Capital controls announced late last year by China’s State Administration of Foreign Exchange (SAFE) are having the intended effect of limiting outbound investment from Washington State’s largest trading partner, and the country of origin for many new residents of the Puget Sound region. These controls comprised further restrictions and restatements of regulations that were already in place. They were announced amid Chinese President Xi Jinping’s broader anti-corruption campaign to “slam the door and beat the dogs (关门打狗),” intercepting the ill-gotten gains of those benefiting from previously lax oversight of state bureaucracies and enterprises. Despite the current effects on capital exits from China, observers expect the current intense scrutiny to be gradually relaxed, and for normal conditions to resume later this year or next.
This is the view shared by Realogics Sotheby’s International Realty (RSIR) brokers Robert Pong and Dehlan Gwo, both members of RSIR’s Asia Services Group. While Pong and Gwo both report stories of clients encumbered by the tightened regulations, each remains confident that demand is unabated and that the present challenges to purchases will subside with time. Gwo says, “People will find alternatives. My anecdotal observation has been that all-cash offers by Chinese are becoming less common, especially for properties at higher price-points. Because fewer funds can transfer at one time, loans for real estate purchases have increased significantly.” Reporting that banks dealing with Chinese clients continue to see good business, he adds: “I think we will see more and more creative ways to move money out of the Mainland.”[1]
Similarly, Pong remains optimistic in the longer term. “My big clients have already moved money out of China, and I am finding that clients shopping in the range of $500,000 to $2 million are having the most difficulties. This temporary challenge will be resolved in time, probably within six to twelve months. People will find a way, I am certain of that.”[2]
China announced the controls on the last day of 2016 in order to curb a flight to foreign currency. Chinese deposit-holders must now meet enhanced reporting requirements when exchanging their renminbi[3] for foreign-denominated funds. For larger-scale investors, $10 billion is now the ceiling on offshore investments.[4] In consequence of these efforts, Chinese non-financial outbound investment has been reduced by 35.7 percent year-over-year, according to China’s Ministry of Commerce (MOFCOM), which also stated that overseas property investment in January fell by 84.3 percent.[5]
Meanwhile, Xi’s anticorruption campaign has set his political opponents on their heels and allowed him to consolidate power domestically.[6] The crackdown saw 800 people detained in China in 2016 in connection with investigations of 380 underground banking operations. The subject transactions amounted to RMB 900 billion (US$131 billion), according to China’s Ministry of Public Security, which was working in collaboration with SAFE and the People’s Bank of China, China’s central bank. These investigations are said to continue in 2017. Underground banks are used by corrupt officials to illegally transfer properties and convey funds out of the country, as well as for conduct universally regarded as criminal in nature.[7]
Chinese buyers whose financial assets are diversified overseas are less likely to be affected by capital controls and other domestic measures undertaken in China, as are those who already own property overseas. The impact on the overall market in Seattle and the Eastside is expected to be minimal. The region ended the year with the highest annual home price appreciation in the country according to the S&P CoreLogic Case-Shiller Home Price Index.
[1] Dehlan Gwo and William Hillis, “Warmly, Chinese buyers survey the world beyond the seas,” RSIR (https://www.rsir.com/blog/2017/02/warmly-chinese-buyers-survey-the-world-beyond-the-seas/).
[2] William Hillis, “Seattle pivot begins,” RSIR (https://www.rsir.com/blog/2017/02/the-seattle-pivot-begins/).
[3] The official domestic currency of China.
[4] “China chokes the onshore yuan in its bid to stymie outflows,” Bloomberg News, 16 February 2017.
[5] “China outbound investment retreats as capital controls bite,” Straits Times, 16 February 2017.
[6] Ibid.
[7] “800 held in China after crackdown on underground banks in 2016,”The Tribune, 26 February 2017; “Hundreds arrested in China crackdown on ‘underground banks’,” South China Morning Post, 27 February 2017; “China arrests 800 in crackdown on underground banking,” The Seattle Times, 27 February 2017.