Debunking the Myth: No Exodus of Funds to Overseas Properties Amidst Real Estate Slump in First-Tier Cities

China is erasing mention of its former foreign minister. But it still hasn’t said why; Chinese stocks set to bounce back as strong earnings revive confidence: analysts;

Welcome to this issue of The China Brief. Today is July 26, 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.

Debunking the Myth: No Exodus of Funds to Overseas Properties Amidst Real Estate Slump in First-Tier Cities

In response to a recent article speculating about funds flowing into overseas properties due to sluggish transactions and price declines in high-end properties in Shanghai, I strongly disagree with such conclusions. Historically, media has used pessimistic judgments about China to attract attention, and connecting property sales with overseas investments is an unprofessional and overly speculative interpretation.

In reality, there is no direct correlation between the stagnation in the domestic real estate market and purchasing overseas properties, and there is no concrete evidence supporting significant capital outflows by Chinese residents. The data available on fund outflows during the pandemic years come from estimations by foreign institutions and financial organizations, lacking official support and credibility.

Take Singapore as an example, where funds involving Chinese citizens primarily come from transfers from Hong Kong, indicating that these funds were already in Hong Kong before the pandemic and did not leave the country on a large scale during that period.

While it's not surprising to witness price declines in high-end properties in first-tier cities amidst economic downturns and real estate curbs, successful property sales don't necessarily indicate funds being used for overseas property purchases. Let's delve into the key points:

Firstly, how are funds transferring abroad? There have been widespread rumors about Chinese funds leaving the country during the pandemic years, with tales of entrepreneurs emigrating and people leaving for business or travel circulating on social media and news platforms. However, the critical question remains unanswered: How are these funds actually leaving the country? The maximum amount an individual can legally take out is $50,000 USD, and for funds to exit through legal entities, they require approval from the foreign exchange regulator and a clear investment target abroad. Hence, the possibility of personal property investment coinciding with non-official fund outflows is minimal.

Unofficial methods remain in the absence of official channels, with the majority of unofficial fund outflows being handled by underground money brokers. Nevertheless, the government has tightened control over such outflows, especially after regulations on foreign investments were reinforced in 2017. As a result, the number of underground money brokers has reduced during the pandemic years, and conducting fund outflows has become increasingly challenging. Additionally, foreign financial institutions have tightened anti-money laundering measures, further limiting the survival space for underground money brokers. For instance, transferring $2 million USD abroad would require dozens or even hundreds of domestic and foreign transactions with small amounts, drawing regulatory attention and leading to scrutiny and account closures. Such outcomes are financially unbearable for the fund owners and disrupt the money broker's operations. Moreover, opening a bank account with overseas financial institutions is exceptionally strict, making it nearly impossible for non-residents or citizens. Even in Hong Kong, where mainland residents can open accounts, the anti-money laundering measures have intensified, reducing the feasibility of unofficial fund outflows to Hong Kong or other overseas destinations. Hence, claims of large-scale "capital flight" during the pandemic years are highly questionable.

The outflow of funds is the essential initial step in any individual's overseas investment, and without it, any other investment plans are mere speculations.

Regarding currency depreciation, the attractiveness of overseas property investment to Chinese citizens from an investment perspective is questionable. Assuming funds can leave the country smoothly, the return on investment from overseas properties is not guaranteed, especially in the current environment of the US raising interest rates. For instance, property prices in Singapore surged during the pandemic, reaching historical highs, making them less appealing from an investment standpoint. Japanese properties, primarily concentrated in Tokyo and Osaka, saw growth in the past six months, but the Japanese yen depreciated by 30%, and at one point, even reached 38%. This means that investors who bought Tokyo properties earlier this year and made returns would still face losses in foreign exchange if they didn't hedge against yen depreciation. Ordinary individuals lack the financial knowledge and capability to handle currency depreciation and hedging operations, making it difficult for many investors to achieve real profits. Vietnam's real estate market experienced a roller coaster ride during the pandemic years, with skyrocketing prices last year followed by significant declines and adjustments this year. Coupled with the depreciation faced by emerging economies due to the US dollar's rising interest rates, Chinese investors face considerable challenges in making informed decisions. Additionally, Chinese investors have limited options for investment regions, and with the current global economic slowdown and US interest rate hikes, finding overseas property investments that generate profits is exceedingly scarce.

Taxation issues are also crucial. If the sale of the Shanghai property is carried out by someone who holds foreign citizenship or is a tax resident overseas, they must report the transaction to their residing country for taxation purposes due to the current global Common Reporting Standard (CRS) for tax information exchange. Evading this tax obligation is virtually impossible. Therefore, individuals holding foreign citizenship must carefully consider the tax burden resulting from selling their property in China. Moreover, if they intend to transfer the proceeds from the sale out of China (which can be approved by the foreign exchange regulator), they will be subject to both Chinese and foreign tax regulations, impacting their future overseas investments, if any.

