Jan302017

Chinese government decree prohibits investment in foreign real estate

State Administration of Foreign Exchange requires all buyers of foreign exchange to sign a pledge that they won’t use their $50,000 quotas for offshore property investment.

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It’s really happening. The outflow of capital from China prompted the decree to stop Chinese Nationals from investing money in offshore real estate.

In several posts I describe the twin threats to the US housing market: rising rates, and reversal of flow of foreign capital. Rising mortgage interest rates will affect the entire housing market, but a reversal of flow of foreign capital will most strongly impact coastal housing markets. In particular, if the influx of Chinese capital were to stop coming in and actually reverse, Coastal California, and especially Irvine, would be most at risk.

In 2014 in Chinese government policy change kills Coastal California housing market I wrote:

this is hot money escaping a collapsing market, subject to the policy whims of an unpredictable totalitarian government. Chinese capital is an unstable source of investment, and it could reverse course in a moment based on policy changes in China.

Most California real estate market bulls and enthusiasts blithely assume Chinese investors are a permanent fixture of the real estate market. The United States is a safe haven for Chinese investors, many of whom recognize their own market is a massive bubble. However, these investors must wire money out of a Chinese bank to an overseas location, and the Chinese government could prevent these transfers if it so desired.

The government hasn’t gone nuclear on overseas investors yet. They could scrutinize every wire transfer leaving the country if they wanted to. Instead, they chose to issue a decree telling investors they can’t spend their yearly allowance of $50,000 on real estate.

Of course, it’s very difficult to know exactly what this money is ultimately invested in once it goes overseas, but by issuing this decree, for those unlucky saps who get caught, the consequences could be dire. Fear of what the government could do will deter many potential investors from buying their little piece of California.

China’s Army of Global Homebuyers Is Suddenly Short on Cash

Bloomberg News, January 26, 2017,

China’s escalating crackdown on capital outflows is sending shudders through property markets around the world.

In London, Chinese citizens who clamored to purchase flats at the city’s tallest apartment tower three months ago are now struggling to transfer their down payments. In Silicon Valley, Keller Williams Realty says inquiries from China have slumped since the start of the year. And in Sydney, developers are facing “big problems” as Chinese buyers pull back, according to consultancy firm Basis Point.

“Everything changed’’ as it became more difficult to send money offshore, said Coco Tan, a broker associate at Keller Williams in Cupertino, California.

That doesn’t sound promising. If local real estate agents already notice a difference, then the problem is for real.

Less than a month after China announced fresh curbs on overseas payments, anecdotal reports from realtors, homeowners and developers suggest the restrictions are already weighing on the world’s biggest real estate buying spree. While no one expects Chinese demand to disappear anytime soon, the clampdown is deterring first-time buyers who lack offshore assets and the expertise to skirt tighter capital controls.

The big fish won’t be hurt by this, but the families and individuals of modest means — the profile of a typical foreign homebuyer in California — the little guys will stop buying.

“If it’s too difficult, I’m out,’’ said Mr. Zheng, 66, a retired civil servant in Shanghai who declined to give his first name to avoid attracting regulatory scrutiny. He may abandon a 2.4 million yuan ($348,903) home purchase in western Melbourne, even after shelling out a 300,000 yuan deposit last August. He’s due to make another big payment next month.

Many countries are weary of the inflow of Chinese buyers. Vancouver, British Columbia, Canada, recently instituted a huge tax to discourage foreign investment. The problem has long been recognized in Australia, where Mr. Zheng was planning to invest, and similar taxes may be forthcoming.

The change spooking Zheng and his compatriots came in a statement from the State Administration of Foreign Exchange on Dec. 31, hours before the reset of Chinese citizens’ annual foreign currency quotas. Among other requirements, SAFE said all buyers of foreign exchange must now sign a pledge that they won’t use their $50,000 quotas for offshore property investment. Violators will be added to a government watch list, denied access to foreign currency for three years and subjected to money-laundering investigations, SAFE said.

How much more explicit can they be? If you were a citizen of China, would you want to be on a Chinese government watchlist?

“A lot of clients are worried and have started hesitating,’’ said Wang Ning, vice president of the international department at Fang Holdings Ltd., China’s most popular property website. While the regulator has long banned the use of foreign currency for real estate, its call for additional documentation was seen as a signal that the government is serious about cracking down. …

Many investors will probably carry on with business as usual and see if the government is serious. Given the severity of their capital outflows, the government may be forced to be more restrictive.

While Beijing’s policy tweak may appear symbolic on the surface, it’s likely to cause a “notable reduction” in Chinese purchases of Australian property …. Australia approved A$24 billion ($18.1 billion) of real estate investments from China in the fiscal year ended June 2015, the most recent figures available, making the country by far the biggest source of foreign buyers. …

Even with tightened capital controls, brokers say motivated Chinese investors can usually find ways around them.

Everyone selling real estate in Coastal California certainly hopes so.

Sellers here don’t want to suffer the fate of Vancouver.

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