China Economy

China Economy

Property market boosted, but outbound investment hit as China restricts flow of cash out of country

Authorities tighter capital controls to defend the yuan are prompting investors to pump cash into bricks and mortar in the domestic market, analysts say

PUBLISHED : Monday, 17 October, 2016, 1:19pm
UPDATED : Monday, 17 October, 2016, 11:30pm

China’s tighter controls on the flow of cash overseas to defend the yuan’s exchange rate has had the unintended side effects of inflating domestic housing prices in major cities and crippling outbound investment, according to market watchers.

China’s currency has lost about 10 per cent against the dollar since August last year when the People’s Bank of China surprised markets by devaluing the yuan . To avoid an exodus of funds from the country, the Chinese authorities have quietly tightened foreign exchange controls.

“A tighter capital control that shuts the door for outflows … has helped shore up the housing boom,” said Raymond Yeung, chief economist, greater China at ANZ. “I am not surprised to see capital restricted within China turn to property in major cities like Shanghai as a safe haven.”

How wealthy Chinese move hundreds of billions abroad to buy assets

While there have been no groundbreaking announcements of additional controls, China’s foreign exchange authorities are getting stricter in approving deals involving capital outflows.

Bloomberg reported last month that Deutsche Bank, which is selling a US$3.9 billion stake in a Chinese lender and seeking permission to move the proceeds offshore, is finding difficulties in remitting funds in a quick and smooth way. China’s State Administration of Foreign Exchange immediately denied the report.

Every Chinese citizen is granted an annual quota of US$50,000 to buy foreign exchange and it is now common practice for banks to require an appointment for over-the-counter purchases to buy large sums.

Claire Ma, a Shanghai office worker, tried to change US$5,000 US dollars at a state bank, but was told by an employee that she needed to make an appointment at least one day beforehand because the branch’s daily foreign exchange cash reserves often sold out quickly.

The more Beijing tries to impose controls on capital outflows, the more Chinese individual and corporate investors attempt to move funds abroad, especially after the yuan exchange rate broke a key psychological level of 6.7 versus the US dollar earlier this month.

China’s official foreign exchange reserves, the world’s largest, shrank over three consecutive months to September, dropping to their lowest level since June 2011.

The government’s efforts to end the bleeding is affecting overseas mergers and acquisitions, according to analysts.

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Mergermarket said in a report earlier this month that the outbound M&A splurge in the fourth quarter could slow down due to forex controls.

The Chinese authorities have introduced stricter controls amid concerns about capital outflows through deals in which firms leverage on the acquisition of foreign shell companies to move assets out of the country to bet on the yuan’s depreciation.

These general restrictions have resulted in Chinese firms losing out during the latter stages of auctions in M&A deals as they await regulatory approval.

They have already forced a consortium of Chinese bidders, including Sinochem, to drop out of the bidding process for German specialty chemicals maker Atotech, which is valued at US$4.4 billion, the report said.

“If corporates are not fully prepared on the forex issue in advance, without informing forex regulators at the earlier stage of deals, it could lead to a disastrous aftermath such as falling behind deal closing dates,” Eric Liu, a senior consultant at the law firm Linklaters, told a forum in Shanghai earlier this month.

Goldman Sachs warns China’s currency outflows may be worse than they look

Concerns about possible capital controls could be a factor dragging down foreign investment in China’s asset market. A recent report from Jones Lang LaSalle on property investment deals between corporate investors showed that mainlanders accounted for 89 per cent of total transactions in the first three quarters in Shanghai, from a share of 56 per cent in 2015.

“Foreign investors could have trimmed deals on concerns of foreign exchange losses,” said Johnny Shao, the firm’s head of capital markets for Shanghai and East China . “Meanwhile, tighter forex control has also pushed domestic money into property projects in Shanghai for risk aversion.”