Even if the property owner is a Chinese citizen willing to pay taxes, they still face the issue highlighted earlier - the difficulty of fund outflows.

Hence, there is currently no concrete evidence suggesting massive fund outflows from domestic property sales to overseas investments. While China's economy and real estate market face challenging times, investors selling properties is a regular investment decision, but it doesn't automatically mean they are solely investing overseas. Admittedly, during the pandemic years, there may be investors with the desire to move funds overseas or invest in foreign properties, and that's entirely understandable. However, we cannot establish a definitive link between selling properties in Shanghai and investing overseas solely based on the intentions of some investors in Shanghai. Moreover, even if such intentions exist, realizing them is an entirely different matter, considering the current financial and regulatory environment in China and worldwide. Fund outflows have become increasingly challenging, and with the trend towards digital currencies in the future, the possibility of unofficial overseas property investments will likely approach zero.

Investing in overseas properties is an operationally intensive investment activity, requiring careful consideration and education. Investors misled by deceptive information will not only face legal barriers but might also suffer significant investment losses.

Today, we need more confidence in China's economy and a better understanding of overseas property investments.

(Authored by Xie Yimin, Investor, and Analytical Expert for China Brief)

China’s new central bank governor faces daunting tasks

CNN

Pan Gongsheng, the former head of China's foreign exchange regulator, has been appointed as the new governor of the People's Bank of China (PBOC), replacing Yi Gang. Pan's appointment comes as China's economy faces challenges such as slowing growth and rising debt levels. He will be tasked with addressing issues including the property industry, local government debt, attracting foreign investors, and creating a sustainable exchange rate regime. Pan's appointment also marks a revival of the central bank's previous leadership model, where one person served as both party boss and governor.

Mineral Resources wary of China, looks to US and Europe for lithium deals

The Sydney Morning Herald

Mineral Resources founder Chris Ellison has defended the company's recent U-turn on its lithium strategy. The Western Australian resources company last week abandoned a joint venture with US lithium company Albemarle, announced five months ago. Ellison said the company decided to avoid entering the Chinese market due to the risk of a diplomatic dispute between the country and Australia. China had been Mineral Resources' first choice for lithium processing, but Ellison said building lithium hydroxide plants in Australia would be both difficult and expensive.

Chinese stocks set to bounce back as strong earnings revive confidence: analysts

South China Morning Post

China's stocks are set to rebound in the second half of the year due to government support measures, according to UBS Group and China Asset Management. UBS predicts that a recovery in corporate earnings could drive a 10% gain in Chinese stocks by the end of the year. China Asset Management also highlights factors such as battered valuations, easing geopolitical tensions, and an expected end to US interest rate rises as contributing to a potential uptick in the equity market. The CSI 300 and Hang Seng have both already risen by almost 2% since the end of June.

Hong Kong's security law puts damper on annual book fair

Nikkei Asia

The Hong Kong Book Fair, one of Asia's largest book fairs, has closed without reports of books violating the city's national security law. Pro-Beijing group Politihk Social Strategic has voluntarily monitored content at the fair for the past four years, claiming to "protect young people from brainwashing and [poisonous] books." The fair, sponsored by the government, featured a new series of books containing the words of President Xi Jinping. However, some major publishers had sections dedicated to the books, which did not attract much interest. Local publishers face a dilemma created by Hong Kong officials: adhere to the city's new political norms or risk their business. Many small and medium-sized publishers did not participate in the fair this year, and last year three publishers were removed from the list of participants. This year, five smaller publishers held a low-key book fair called "Hello, Publishing" five kilometers away from the official fair. The fair generated almost 70% of the annual revenue for some local publishers, but publishing books that do not align with government policy makes survival difficult.

China is erasing mention of its former foreign minister. But it still hasn’t said why

CNN

China's Foreign Minister, Qin Gang, has been replaced by his predecessor Wang Yi. Qin's activities and his six-month tenure have been erased from the record following his abrupt departure from public view in late June. Qin's whereabouts, the reason for his removal and his ultimate fate as a member of the Communist Party remain unknown. Such unanswered questions about official decision-making are standard in China, where the political system is notoriously opaque and has only become more so under President Xi Jinping. Qin's replacement by Wang, who held the post for roughly a decade before a promotion last year, only deepens the mystery. "The lack of transparency is already a well-known issue for the Chinese bureaucracy. And decisions are fine until they are not. And when they are not, it usually creates much bigger trouble for the system," said Yun Sun, director of the China Program at the Washington-based think tank Stimson Center. The development could damage China's efforts to present its leadership as an appealing alternative to the West.

