Liquidity challenges are reshaping the financial strategies of Asia’s affluent. In Hong Kong and mainland China, where financial markets face headwinds and property values remain in flux, high-net-worth individuals (HNWIs) are turning to a powerful tool: equity-backed loans. This financial instrument, offering a blend of flexibility and speed, is becoming a preferred lifeline for those looking to navigate turbulent times.

The Growth of Private Lending

The traditional bastions of wealth—real estate and public markets—are no longer the reliable liquidity sources they once were. In the wake of sustained interest rate hikes and slow recoveries in capital markets, private lenders have emerged as critical players. As SCMP reports, wealthy individuals in Hong Kong and China are increasingly using stocks to access much-needed liquidity.

Why stocks? Unlike real estate, which has seen its value diminish amid persistent market woes, stocks offer a liquid, easily quantifiable form of collateral. For private lenders, this is a goldmine. Loans are extended at attractive rates, often providing a compelling alternative to traditional banking channels.

How has the private credit market in Asia-Pacific grown so dramatically? In 2023, the market had swelled to an estimated US$124 billion, driven in large part by distressed developers and wealthy families. Family offices in Asia-Pacific are also playing a role in this transformation. According to a Citi Private Bank report, these entities have increased their equity allocations for three consecutive quarters, with equities now comprising 40 percent of their portfolios—the highest ratio globally. This shift underscores the growing appeal of stocks as both investment vehicles and collateral for borrowing.

The Tax Advantage: A Regional Perspective on Capital Gains

One of the driving factors behind the popularity of equity-backed loans is the potential tax benefit. Across Asia, the capital gains tax landscape varies significantly, offering unique opportunities for borrowers:

In regions where capital gains taxes on stocks exist, such as Japan, equity-backed loans enhance the broader tax planning strategies of the wealthy, allowing income to be shifted from taxable sources to non-taxable or deferred ones. By leveraging assets like stocks for borrowing, the affluent can effectively maintain liquidity and fund their lifestyle or business ventures tax-free. This not only preserves their wealth but amplifies its growth potential over time, illustrating how financial structuring can create significant advantages in tax efficiency.

In jurisdictions like Hong Kong, Singapore, Malaysia, and China, where individuals are exempt from capital gains taxes on stocks, one might wonder: why borrow against stocks at all if tax savings aren’t the primary motivator? The answer lies in the strategic advantages that go beyond tax benefits.

Beyond Taxes: Why Equity Loans Still Matter

Even in regions with no capital gains tax, equity-backed loans provide good value. They allow borrowers to unlock liquidity without selling their stock holdings or by leveraging their stock position and having an option to receive the same number of shares in the future, enabling them to seize opportunities such as new investments or property acquisitions. This approach ensures that the long-term growth potential of their stock portfolios remains untouched.

For example, an HWNI entrepreneur in Hong Kong could use a stock-backed loan to fund a new business venture without diluting their equity holdings. Similarly, a family office in Singapore might finance a philanthropic initiative while keeping its core investment portfolio intact.

Moreover, these loans offer flexibility in financial planning. Borrowers can leverage their stocks to diversify their income streams or create buffers for unexpected expenses.

The Federal Reserve’s aggressive rate hikes since 2022 initially dampened borrowing against stocks. Higher interest rates and declining stock values led to a wave of deleveraging among the wealthy. However, as markets show signs of recovery and the Fed starts at a pivot to cut the interest rate, the appetite for equity-backed loans is resurging.

Equity-Backed Loans as a Financial Game Changer

Equity-backed loans are not just a solution to short-term liquidity challenges but represent a significant improvement in how wealth is managed across Asia. By unlocking the value of stocks without the need to sell, these loans empower HNWIs to navigate economic uncertainties with greater agility and foresight. They offer a unique combination of flexibility, tax efficiency, and strategic leverage that traditional financial tools often cannot match.

For high-net-worth individuals seeking equity-backed loans, working with a trusted and high-quality lender is crucial. Squadron Capital specializes in providing tailored equity financing solutions, offering borrowers access to liquidity while retaining ownership of their valuable assets. Their expertise ensures a smooth and reliable lending process, emphasizing transparency and trust.