China's Real Estate Market and Capital Outflow: A Government Shortcoming or Our Perceptual Bias?
U.S. to provide up to $345 million in military aid to Taiwan; Shein is trying to take on Amazon; China eases residential registration rules to boost growth
Welcome to this issue of The China Brief. Today is July 29, 2023. Here at The China Brief, we bring you the latest news on China's politics, economy, and society from global media sources, along with exclusive expert analysis. If you find our content helpful, please subscribe to our newsletter.
China's Real Estate Market and Capital Outflow: A Government Shortcoming or Our Perceptual Bias?
In response to Mr. Yang Tian's article, I wish to address the following points:
To begin, Mr. Yang Tian operates primarily within the shipping and trade-related industries, engaging with individuals predominantly associated with enterprises possessing trade and foreign exchange qualifications, thereby having foreign exchange quotas.
As I previously mentioned in my own discourse, a minority of individuals with foreign trade quotas may participate in sporadic additional foreign exchange outflows. It is essential to note that the cases highlighted by Mr. Yang Tian largely represent a survivorship bias, focusing on specific groups rather than encompassing the general Chinese populace who own real estate.
I am uncertain and, indeed, skeptical that the situation of selling properties in Shanghai or other first-tier cities to invest overseas is exclusive to specific groups. Instead, it seems to be a randomly occurring phenomenon affecting any ordinary Chinese citizen. Therefore, my article addresses the current difficulties faced by the general Chinese population regarding capital outflows.
Secondly, we must grasp the distinction between willingness and factual occurrences, as mere willingness does not inevitably imply widespread capital outflows beyond regulatory control. If desires alone could manifest into actual outcomes, the Chinese Communist Party might have long lost its grip on power.
Thirdly, my article emphasizes that after the tightening of regulations in 2017 and, more notably, during the three years of the pandemic, the difficulty of capital outflows significantly increased. Those with basic financial knowledge recognize that prior to this period, numerous channels existed for capital outflows, with relaxed supervision and underdeveloped systems. Moreover, national policies at that time encouraged overseas investments, leading to considerable Chinese funds flowing abroad to purchase real estate, particularly in destinations like the United States, where Mr. Yang Tian resides—a preferred location for Chinese high-net-worth individuals at the time. Therefore, what Mr. Yang Tian deems "ubiquitous" may pertain to properties purchased before the pandemic or before the stricter regulations of 2017, rather than the incremental changes during and after the pandemic, which my article discusses.
Fourthly, capital outflows entail an exceedingly operational subject that cannot be dismissed with a few seemingly reasonable phrases like "wholly-owned entities," "opening letters of credit," or "these enterprises." When discussing capital outflows in foreign trade, it naturally involves domestic funds used to purchase goods abroad, facilitating capital outflows. Thus, please consider the following:
The so-called wholly-owned entities (overseas) acting as intermediaries should be understood as trade agents. Whose wholly-owned entities are they? Are they owned by domestic enterprises, overseas manufacturers, joint ventures between domestic enterprises and foreign entities, or by individual owners of domestic enterprises?
If they are wholly-owned by domestic enterprises or joint ventures with overseas manufacturers, could you clarify how these domestic enterprises directly hold companies overseas after 2017, especially after 2019? Did they comply with the regulations stipulated in Circular 2008 [No. 30] by the State Administration of Foreign Exchange for foreign investment registration by domestic enterprises? According to Circular No. 30, foreign-held companies are required to submit annual audit reports. Thus, did these additional investment projects by overseas entities undergo reporting and approval by the State Administration of Foreign Exchange, as described by Mr. Yang Tian? Evidently not. In that case, aren't these domestic and overseas enterprises simply awaiting regulatory intervention by the State Administration of Foreign Exchange, only a matter of time?
If these investments were not registered under Circular No. 30, how are these overseas assets accounted for in the domestic financial statements of Chinese enterprises? Is it reasonable to assume that domestic enterprises would perpetually conceal such foreign assets? That seems almost unfeasible.
