The Chinese middle class is again taking substantial risks to move their money out of China. As a result, Chinese investors are blowing up foreign real estate markets while risking getting ripped off at the same time.
The South China Morning Post recently highlighted one such example, profiling several Chinese citizens who purchased property in Australia to safeguard their wealth, only to see the well-known Australia-based property agent suddenly shutter its doors in August, leaving behind about $50 million in missing deposits and failed settlements.
This kind of "unexpected" event is just one example of the risks that Chinese mainlanders face while trying to protect themselves by moving assets overseas, especially in light of Beijing's strict capital controls on outbound capital. Many Chinese citizens even seek out citizenship or visas in nearby friendly foreign countries to diversify away from investment options at home.
And in China, this isn't just some basic diversification strategy like it is elsewhere around the globe. Instead, it is a direct response to growing fear that the Chinese quality of life is deteriorating. It's also a result of growing frustration that there are so few opportunities to invest at home. And the government isn’t making it easy: China severely restricts capital flows out of its country, stating that it wants the cash to stay domestic for productivity and development purposes.
It also means that those who accrued their wealth through the country’s real estate "boom" really don’t have a way to feel financially secure, as their proceeds must stay within the country, subject to several additional growing bubbles inevitably waiting to pop in China. And it isn’t just for economic reasons - Chinese citizens are also starting to look abroad as a result of the country's authoritarian political climate, heavy pollution and national food safety and vaccine scandals.
Faced with increasingly draconian capital controls, China's citizens are growing desperate to move their money offshore and doing silly things to achieve it. Take Raymond Zhang who was in his early 40s when he paid to join a real estate investment tour of Australia. He was thinking he would diversify his finances to safeguard them.
“It had been arranged for us to visit a dozen property projects in Melbourne, Sydney and Brisbane, including flats, villas and houses with land packages. I loved Australia as soon as I landed there. The [prices of the] properties and living costs were quite affordable for us, not to mention the good air, legal system and education system for my family,” he told the SCMP.
The company that took them overseas asked for a $29,000 deposit, to be returned to 35 days after the investors returned back to China. Zhang says the money was never returned.
Meanwhile, the door to get money out of the country is closing as Beijing has dramatically increased the way it polices efforts to skirt capital controls and even "names and shames" people involved in this effort in order to warn the country's middle class. The State Administration of Foreign Exchange, or SAFE, told the SCMP that at the end of August, there were 23 such cases outstanding. Five of them involved Chinese individuals trying to buy property overseas, others were using "underground banks" to buy property and move large chunks of money out of the country.
To limit capital flight, Beijing grants every individual a mere $50,000 foreign exchange quota, and buying beyond that amount requires special approval from SAFE. In addition to an annual cap on foreign exchange purchases, Beijing also limits individuals’ overseas withdrawals using a Chinese bank card at 100,000 yuan (US$14,400) per year.
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The effect of China's capital flight isn't confined just to the mainland. Those looking to buy real estate outside of the country have negatively impacted many local economies, sometimes causing housing markets to bubble.
In response, Australia has tried to tighten its foreign investment rules in response to Chinese capital inflows. In 2016, the land Down Under even made it illegal for the country's four major banks to lend to foreign property buyers without domestic incomes. New Zealand went so far as to simply prohibit foreigners from buying property altogether because the demand was driving property prices out of the reach of locals. Canada did something similar, canceling its Canadian Federal Immigrant Investor program because of the huge backlog and bubbly real estate markets in places like Vancouver and Toronto.
Hundreds of Chinese "investors" who had put down deposits or bought homes in Malaysia also found themselves scrambling after new Prime Minister Mahathir Mohamad stated his country would not allow foreigners to buy residential units in a forthcoming $100 billion real estate project, which is being developed by a Chinese firm.
Laura Zhang, who already bought a home in the project told SCMP: "What Mahathir said has definitely had a negative impact on the demand from and aspirations of middle-class investors from China. We feel we are not welcome here and there is growing uncertainty and risk for our long-stay visas and investments."
In the United States, the EB-5 investor visa seems to finally have fallen out of favor given how immigration law under President Trump has tightened significantly. Approval for this visa can take up to 10 years and the huge backlog has deterred people from signing up.
None of these developments have quenched Chinese citizens' thirst to move their savings overseas. Raymond Zhang, who lost his nearly $30,000 deposit, concluded by telling the SCMP that even if he cannot get his money back, he still wants to buy property abroad:
"I’m really worried about the worsening economic situation on the mainland, so that is really my main driver to have another go," he said.
In light of this pent up capital flight, one wonders how long before enterprising Chinese citizens rediscover cryptos and some novel way of bypassing China's firewall, and resume buying and sending cryptocurrencies outside the country. As a reminder, it was Chinese citizens that back in late 2015 first catalyzed the next massive move in bitcoin from $230 all the way up to $20,000 - a move which was subsequently joined by Japan and South Korea - before a global coordinated crackdown was required to halt interest in and purchases of cryptocurrencies.