Since the beginning of 2017, that People’s Bank of China (PBOC) has tightened requirements for cash and overseas transactions has become a hot topic among Chinese people in Australia.
On 28 November 2016, the State Administration of Foreign Exchange (SAFE) issued new regulations, that SAFE has
started vetting transfers abroad worth USD 5 million or more under the capital account, for transactions such as portfolio or foreign direct investment, including those with prior approval. Previously, only foreign exchange transfer worth USD 50 million or more needed to be reported to SAFE. This new rule is more related to those large state-owned enterprises. However, on 30 December 2016, PBOC issued the amend Administrative Measures on Reporting of Large-Sum Transactions and Suspicious Transactions by Financial Institutions (the Amended Measures), which will take affect on 1st July 2017. It has generated plenty of buzz, as the Amended Measures will have a broad impact
on the general public.
Under the new policy, the annual quota of USD 50,000 for foreign exchange purchase by individuals has remained unchanged; however, buying foreign currency onshore becomes more difficult for Chinese residents. Starting from 1 January 2017, everyone has to fill out an application form for any purchase of foreign currency, regardless of the way you do it. The new application form includes more detailed information. It clearly states that Chinese individuals are not allowed to purchase foreign currency for the purposes of buying overseas properties, investing in securities, buying life insurance or insurance with investment returns, etc. Moreover, all individuals are required to provide the purposes of purchasing foreign currency and the estimated time frame for using the amount of foreign currency purchased. If the real usage is different from what has been reported on the application form, you have to fill out a new form reflecting the real situation. It is not allowed to report any false information, or provide any fake supporting documents. Any individual must not purchase foreign currency on behalf of other people, nor circumvent the annual quota of foreign exchange purchase in a way such as splitting. Individual who is involved in any illegal activities such as providing false declarations, using false pretenses to buy foreign currency, committing foreign exchange fraud, illegally using or transferring foreign currencies, etc. will be put on a “watch list”. Those who are on the “watch list” will not have any foreign exchange quota in the current year and two following years; and meanwhile, an anti-money laundering investigation will be carried out. Those people are likely to be charged a monetary penalty for 30% of the foreign currency amount to the maximum of 50,000 Yuan. Those who use current accounts to purchase foreign currency for overseas properties or investments under capital account could be transferred to the judicial organs in serious cases. Therefore, it is not as easy as before to transfer your money from China to Australia.
It is obvious that China is tightening controls from limiting capital inflows to outflows, which is a warning that China is now facing the capital outflows problem. However, what is causing those capital outflows from China?
First of all, since the reform and opening-up, Chinese people have gradually developed a global vision. Global assets allocation has drawn more and more people’s attention. Many people have started to consider investments in foreign countries. According to some statistics, China’s foreign investment reached a record USD 53.09 billion within the first 9 months in 2016, more than the total investment of the previous year. As a result, China has overtaken the US to become the largest source of proposed foreign investment in the world. In the meanwhile, the growth of Chinese investment in Australia is much stronger than other countries. The level of Chinese investment in Australia has
grown significantly. Chinese overseas direct investment in Australia only accounted for 8.48% of the total foreign investment in Australia in the financial year 2010-2011; while during FY 2014-2015, this figure jumped to 23.93%. In FY 2009-2010, China was the third biggest overseas investor, only behind the US and UK. Only four years later,
in FY 2013-2014, China became Australia’s biggest foreign investor. It is worth noting that just the first 11 months in 2016, the total Chinese Yuan outflows through offshore payments had reached 1.8 trillion Yuan; in the same time, offshore Chinese Yuan deposit had decreased by 255.7 billion Yuan. This indicates that some Chinese enterprises are
taking advantage of the offshore RMB market to avoid foreign exchange regulations.
Secondly, the house prices in China have increased significantly over the past decade, which makes overseas real properties become attractive to many Chinese buyers. In China, some people need to apply for mortgage to make the down payment on a house. Some people even fake divorce in order to buy a house in leading cities in China. On the other side, as more and more Chinese people have been to overseas for travel and study, and also because there are more and more Chinese migrants in foreign countries, more Chinese people have interest in buying properties overseas. Take Australia for example, FIRB (Foreign Investment Review Board) 2009-2010 Annual Report shows Chinese total investment volume in Australia during that financial year is AUD 16.282 billion; while the same figure in 2014-2015 reached AUD 46.563 billion, an increase of 186%. During the past two years, Chinese investment in Australian real estate has grown exponentially. If we look at the data of the past five years, the compound annual growth rate is nearly 60%! Over the past five years, Chinese people have purchased Australian real property for the total value of AUD 50.9 billion (equals to RMB 252.1 billion), among which 72% of the investment (which is RMB 181.8 billion) happened during the two years from 1 July 2013 to 30 June 2015. Moreover, Credit Suisse expects Chinese buyers will purchase 20% of the new homes in Australia by 2020.