Moreover, according to Mr. Yang's account, if the enterprise owner merely sells domestic properties while using overseas foreign exchange to purchase properties abroad through the company (or affiliated parties), in reality, the sales proceeds never leave the country, and this is not the focus of my article. Additionally, these overseas property purchases involve existing foreign exchange reserves and do not generate incremental capital outflows. Furthermore, if "ubiquitous" instances of such overseas property purchases do indeed exist, wouldn't that precisely illustrate the difficulty in capital outflows, forcing enterprise owners to resort to such expedient measures? Doesn't this align with the scenarios I described?
Furthermore, Mr. Yang Tian mentioned consulting with large overseas banks, claiming that certain financial products are preferred by Chinese private enterprises and individuals. It is important to note that overseas banks deal with funds that have already left the country. While there may be 10 successful cases for 10 clients, resulting in a 100% success rate for overseas banks in handling capital outflows, the majority of cases may involve thousands or even tens of thousands of failed attempts from individuals or enterprises without foreign trade resources or foreign exchange quotas. Consequently, how do these ordinary masses execute capital outflows using the foreign trade methods described by Mr. Yang Tian?
China's foreign exchange controls have effectively prevented multiple waves of economic undervaluation from capital flight since the reform and opening-up era. Even during the relatively rudimentary regulatory landscape of the 1980s and 1990s, it was exceedingly challenging for enterprises to seek offshore registrations. We are all familiar with the concept of "window companies," but such practices were mainly limited to state-owned enterprises. For private enterprises like those mentioned earlier, gaining approval from the Ministry of Foreign Trade and Economic Cooperation and the State Administration of Foreign Exchange was necessary for offshore registrations. Otherwise, their financial statements would not pass audits. Consequently, numerous instances of holding through proxies emerged, even among state-owned enterprises, where high-ranking executives registered companies overseas to facilitate holding. However, these situations underwent thorough regulatory cleanup in state-owned enterprises during the past decade. Meanwhile, the phenomenon of offshore holding became more prevalent among private enterprises, with many establishing overseas companies through individual owners or proxies to conduct international business. Nonetheless, once these businesses sought to regularize their operations and include offshore assets in their financial statements, issues of compliance and legitimacy surfaced. These problems proved insurmountable obstacles for practical operations. For instance, if an enterprise intends to pursue a red-chip listing overseas, and the owner or shareholder declares that they already hold overseas companies, due diligence investigations often reveal that most cases involve non-compliant enterprises established through proxies, rendering them ineligible for listing. Consequently, this may lead to delays in the listing process, sometimes by years, or even result in a missed listing opportunity.
Given the above discussion, the challenges faced by Chinese investors regarding capital outflows today are highly operational. At every stage, supervision strengthens, not solely by the Chinese government, but as part of a global effort in anti-money laundering and tax regulation. Thus, conducting cross-border capital flows freely is becoming increasingly difficult for investors worldwide, not just in China. Subjection to supervision is an inevitable reality.
The issue of having confidence in the Chinese economy is entirely unrelated to the feasibility of conducting capital outflows. Mr. Yang Tian touched upon various confidence-related matters but failed to inquire about the following for his "ubiquitous" cases:
When did they purchase their overseas properties? Before or after the pandemic?
When did the funds for purchasing overseas properties leave the country? Before or after the pandemic?
Are their overseas companies genuinely registered under their own names, or are they held by other affiliated parties?
Without answers to these details, it is impossible to establish the chain of capital outflows, nor can it be proven that the foreign trade channels described by Mr. Yang Tian led to massive capital outflows from China.
If the capital outflows under regular trade activities are as extensive as Mr. Yang Tian claims, why has the Chinese Communist Party put significant effort into clamping down on both large and small underground money-laundering channels but not addressed such significant and pervasive foreign trade loopholes? Are we to believe that the Chinese Communist Party is less astute than us? Or is it that China's regulatory system is severely outdated? Yet, from the annual foreign exchange surplus figures, we can discern no evidence of such massive capital flight. So, who is experiencing a bias in perception – us or the Chinese Communist Party?
