Middle-class mainlander Laura Zhang found the idea of owning a home overseas irresistible after being bombarded by commercials for an affordable project “near Singapore”. The Forest City project in the southern Malaysian state of Johor, the subject of the advertisement , is being developed by Country Garden, China’s third-largest home builder. Zhang said she was told a flat in Forest City, the developer’s flagship project Malaysia, was not only an asset that would appreciate in value but also one that offered a tropical, garden city lifestyle, access to high quality international education for her son, and a chance for the whole family to become permanent residents of another country. Country Garden halts Malaysian housing sales amid capital flight crackdown However, capital controls introduced by Beijing have turned the dream of a Malaysian property into a nightmare for many mainlanders. Zhang, who lives in Hefei, the capital of Anhui province, was enticed by Forest City commercials in early 2016, when China was witnessing the largest wave of outbound investment the country had ever seen, with its foreign exchange reserves, a rough gauge of capital outflows, falling at a record pace. Big Chinese investment deals abroad made frequent headlines, with property deals being particularly eye-catching. Dalian Wanda chairman Wang Jianlin, China’s richest man, bought a 10-bedroom home in Kensington Palace Gardens in London at the end of 2015 for £80 million (US$118 million at the time), and Anbang, a Chinese insurer controlled by tycoon Wu Xiaohui, completed the US$1.95 billion purchase of the Waldorf Astoria New York hotel, a Manhattan landmark, the same year. While the middle-class residents of second-tier cities such as Hefei lacked the tycoon’s financial resources, they had been made wealthier by China’s economic boom and hefty price increases for mainland apartments. Many, like Zhang, longed to follow in the tycoon’s footsteps and own a property overseas. China developer Country Garden expects 20 billion yuan in sales from Malaysia project this year In theory, the Chinese government prohibited direct individual investment in overseas property projects, but there were numerous ways to skirt around the restrictions. China’s foreign exchange regulators usually turned a blind eye to such outflows because Beijing had been focused for most of the previous decade on stopping hot-money inflows. The government had even encouraged mainland companies to invest abroad and had urged residents to hold more foreign currency in order to “hide foreign exchange reserves among the people”. That was the atmosphere when Zhang, her friends and relatives signed up for a free “investment tour” of the Malaysian project in September. Zhang said she thought “it won’t hurt if I just have a look at the project.” She was part of an army of ordinary mainland residents who were trying to buy property overseas, partly as a way to guard against yuan depreciation, said Peng Peng, a senior economic researcher with the Guangzhou Academy of Social Science. “But actually it’s full of risks for these Chinese small investors since most of them know little about laws and markets overseas,” he said. “They blindly believe overseas property markets will soar in the same way as the mainland market.” On September 10, Zhang left on a three-day tour of Singapore and Malaysia organised by the Nanjing branch of Country Garden. Most members of the 20-strong group were residents of Nanjing – businesspeople, retired civil servants and wealthy housewives – and for most, like Zhang, it was their first overseas trip. When they arrived in Singapore they were impressed by city’s cleanliness and modernity, but they were told property there cost about 100,000 yuan (US$14,494) a square metre, more than they could afford. The next day they took a two-hour bus ride, crossing the Malaysian border at the Woodlands checkpoint and ending up at Forest City’s massive sales centre, where they were greeted by futuristic-looking models of the project and an army of Mandarin-speaking salespeople. Chinese property investors still getting overseas deals done despite tighter capital controls, says ING Every potential investor was accompanied by at least one salesperson, and Zhang said they described a future in which their children could easily attend an international school in Malaysia or Singapore and in which their parents could enjoy the same social welfare as elderly Malaysians. Zhang said she was told the price was only 20,000 yuan per square metre, a quarter of that in downtown Beijing. They were also told they could apply for the Malaysia My Second Home Programme, which allows foreigners to live in Malaysia on long-stay visas of up to 10 years, offering the families hope they would be able to commute between the mainland, Malaysia and Singapore. After two days of sales pitches, most of the visitors were persuaded and opened up their wallets to make down payments. Zhang signed an off-plan purchase agreement with Country Garden Pacific View, a Malaysian unit of the mainland developer, and paid 63,500 ringgit (US$14,321) with her China UnionPay bank card as a 10 per cent down payment on a 59 square metre flat. “I’m not so rich that I can afford those properties in North America or Australia, but I was very interested in buying an apartment abroad for my child’s education or possible emigration in the future,” Zhang said. “That’s why I joined the tour. Besides, the Forest City project is very famous among Chinese as you can see its advertisement everywhere in China.” Country Garden president Mo Bin said in August that it expected to see at least 20 billion yuan in sales at Forest City by the end of last year. “We expect sales at Forest City in the second half will not be below the 10 billion yuan recorded in the first half,” Mo told the South China Morning Post at Country Garden’s interim results briefing. The company said the first tranche of flats in the 14 sq km project, being built on four artificial islands, would be completed late this year. Chinese firms that ‘went global’ at Beijing’s request now hit hard by capital controls It has said the project will receive total investment of 250 billion yuan over 20 years, but Mo said Country Garden had only paid five billion yuan by August, including the cost of land. Forest City was the subject of one the biggest advertising campaigns China has seen. Commercials extolling the lure of a tropical island home were broadcast on state television, placed on billboards at railway stations and played time and again in apartment lifts. The company even set up sales centres in dozens of mainland cities to promote the project, but they all were closed “for renovation” early this month, with a Country Garden spokeswoman denying the move had anything to do with Beijing’s crackdown on capital outflows. The mainland has lost nearly US$1 trillion in foreign exchange reserves from the peak in 2014, and about two months after Zhang’s visit to Johor, Beijing ordered a halt to “irrational” outbound investment, especially that which ended up in overseas property projects. Zhang discovered this year that no bank on the mainland would help her pay for her overseas property dream. When she attempted to transfer money to the vendor’s bank account in Hong Kong in January, her local bank told her the Hong Kong account was “not correct”. However, she had managed to pay 20 per cent of the amount she owed for the property to the same Hong Kong account in October. She told the Post she was now trapped in limbo and was trying to get a refund. Other purchasers are taking the same course of action. “Now we understand all further instalments need to be paid abroad. But this is not allowed due to the foreign exchange controls from the Chinese government,” said another Forest City purchaser, Vicky Wu from Guangzhou. “If we do so, we will be put on the government’s black list.” Country Garden’s ambition in Malaysia backed by Johor’s royal family Some mainland purchasers said they had been misled by Forest City salespeople, something Country Garden denied. It said in a statement last week that development and construction of Forest City was carried out “under the legal framework, with its sales in strict accordance with laws and regulations and contractual commitments”. “Forest City is a world-class township developed for the global market,” the company said. “All sales procedures have been approved by the local government, while implementation of relevant operations are in strict accordance with the requirements of the Malaysian government and legal compliance.” About 40 people, including Zhang and Wu, have joined a WeChat group “to quit Forest City and get refunds” set up two weeks ago by Leo Wang from Hunan. They’ve made down payments for Forest City flats but are now unable to transfer money out of the mainland or get their money back. “We thought it was a good and affordable deal to invest in overseas property, without thinking of the possible risks, and even signing the agreements in English even though we don’t know the language,” Wang said. Developer Country Garden led its rivals in January’s land purchases Liu Zhenbiao, who runs a company, Kit Hei, that helps wealthy mainlanders snap up real estate overseas, said such disputes were not uncommon. “Similar disputes will happen when growing numbers of Chinese nationals try to invest in overseas properties because many Chinese do not understand the local language and law,” he said.