Thirdly, many uncertainties around world including Donald Trump’s win, Brexit, etc. have increased people’s concern about Chinese Yuan depreciation. Yuan has continued depreciating after its inclusion in the SDR (Special Drawing Right) basket, while the US dollars remain strong. Both licit and illicit capital outflows have caused more pressure to Yuan’s depreciation. Over the period of October and November 2016, Yuan against the US dollar was down for 3%. In October 2016, China’s foreign exchange reserves fell to $3.1206 trillion, a nearly six-year low since March 2011. However, China still has the largest foreign exchange reserves in the world.
Fourthly, increasing concerns about China’s smog crisis, food safety and capital security have made more Chinese people choose to study abroad or even migrate to other countries. As a result, many Chinese families start to have foreign currency deposit.
Given that some large enterprises are taking advantage of cross-border uses of Chinese Yuan to enable capital outflows, it is fairly reasonable for China Central Bank to make efforts to tighten capital controls. The new capital controls can help break the cycle of Yuan’s further depreciation and more capital outflows. It is noted that the new rules will not affect normal activities such as overseas travel, study, medical treatment, buying and selling B stocks, and business investment through the channels such as QDII, because such business investments will not make a difference to China’s foreign exchange reserves. While if you purchase foreign currency to buy stocks or houses overseas, it becomes a different story. Considering the difficulties financial institutions have to formulate their own transaction monitoring standards and update relevant systems, China central bank has given them about six months’ time to make the transition. The changes will not take effect until 1 July 2017.
Then what impact will the new rules have for Australia?
At the beginning of 2017, the dollar/Yuan had almost reached 7. But soon after, Yuan quickly climbed to the highest point over a few months. In this case, the Australian dollar/Yuan should have dropped as well. However, that is not what happened.
The US dollar had been very strong in the last two months in 2016, which weakened most other currencies. Compared to Chinese Yuan, Australian dollar has higher volatility. It plunged a great deal after Trump wins, which has weakened more than Chinese Yuan. The AUD/Yuan rate once fell below 5.00. Experts predict that Australian dollar is likely to continue dropping in the new year, as the result of the slowdown of the Chinese investments in Australian real estate market together with the Trump policies.
Federal government data shows almost 50,000 Chinese students started courses in Australian universities, colleges and schools during the first three months in 2016, up 23% on the previous year. On 30 April 2016, the National Strategy for International Education 2025 was launched, which aims to create more opportunities for Australian international education. Australia’s onshore international education sector is forecast to grow from 650,000 enrolments today to 940,000 by 2025.
Moreover, based on the data from the Australian Bureau of Statistics (ABS), there are over 8 million visitor arrivals for year ending November 2016, an increase of 11.1% relative to the previous year, among which more than 1 million are Chinese visitors.
Real Estate Market
In fact, the rules have not really changed. Under the old rules, there were also restrictions on individuals purchasing foreign currency for overseas investments such as buying houses, securities, insurances, etc. But in the good old days, there was no such strict supervision. As long as you do not mention the real use of the foreign currency purchased is to buy overseas houses, you would be fine. While under the new rules, you can no longer hide it. This would inevitably have a great impact on Chinese buyers in the Australian property market.
A research conducted by Credit Suisse indicates that Australian real property market growth rate is the second among 23 countries around the world. The property price to income ratio in Australia has reached its new high since 1985. Over the past four years, Australian property prices have gone up by 23%. According to the data of the last quarter in 2016, Melbourne property prices grew faster than those of Sydney, becoming the fastest growing city in Australia. The house prices in Australia are expected to continue increasing in 2017. Mr Louis Christopher, from leading analyst SQM Research, predicated wealthy owner-occupier will reignite the Sydney and Melbourne housing markets next year sending the two markets back to double-digit growth. To some extent, the new Chinese foreign exchange regulations may have a positive impact on the Australian real property market stability.
All in all, a few changes happened in 2016. There is likely to be more changes in 2017, where both China and Australia will be involved. Will you be the one that celebrates or feels desperate?