What's Next for China's Capital Controls

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Game-Changing Government Policies & Drivers

By William Hillis

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William Hillis

Broker & Research Editor, Realogics Sotheby's International Realty

"China's policy on foreign exchange and overseas transactions, like so much about China itself, is complex and multifaceted, the product of multiple aims and concerns." 

 

The 2.25-percent income tax unanimously enacted by the Last year, China’s State Administration of Foreign Exchange (SAFE) was prompted by a weakening yuan to “introduce” capital controls. Actually, what they did effective 31 December 2016 was to resume enforcement of existing prohibitions on forex transactions for the stated purpose of buying property overseas, and to prohibit the bundling of forex transactions for that purpose through the practice of mayi banjia (蚂蚁搬, or “ants moving”). A recent twist has been the emergence of cryptocurrencies like Bitcoin for dodging the controls. This may well have been a factor in China’s September 2017 closure of their domestic Bitcoin exchanges.

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China’s policy on foreign exchange and overseas transactions, like so much about China itself, is complex and multifaceted, the product of multiple aims and concerns. Most commonly stated is the need to maintain the value of the renminbi. There is also the essential political matter of social cohesion to be minded, which has resulted in President Xi’s anticorruption campaign. Inhibiting conversions of ill-gotten gains into overseas property is certainly an objective of this campaign.

There is also the wider aim of channeling investment into state priorities—China is still a planned economy with an industrial policy, as explained by Andrew Polk of Trivium/China:

First, China is not shutting down deals altogether - they are just trying to rein in what they see as "irrational investment" ... Secondly, [a]uthorities are zeroing in on areas like real estate, hotels, luxury, entertainment and sports teams for greater restrictions. They deem such deals as having no "national benefit." 

In August, SAFE declared that “China's economy has been performing well,” and that the stable renminbi exchange rate had made “domestic market participants more sensible in foreign-related transactions.” Yet be cautious. Such remarks by Chinese officials are characteristically opaque and need not portend change.

Impact: China will continue to restrict investment in overseas properties for the duration of the Xi Presidency, although Chinese investors in Washington state and elsewhere will continue to find workarounds.