(Author: Xie Yimin, Investor, Special Contributing Analyst for The China Brief)
U.S. to provide up to $345 million in military aid to Taiwan
Washington Post
The US will provide Taiwan with up to $345m in military assistance, including defence equipment and training, as China seeks to increase its control over the democratically-run island. The move follows complaints from Taiwan about delays to the delivery of US arms that it had already purchased. China regards Taiwan as part of its territory. The announcement marks the first time that the Presidential Drawdown Authority has been used for Taiwan. It has been used dozens of times for Ukraine under a separate emergency provision.
Shein is trying to take on Amazon. Some say it should be cleaning up its act, instead
CBC
Online fast-fashion giant Shein is expanding into an online marketplace, allowing third-party vendors to sell directly to consumers, similar to Amazon. The Chinese company, which has seen its popularity explode on social media, is focusing on meeting consumer demand as it expands. However, Shein has faced criticism for its environmental impact and human rights track record, and experts warn that an expansion could exacerbate these issues. Shein became the largest fast-fashion retailer in the US in 2021 and has already launched its marketplace in Mexico, Brazil, and the US, with plans to expand to Europe later this year.
China eases residential registration rules to boost growth
Nikkei Asia
Provinces across China are reforming the household registration system, known as hukou, to better respond to labour shortages and changes in the country's slowing economy. The hukou system categorises families as rural or urban, and is linked to welfare entitlements such as healthcare and education, and the right to buy a home. The reforms aim to make it easier for migrants to settle in cities and access urban welfare benefits, and to encourage migrants to stay in cities and make economic contributions. However, there are limitations to the reforms, including the exclusion of central districts of major cities and the potential loss of benefits offered in migrants' places of origin.
Taiwan military’s plan to use mountain shield called into question
South China Morning Post
Growing activity by the People's Liberation Army (PLA) in the waters off the east coast of Taiwan has called into question the Taiwanese military's plan to preserve its forces on the east side of the island in the event of a Chinese attack. While the heavily fortified west of the island is shielded by the Central Mountain Range, the PLA's increased presence in the east has raised doubts over the island's long-standing defensive plan.
‘Sea of empty desks?’: how work from home is changing Asia-Pacific offices
South China Morning Post
The shift towards remote work, accelerated by the COVID-19 pandemic, is leading to a surplus of empty office spaces across the Asia-Pacific region. Employees are increasingly prioritizing work-life balance and well-being, and are reluctant to return to full-time physical attendance at the office. As a result, office occupancy rates have dropped significantly, leading to concerns about the future of the commercial property market and potential banking crises. In some cities, such as San Francisco and Hong Kong, office vacancy rates have reached record highs, while in Singapore the demand for office space remains relatively strong due to domestic and overseas interests. The market for office real estate in the region is at a tipping point, and the future will depend on factors such as economic recovery and the willingness of employees to return to the office.
White House ambiguous about inviting Hong Kong leader John Lee to Apec summit
South China Morning Post
The US has not confirmed whether it will invite Hong Kong Chief Executive John Lee to a high-level gathering of Pacific Rim economies in November. Last year, Lee, then Hong Kong’s security secretary, was sanctioned by the US for the crackdown on political rights in Hong Kong. White House officials have avoided confirming whether all top Asia-Pacific Economic Cooperation leaders will be invited to the meeting. China has demanded that the US lift the sanctions against Lee and invite him to the summit, warning that a decision to bar him would complicate prospects for a face-to-face meeting between US President Joe Biden and Chinese President Xi Jinping.
