Capital Flight: How China's Elite Are Using Japan's Real Estate Market To Escape Xi's Economic Maelstrom

As the Chinese government grapples with the ripple effects of a plummeting property market, wealthy Chinese citizens are accelerating moves to safeguard their wealth by investing abroad, Nikkei reports.

Notably, older Chinese, weathered by the harsh realities of the Cultural Revolution, are leveraging technology and international markets to insulate their assets from domestic economic shocks. Their destination? Japan's burgeoning real estate sector.

In Osaka's famous Dotonbori entertainment district, Chinese people are buying up buildings.

"The owner of the building next door is now Chinese, too," said a woman in her late 70s who has been running a coffee shop for many years in the area. "That one's probably going to turn into a minpaku business or be rented out to commercial tenants after the renovation work is done." -Nikkei

"Chinese people are buying up property in Japan so casually as if they were buying a cheap car or something," one Osaka realtor said recently.

This exodus of capital has not gone unnoticed. President Xi Jinping finds himself in a quandary, caught between the 10th anniversary celebrations of the Belt and Road Initiative and a flood of capital flight by China's affluent class. The spotlight fell on this economic undercurrent with the recent arrest of two Chinese nationals in Hokkaido, Japan, underscoring the intricate web of unofficial money transfers from China to Japan.

These transfers, often facilitated through smartphone applications such as Alipay, have opened a Pandora’s box of illegal banking activities, pushing the boundaries of Japan's financial regulations. The two arrested nationals allegedly orchestrated unlicensed payments totaling approximately 260,000 yuan ($35,000), a violation of Japan's stringent banking laws.

"Agents residing in Japan could be using apps like Alipay to transfer minpaku revenue or real estate transaction referral fees to people in China," said one property industry rep in Japan's Kanto region, which includes Tokyo.

What's driving all this? Decaying confidence in China's property sector - as Beijing's once-meteoric housing market has begun to implode, instilling a sense of urgency among property owners to liquidize their assets in favor of more stable investments abroad. The depreciating yen amplifies Japan's appeal, offering cost-effective investment opportunities for Chinese investors.

Another reason is that rich Chinese can open a path to long-term residency in Japan. Foreign nationals who seek permanent residency can reside in the country under a business manager visa by 'running or managing a business,' as one option.

Chinese money is also flowing into properties in the Kansai region, which includes Osaka and Kyoto. According to a referral agent, Chinese buyers are especially keen on what in Japan are assumed as lower-end real estate products. These buyers are focusing on a certain residential area of central Osaka where deals are cheaper than in other areas despite the convenient location. The neighborhood is held in low regard by the surrounding community.

While Japanese investors may be reluctant to buy properties in the area, "Chinese buyers are making snap decisions," the referral agent said.

Many small houses starting at around 20 million yen each as well as apartments are now up for sale in the neighborhood -- and are being snapped up by Chinese buyers. -Nikkei

Consequences?

While Beijing grapples with potential social unrest stemming from economic instability and surging youth unemployment, the property slump appears to be an unsolvable puzzle, at least for now. Macroeconomic projections by Chinese executives and businesspeople are pessimistic at best, foreseeing further depreciation in housing prices.

That said, stringent Chinese regulations on overseas investments and currency export present obstacles, sometimes leading to illegal workarounds and "underground banking" solutions. Despite these challenges, the influx of Chinese capital is significantly influencing property values in these Japanese regions, a trend expected to persist until there is a substantial recovery in China's property market.

In short, the flight of capital from China to Japan is an unintended offshoot of Beijing's economic strategies, creating ripples in international real estate markets and potentially altering the economic landscapes of both nations.