After months of speculation that currency controls would increase, China’s State Administration of Foreign Exchange (SAFE) issued a statement on New Year’s Eve, 2016, that effectively imposed new restrictions on Chinese individuals and companies wanting to transfer money abroad.
The news was released by business intelligence and networking group Basis Point, who believes the changes are less substantive than symbolic, but will nonetheless have a big impact on money coming out of China.
According to Basis Point, Chinese investors are expected to struggle to get money out of China for the next six to 12 months, which will impact all sectors that depend on Chinese investment, including real estate.
Result of the regulation changes
Beijing is signalling to banks, companies and individuals that it disapproves of foreign spending and investment, except for a few purposes that are explicitly defined by the government. As a result, Chinese banks are being encouraged to increase scrutiny of currency transfers and must report any overseas transfers by individuals of US$10,000 or more.
From here on in, customers are required to state the intended use of the transferred funds. At the beginning of July 2017, banks and other financial institutions in China will have to report all domestic and overseas cash transactions of more than 50,000 yuan ($7,201), compared with the current amount of 200,000 yuan.
According to Basis Point:
Use for overseas property, securities, life insurance or other investment-style insurance products is DISALLOWED.
Use for tourism, schooling, business travel, medical care, trade in goods, non-investment insurance and consulting service purchase are ALLOWED.
The yuan has depreciated 6% versus the US dollar over the past 12 months and is currently hovering near 7.00 per USD - an important psychological barrier that hasn’t been crossed since May 2008.
"Second, their foreign currency reserves are about to fall below $3 trillion, which hasn’t happened since 2012. Those are causing panic in the government,” he said.
Mr Johnson said the foreign currency reserve “war chest” has significant practical and emotional importance to the Chinese government.
Contributing Factors
General sentiment in China is that the yuan will continue to depreciate, adding impetus to the desire to expatriate funds. This creates additional downward pressure on the yuan.
The yearly US$50,000 limit resets on January 1, with the usual result that January is a big month for individuals to buy foreign currency. This creates additional downward pressure on the yuan.
Questions about the existence of a Chinese real estate bubble contribute to a fear that, if capital controls are relaxed, many people will sell their properties and transfer their wealth abroad. This would trigger a collapse in the Chinese property market, which is the major investment vehicle of the vast majority of Chinese people.
Concerns about debt levels in the Chinese economy contribute to a sense that there are hidden risks that threaten the accumulated wealth of Chinese companies and individuals. This causes more interest in moving capital abroad, creating additional downward pressure on the yuan.
Reduction in off-the-plan real estate purchases by Chinese overseas investors, unless financing options or other solutions can be found.
Slow down in M&A activity from mainland companies, at least for the first 6 months of the year.
Increased difficulty for SIV immigrants to fulfill the funding requirements, at least for the first 6 months of the year.
Increase in purchases of foreign goods and services, as the Chinese seek to find “legitimate” ways of exchanging yuan for things they want.
Increase in Chinese traveling abroad, and sending their children abroad to study. Education is considered a “legitimate” use of foreign currency and it represents a kind of investment.
Mr Johnson said this will temporarily slow down investment into the Aussie property market, but within a few months there will be a new mechanism and the Chinese will be off to the races again.
“Ironically, these restrictions are increasing the pressure for Chinese people to get their money out and invest abroad."
