Submitted by Eric Peters, CIO of One River Asset Management
"The only way I know to get money out is to set up a Japanese company,” he whispered.
“That’s why so many Chinese nationals are in Japan. First of all, you can get a visa and permanent residency. Second of all, Japan and China don’t exchange tax information because they’re still bent out of shape about WWII. And thirdly, China’s police can’t come get you. Chinese billionaires don’t get ‘disappeared’ in Japan like they do in HK and NY,” he explained.
“That’s why they’re buying homes in Tokyo and Osaka."
"Despite capital controls, you can settle renminbi transactions in Yen,” he continued.
“So you set up a Japanese shell company, get a bank account,” he said. “Then you transfer renminbi to your company’s bank in Tokyo, settled in Yen. At that point, the money basically vanishes. The account name is in kanji. And I’m sure it doesn’t work for really big transactions, and you can’t do it as a US citizen, but the Chinese have probably set up 100k of these companies.”
In H1 2019 Chinese inquiries about Japanese property jumped 13x.
Goldman sold a 4% stake in Taikang Life. Allianz paid them 800mm euros, valuing Taikang at E20bln. Goldman bought its Taikang stake in 2010 from AXA at a E7bln valuation. AXA inherited Taikang in its 2006 acquisition of Swiss insurer Winterthur (Credit Suisse subsidiary). Winterthur bought its Taikang stake in 2000 alongside Softbank and GSIC.
The buyers/sellers have flipped Taikang shares in dollars/euros ever since, avoiding RMB. Chen Dongsheng started Taikang in 1996 (married Mao’s granddaughter too). He’s worth $4.8bln.
“They can no longer get their money out,” said the investor, a builder of global institutional portfolios. “Allocators who made private equity investments in mainland China over the past 5-10yrs are now trapped,” he continued. “Not metaphorically trapped - they’re literally not permitted to move cash proceeds out of China as those investments are sold. The problem is widespread and the sums so large that we now have internal people focused on helping these allocators hedge the exchange rate risk.”
A worse fate than having your capital simply imprisoned in a foreign country, is having it locked-up and then devalued while you plot an escape. “As investments mature and private equity managers distribute renminbi, they now ask clients who cannot get that money out of China to re-invest in their latest funds.” But even as the globe’s most sophisticated institutional investors find their capital quietly held hostage by Beijing, passive retail retirement savings is flowing into Chinese stocks and bonds at an accelerating pace.
In March 2019, MSCI quadrupled the share of Chinese onshore equities in their indexes. The increase is estimated to force between $80bln-$125bln of overseas savings into Chinese onshore stocks. MSCI left room to go further - to get to their full weighting, another $160bln-$250bln of passive equity flows will move to Beijing. And the Bloomberg Barclays Global Aggregate index introduced a 6% weighting to China’s $13trln domestic bond market for the first time this March. An estimated $125bln-$150bln of inflows followed. If other bond index providers follow Bloomberg/Barclays, an additional $125bln-$150bln will race in.
After decades of ever rising global capital flows, it is easy to forget that capital enters and exits nations only with the express permission of those in power. “In the midst of rising East/West conflict and knowing that institutional investors are struggling to get their money out, it is astonishing that MSCI and Bloomberg/Barclays index boards have forced global pensioners to fund the Party.”