WeChat Image_20170505113131Written by Elizabeth Winkelman

When China depreciated its currency in 2015, it’s wealthy classes reacted with a steady stream of outbound capital, rocking financial markets around the world. China’s well-heeled class found ways to get around the financial regulations which have become stricter in monitoring capital flows abroad. The hundreds of billions leaving China are largely driven by an expectation that the yuan will continue to decline.

Chinese foreign currency reserves have also slid to a six-year low of $6.3 trillion, leading some to speculate that the continued drop in Chinese reserves could lead to a further devaluation of the renminbi.

The People’s Bank of China (POBC) has been battling against the tide of shifting foreign exchange for a number of years. China’s foreign exchange reserves are now below US$3 trillion. Globally, according to Goldman Sachs estimates, Chinese residents moved US$108 billion in the first quarter of 2016, and another US$372 billion was invested in foreign assets in the second quarter outside China.

The buying up of Australia’s infrastructure, agriculture and property has been a recurring theme of despair in mainstream media, where the blame is pointed squarely on China for upping property prices.   Canada is another country that is often referred to as a destination that has become unlivable due to Chinese migration and investment in real estate.  Cities such as Vancouver and Sydney have seen a huge rise in foreign investment coupled with crippling unaffordability for most.  Yet Chinese investors operate in a global financial environment, they place their assets in what they perceive to be safer, more profitable investment environments where investment-friendly migration programs are fuelling demand.

SIGNIFICANT INVESTOR VISA OPPORTUNITY IN AUSTRALIA

Outbound investment from China has become an emotive issue, and is felt particularly in Australia, where Chinese migration, tourism and investment have become increasingly subject to public scrutiny.   Last year, the Australian federal government investigated over A$3.3 billion financial transfers to Australia. China’s wealthy are keen to move their funds offshore and Australia’s Significant Investor Visa (SIV) has been an attractive incentive for some, however the new SIV framework led to a quick slump in application numbers.  The Australian government tried to re-address systemic issues with the Significant Investor Visa, to better reflect where monies were needed in Australia.

SIV INVESTMENT DRIVERS

Before the changes in 2015, the Australian federal government’s $5 million Significant Investor Visa (SIV) was a direct way for China’s jet-set to acquire Australian permanent residency.  90% of all applications were from Chinese applicants. The SIV program attracted A$4.3 billion in investment, equalling 858 residency visas with an additional pending 1,239 applications.  Altogether, there were fifty SIV applications a month.  The SIV framework was initially established in light of the investment policies of many other countries who were encouraging investment from wealthy Chinese.

According to Austrade: “The Government decided that the bar was set too low in the previous program – SIV investment was mostly going into passive investments like government bonds and into residential real estate schemes – areas that already attract large capital flows. While there may be an initial reduction in the number of applications, the Government wants to see a program which delivers a better result in terms of investment into the commercialisation of Australian ideas, research and development which is critical to future economic growth”.

“DODGY MONEY”? 

The Productivity Commission report into the Significant Investor back in 2015 recommended the SIV be scrapped. The Commission report found it was too easy to “rort” the system, that money laundering was unpreventable and that “loan back” arrangements were all too common. “Loan back” is when the SIV applicant invests in qualifying assets then borrows against those same assets to invest how they wish, often outside Australia. With no real benefits to the Australian economy, the report suggested it was only the visa holders themselves and their fund managers selling the assets who gained from the SIV framework.

As there were no age limits or English language requirements to gain either visa, the Productivity Commission questioned whether there were any potential economic benefits to the visa program. Following the report, the SIV was dramatically altered.   The revised rules required that applicants invest in areas where funding was needed, such as venture capital and in start-ups. SIV applicants must now invest A$500,000 into an approved or qualifying venture fund.

With the introduction of higher risk venture investment rules for the Significant Investor Visa, applications suddenly slumped as Chinese investors, preferring investing in property development projects were faced with more requirements. Under the new SIV scheme, applications must fulfil investments in other categories. Ten per cent of the $5 million must be allocated to approved capital venture funds, while thirty per cent must go to listed “emerging” companies, then the remaining amount can be invested in corporate and property projects, real estate investment funds, infrastructure trusts, corporate bonds and deferred annuities. Only 10 per cent of the remaining $3 million can be invested in property funds, under the new rules. SIV applicants then must maintain their investments for four years, in order to qualify under the new SIV framework for Australian permanent residency.