China weighs easing tech transfer rules for office gear

Nikkei Asia

The Chinese government is considering easing proposed rules that would require foreign office equipment makers operating in the country to transfer key product technology to China. The rules, which were strongly opposed by Japanese, U.S., and other foreign companies, have been deleted from the draft presented to companies in May. The Chinese market for multifunction printers is controlled by foreign manufacturers due to their sophisticated optical technology, and the proposed rules would have put manufacturers under pressure to transfer key technologies. The Chinese government may be making concessions to appease overseas manufacturers and boost the economy.

Antony Blinken in Tonga warns of ‘predatory’ Chinese aid

Japan Times

US Secretary of State Antony Blinken has become the first US secretary of state to visit Tonga and has warned the South Pacific nations of the dangers of Chinese investment. As part of the US's efforts to counter Beijing's growing influence, Blinken pledged support for issues such as climate change and illegal fishing. However, he also warned about aid from China, claiming that it often comes with strings attached and can undermine good governance and promote corruption. China has increased its engagement with the region in recent years, leading to concerns about its influence.

https://www.japantimes.co.jp/news/2023/07/26/world/politics-diplomacy-world/blinken-tonga-warn-chinese-aid/

Xi's recall of 'wolf warrior' Wang Yi lays ground for U.S. summit

Nikkei Asia

Chinese President Xi Jinping's decision to recall senior diplomat Wang Yi to head the Ministry of Foreign Affairs is seen as a misstep, but it could be a crucial move ahead of a possible US-China summit in November. Wang's return signals a comeback for more aggressive "wolf warrior" diplomacy and reflects Xi's preference for someone with a track record of defending China's positions and asserting the country's interests. Wang's reappointment has been broadly welcomed in Indonesia, but locally there have been mixed reactions, with some critics saying he is too aggressive.

U.S. and China battle for influence in Pacific island nations

Washington Post

The US is hoping to counter China's influence in the Pacific by boosting diplomatic and economic ties with island nations in the region. The Biden administration is seeking to build long-dormant relationships with countries including Tonga, Papua New Guinea, Micronesia and Palau, where China already has a strong presence. The US largely abandoned the region after the Cold War, but is now worried about Beijing's "increasingly problematic behaviour", including predatory financing, militarisation of the South China Sea, and investments that undermine other countries' sovereignty. However, previous US bursts of interest in the Pacific have quickly dissipated, leaving local leaders unsure whether this time will be different.

Hong Kong rejoins world’s top 5 places with highest expat pay and benefits

South China Morning Post

Hong Kong has reentered the top five locations with the highest expatriate pay and benefits packages, according to a survey by ECA International. Despite a 2% decrease in remuneration from 2021, the strength of the Hong Kong dollar helped the city rise three places to rank fifth. Expatriate pay packages in Hong Kong were estimated at over HK$2.18m ($279,064) per year in 2022, with salaries dropping by $2,400 and benefits by $1,600. Britain topped the global list, followed by Japan, India, and mainland China. Expatriate salaries also decreased in Japan, Korea, mainland China, and Taiwan, while Singapore saw an increase, placing it 16th.

Singaporeans feel joy, ‘peace of mind’ as visa-free China entry resumes

South China Morning Post

China has resumed its 15-day visa-free travel scheme for Singaporean citizens, ending months of frustration and long queues for entry approval. The visa-free scheme, which has been in place since 2003, was suspended during the Covid-19 pandemic and was not immediately reinstated when China reopened for travel earlier this year. Singaporeans have welcomed the news, particularly those with strong business links in China who had been forced to miss out on key meetings due to the high demand for visas and long queues for visa applications. The resumption of the scheme comes as high-level diplomatic contacts between the two countries have returned to pre-Covid levels.

‘May­hem’: Chi­na’s COVID rules raised flight safe­ty fears over­seas

Al Jazeera

Newly released emails obtained from the United States Federal Aviation Administration reveal that China's strict COVID rules for flights during the pandemic were flagged as an air safety risk by foreign officials. Multiple countries including the US, France, and the Netherlands raised concerns about China's "zero COVID" policy, strict quarantine measures, and disinfection procedures, stating that they posed serious flight safety concerns. The officials criticized the logic of the Chinese government's policy-making and called for urgent action to ensure the safety of international air crews.

China’s inaction on North Korea could backfire as US ramps up pressure: analysts

South China Morning Post

US Secretary of State Antony Blinken has called on China to help rein in North Korea's nuclear programme, warning that a lack of action could harm Beijing's security interests. Blinken said that China had a "unique influence" on North Korea and that the US hoped Beijing would use its leverage to gain cooperation from Pyongyang. He added that if China failed to intervene, the US would take action, which could include strengthening its defence alliance with South Korea and Japan. The US has recently sent an increasing number of strategic assets to the Korean peninsula.