Hong Kong book fair’s success a significant step on the road to normality
SCMP Opinion
The Hong Kong Book Fair, one of the largest of its kind in the world, saw almost 1 million people in attendance, marking a return to pre-pandemic levels. The event featured 780 exhibitors from 36 countries and regions, with authors from mainland China and overseas participating in talks and cultural events. The focus of this year's fair was literature for children and young adults. The event made a significant contribution to Hong Kong's return to normalcy following the reopening of borders. Despite the prevalence of digital reading material, the book fair demonstrated that the joy of reading books is still alive and well.
North Korea's Kim vows to develop cooperation with China to 'new high'
Reuters
North Korean leader Kim Jong Un met with a Chinese delegation and vowed to strengthen relations between the two countries, according to North Korea's state media. The meeting took place after Chinese and Russian officials joined Kim in reviewing his latest military capabilities at a parade.
Biden says Vietnam leader wants to meet him at G20 to elevate ties
Reuters
Vietnam's leader has expressed a desire to meet with U.S. President Joe Biden at the September G20 summit in New Delhi to discuss elevating U.S.-Vietnam relations. This comes as Washington seeks to solidify relations with partners in Asia to counter an increasingly assertive China. The U.S. has been working to elevate ties with Vietnam to a "strategic" partnership, which could include increased military cooperation and U.S. weapons supplies. However, potential military deals could face hurdles due to concerns over Vietnam's human rights record.
EU's Von der Leyen to make first state visit to Philippines
Nikkei Asia
European Commission President Ursula Von der Leyen will visit the Philippines for a two-day official visit starting Monday. This visit aims to strengthen cooperation between the European Union (EU) and the Philippines in various fields, including trade, economics, maritime safety, and aerospace. This will be the first visit by the president of the EC to the Philippines in the 60 years of diplomatic relations between the two countries. Discussions during the visit are expected to focus on economic cooperation, but the issues over the South China Sea may also be on the agenda. The EU has previously reiterated the importance of upholding the freedoms, rights, and duties established in the United Nations Convention on the Law of the Sea.
Australia to Fast-Track Missile Production for U.S. Exports
NY Times
Australia has announced plans to accelerate the production of missiles for export to the US and other countries. The country's government has set aside AUD2.7bn ($2bn) to purchase long-range strike missiles that will boost Australia's stockpiles and could be sold to other nations. Production is expected to begin in 2025. The move comes as Australia and the US deepen their military relationship, with defence officials from the two countries meeting in Brisbane this weekend to discuss expanding security cooperation in the region.
Japan, South Korea should deepen Gulf ties as US-China rivalry ensnares region
SCMP Opinion
Asian countries, particularly Japan and South Korea, need to increase their engagement with the Gulf Arab states in order to compete with China's growing influence in the region, according to an op-ed by Tom Hussain in South China Morning Post. China has invested more than $100 billion in the Gulf Arab states and has built strategic relationships with them and their rival Iran. This has allowed China to play a role in restoring diplomatic relations between Saudi Arabia and Iran. In contrast, Japan and South Korea have been slow to respond to changing dynamics in the Gulf. However, they can provide economic alternatives to the Gulf monarchies, particularly in technology-driven sectors such as renewable energy and the digital economy. They can also expand their defense and security ties with the Middle East, as Gulf monarchies measure their international relationships by their partners' contribution to their defense against external threats. Joining minilateral alliances in the region could also help protect and promote their interests without having to become subservient to US policy. In order to compete with China, Asian countries need to increase their engagement in the Gulf and establish themselves as significant players in the region.
Stay informed about the latest news, analysis, and policy briefs from across the globe related to China with the China brief. Our team aggregates, synthesizes, and summarizes the most important information from various sources, including media outlets, think tanks, government agencies, and industry experts.
Our mission is to provide you with easily accessible and critically valuable information tailored to your specific field of interest. We understand the significance of staying up-to-date on developments related to China and aim to make this information comprehensible for our readers.
Join the conversation and stay informed about the latest news and developments related to China by visiting our website at www.6dobrief.com