be able to maximize your bargaining position by making health care insurance one of your deal points. Employers get a double benefit from funding health care plans for key managers – they get steep discounts on the kind of insurance they want for themselves, and it’s a direct expense for job retention. The company only pays the benefit for the time the manager is on the job. He leaves in 3 months – the coverage stops.

If you’re negotiating you can expect to get much more bang from your buck from the insurance compared to cash (at least if your company has some kind of health care plan for its senior people – which it probably does). This makes sense if you have young kids who are always seeing doctors or place top-notch medical care as one of your priorities. For singles and those covered by spouse’s programs – go for the cash if you must. But lots of shrewd bargainers have taken the insurance at the start of the year — and were demanding cash raises again by June. That’s the beauty of Shanghai. It’s always time to ask for more.

If medical coverage is important to you but you don’t think you can get management to offer you coverage, consider proposing a co-pay arrangement. This could be very good for couples with young kids. The company uses it’s relationship to get the best discount, and you try to get them to pay for some of it (shame is good – pity is also good). Even if they don’t, you can still opt for one of the more basic plans to save money. Medical cover usually has at least 3 levels (Bronze, Silver, Gold, etc) and the cheapest has all the basics of high-end care – and will get you into the private clinics and international wings.

Another way to control cost is to get a higher deductible. You pay a higher amount out of your own pocket when things do go wrong, and the premiums get reduced.

When looking at health coverage in China, be sure to pay attention to issues such as “countries covered”, “portability”, and currency issues. Most programs you’ll look at are fine, but China is still fairly unregulated as far as expat finance goes. You’ll have to check more carefully here.

More information on health coverage.
 

Expat families in China have special budget, finance and spending needs.  Knowledge of international and Chinese law, investment options, financial planning techniques, offshore investing and international tax law is important — but it’s hard to stay up to speed.  China Family Finance aims to help new arrivals and old hands gather the information they need to make the best decisions.