Senators introduce bill to increase transparency of China in American development bank

The Hill

US Senators have introduced legislation to increase transparency on China's activity at the Inter-American Development Bank (IDB). The IDB Transparency Act would require a public report from the US Treasury every two years that lists all China-funded projects, how the IDB has benefited from Chinese entities, and all projects China is involved in. The second part of the bill would call on the US to use its influence at the IDB to curb China’s influence at the IDB, block any additional shares from being sold to the IDB, and vote against China-funded projects "that threaten national interests" and push for greater transparency.

Devil is in the detail: is China’s course correction too late for its economy?

South China Morning Post

China has indicated that it will introduce more proactive policies to support its economic recovery. The country's Communist Party stated that policymakers would "strengthen countercyclical support" in response to disappointing economic data in Q2 2021. The statement also highlighted a shift in policy towards property and local government debt, with a focus on boosting housing demand and developer financing. The government is also seeking to increase domestic demand through targeted consumption policies and support for the private sector. However, economists have questioned whether the signals will be enough to revive the private sector, which has been hit by regulatory crackdowns in recent years.

Alarm bells are ringing as China faces reality

The Age

The Chinese government is scrambling to inject momentum into its faltering economy after weak economic data from the second quarter. The Politburo has announced a series of measures to try and boost economic growth. The International Monetary Fund (IMF) has warned that China's anaemic recovery could slow down and have negative implications for global economic recovery. The Chinese authorities have realised that President Xi Jinping's economic policies may not have been successful in achieving their goals. For the past two years, there has been a crackdown on the private sector, particularly on Chinese tech companies, as the role of state-owned enterprises has been elevated. The private sector contributes about 60% of China's GDP and 80% of urban jobs. The property sector, which contributed about 30% of GDP, is also struggling. The authorities have promised to make the private sector "bigger, better, and stronger" and to resolve the debt-laden plight of local governments. It remains to be seen whether these measures will be effective in boosting economic growth and regaining trust in the private sector.

Fiji prime minister cancels China visit after ‘small accident’

The Sydney Morning Herald

Fiji's Prime Minister, Sitiveni Rabuka, was forced to cancel an official visit to China after sustaining a minor head injury. The visit was announced by the Chinese embassy in Fiji, which stated that Rabuka would attend the opening of the World University Games in Chengdu alongside Chinese President Xi Jinping. Rabuka said he had to cancel the visit after tripping on the stairs while looking at his phone, resulting in a head injury. The trip was part of China's push to build stronger relationships with Pacific Island nations.

Former RCMP officer charged in China foreign interference case granted bail

The Globe and Mail

William Majcher, a retired RCMP officer charged with conducting foreign interference on behalf of China, has been granted bail on the condition that he does not communicate with another former Mountie with whom he is alleged to have conspired. Majcher was arrested in Vancouver last week and charged with two counts under the Security of Information Act. The RCMP alleged that Majcher contributed to the Chinese government's efforts to identify and intimidate an individual outside the scope of Canadian law. Court documents allege that Majcher conspired with fellow former RCMP officer Kenneth Ingram Marsh, along with "other persons known and unknown." His bail conditions prohibit him from speaking with either Marsh or a man named Ross Gaffney, except through his lawyer for the purposes of preparing his defense. The charges against Majcher come amid a national debate on Chinese government interference in Canada, as the country's intelligence services face pressure to show they are addressing the issue after facing accusations of ignoring it.

China, India dams stoke water politics, upend lives of region's poor

Nikkei Asia

Climate change, damming, and construction projects are causing the Brahmaputra River in northeastern India to recede, impacting the livelihoods and diets of indigenous communities that rely on the river for their way of life. Rice, once a staple crop, is becoming increasingly difficult to grow due to changes in the river, forcing communities to change their diet and seek alternative sources of income. The river is also a source of tension between China, Bangladesh, and India, as damming and construction projects in China have the potential to trigger flash floods or create water scarcity downstream. India is responding to China's actions by bolstering its hydropower ecosystem in the Northeast, while Bangladesh is considering alternative options to manage its water resources, including accepting a loan from China to maintain water levels in the Teesta River during the dry season. However, these options come with their own risks and challenges, highlighting the need for regional cooperation and consensus in managing transboundary rivers.

A familiar face for the US as China's Wang returns as foreign minister

Reuters

China's decision to reappoint Wang Yi as foreign minister is unlikely to improve the tense U.S.-China relations, which have hit their lowest point in decades. Wang's return to the post is seen as a sign of Beijing's eagerness for stable relations with Washington ahead of President Xi Jinping's likely meetings with U.S. President Joe Biden later this year. However, analysts suggest that Wang's reappointment does not change the structural reasons for friction in the relationship and reflects the unpredictability and opacity of the Chinese system.

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