Tags: China | Capital | Controls | Global | Real Estate

China's Capital Controls Will Slow Global Property Sales

China's Capital Controls Will Slow Global Property Sales
(DreamsTime)

By    |   Friday, 31 March 2017 04:52 PM

In recent years, China has seen a stark rise in outbound investment. As the outflow increased starting around 2014, the global property market began booming.

Starting in 2014, there were reports that the yuan would no longer be pegged to the U.S. dollar, and by December 2015 China’s government had officially stated its intention to relax the peg against dollar.

As a direct result of this, property prices show up overnight in the United Kingdom, New Zealand, Australia and Canada.

The reason for this is that many of these property purchases were made by Chinese investors looking for inflationary hedges against their capital.

According to official data, which is always somewhat unreliable, Chinese firms invested around 1.1 trillion Yuan overseas in 2016, an increase of 44.1% year over year.

The Chinese government’s intention is no doubt to curb this outbound investment practice and it recently took steps in that direction.

This is not the first time that a property bubble has threatened the global economy. Experts fear a repeat of 2008, when the collapse of the U.S. property market dragged the world into the worst recession since the Great Depression.

China’s moves to curb capital outflows are going to have a major effect on economies worldwide, there are no two ways about it.

To date, the major restrictions put on capital outflows are as follow:

  • When converting yuan to another currency, citizens must pledge that the money will not be used to purchase property, securities, or insurance products.
  • Borrowing or lending on behalf of others is now prohibited. Borrowers must sign a legal declaration saying they aren’t doing this.
  • Details must be furnished about the usage of any funds for overseas study, travel, family visits, trade and purchases of non-investment insurance policies, medical treatment.
  • If an individual is found violating the foreign exchange rules, it will be brought to the notice of the currency regulator and foreign exchange quotas for three years will be denied. Further, an investigation related to the money-laundering will be conducted.
  • Overseas remittances are limited to US$50,000 per year per citizen

The effect of such restrictions can be seen on property markets around the world, from the United Kingdom to Toronto to Melbourne.

The direct effect has been a stark decrease in Chinese buying overseas properties since the beginning of 2017.

Chinese demand for overseas properties is not going to disappear anytime soon, but we should increasingly creative solutions by Chinese buyers as they seek to skirt capital controls.

Nobody has proven exempt from this crackdown on capital outflows.

For example, Chinese construction firm Country Giant was forced to put a hold on mainland sales of their residential Forest City development in Johor, Malaysia earlier this year. Even China’s richest man, Wang Jianlin, had his plans of buying a Hollywood production house crushed due to a restriction on his funds.

According to Nathan Sang, founder of Investment Zen and resident of Toronto, “Since the beginning of 2017 we have seen a trend of fewer Chinese homebuyers purchasing property in the greater Toronto area. This seems set to continue until China’s capital controls are relaxed.”

What about the Global Real Estate Markets?

Global real estate markets will see a slowdown in property sales as China’s restrictions tighten.

China’s underground banking system will continue to operate clandestinely and billions of Yuan will exit the country clandestinely. However, the government is giving this “shadow banking” sector an increasing amount of its intention.

Last year, the Chinese government seized one such operation that was handling more than 40 billion yuan ($5 Billion USD). In the same report, an operation run on the Vietnam border and handling 28 billion Yuan ($4 billion) was also reported. There is no word on how many such operations exist in China, but they will continue to provide Chinese citizens with liquidity even as the government targets them.

Another practice that looks set to continue is that of “smurfing,” in which friends and relatives are used to export small amounts of cash out of the Mainland. Most of the people do this in order to hedge against currency devaluation by storing their wealth in property.

As we have seen in cities like Vancouver, this can lead to miles upon miles of million dollars homes, sitting mostly unoccupied, testaments to the increasing desperation of many Chinese to get their cash out of the mainland by any means possible.

Michael Michelini is host of the GlobalFromAsia.com podcast, an online radio show to help business owners grow their companies in Asia and around the world.

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MichaelMichelini
In recent years, China has seen a stark rise in Outbound Investment. As the outflow increased starting around 2014, the global property market began booming.
China, Capital, Controls, Global, Real Estate
757
2017-52-31
Friday, 31 March 2017 04:52 PM
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