According to Stacey Martin, SIV consultant from Expat Advisors Community Professional Network despite the initial slump, there have been 136 approved SIV applications under the new framework: “This means there will be $68M invested during the 12 months following into venture capital and growth private equity in Australia, plus $204M into Australian small company shares and $408M in managed funds investing in corporate bonds, commercial property and shares”.

The Significant Investor Visa (SIV) and the Premium Investor Visa (PIV), which came into effect in July 2015, are separate application frameworks. The PIV is by ‘invitation only’ and must be nominated by Austrade, where local State governments can make referrals on behalf of PIV applicants who match their criteria such as their entrepreneurial skill, benefit to Australia and personal character. PIV applicants must also invest a minimum of $15 million into complying investments and/or donations. PIV applicants can also invest all or a portion of their investment as a donation to an Australian philanthropic organisation, although this may not have gained much traction with visa applicants thus far.

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WHY CHINESE MOVE THEIR CASH OVERSEAS

There is a need for the growing wealthy classes in China to move their funds abroad.   Yet inside China, the market for wealth management products (WMP) tripled to US$3.8 trillion in three years to 2016. David Chin, Managing Director of Basis Point, a business intelligence company focusing on the financial markets of Asia and Australia, says that “China’s risk to the world… is not its economy but its financial markets”.

Chin explains: “There is $9 to $12 trillion invested in Chinese WMPs (wealth management products) and other under-regulated investment products distributed by banks, asset management firms, trusts, brokerages and private funds. (The products are not in the bank balance sheets.). Wealth management products are a key part of China’s shadow banking system, where investments are made off banks’ balance sheets and Chinese citizens have poured more than US$9 trillion into these products.  There seems to be a consensus among wealth management product investors in China that the government will bail them out if the investments go haywire. In response, Chinese regulators sought to make clear that there were no State guarantees on any product, and the People’s Bank of China began a new regulation that banks account for their off-balance sheet WPMs, allowing them to better assess risks.

Official figures from China’s State Administration of Foreign Exchange show that China’s foreign currency reserves fell another US$13 billion at the start of 2017, putting China’s reserves in a precarious position. It is the search for better yield investments and the need to re-allocate funds out of an uncertain environment, coupled with the fact that China now has more billionaires than in the US, in fact, 568 of them, according to the Hurun Report. Yet this number does not take into account the many Chinese billionaires with foreign citizenship, as the number could be significantly higher.  Chinese residents naturally want to protect their wealth and that is why gaining foreign assets accounts for the bulk of financial outflow from China.

Hurun’s latest China Wealth list 2016 shows Wang Jian Lin, owner of Vanke Property at top place with US$34400 million, followed by Ma Yun at Alibaba with US$22700 million, but this is only a calculation of publicly-listed companies, and a estimate at best.   Globally, top billionaire cities are all found in the Chinese cities of Hong Kong, Shenzhen, Shanghai and Beijing.

As the yuan depreciates, China’s fiscal policy has been to contain money, particularly foreign currency for both individuals and companies back in the Mainland. Chinese bank regulations have enforced much stricter controls over foreign currency and money moving outside of China. For the past year, Chinese government restrictions for Chinese bank accounts were limited to taking US$50,000 out or buying overseas assets annually, per person. Thus, individuals will ask family members and friends to transfer US$50,000 at a time out of China to purchase properties. This has become a very common method for transferring funds to purchase property overseas. In Chinese it is referred to as “ants moving their house” or 蚂蚁搬家,倾巢出动!

Other underground transfer methods include buying homes through incorporated companies, using private black market banks where an individual can transfer their renminbi then take out the same value in foreign currency. Then there are those who create fake invoices to overstate the value of imports, thus hiding the real value of the import and moving the assets to offshore bank accounts. Much of that money is transferred to Hong Kong, some of it disguising asset flows. Imports of gold and precious metals to China from Hong Kong became suspiciously high around the same time as tighter foreign asset flow in China, prompting to speculation of fake transfers so as to move funds outside of the country. In July of 2015, gold imports from Hong Kong to China grew 143 percent and monthly imports were growing exponentially: 144 per cent and 243 percent, just in May and June of 2015 alone. Precious metals, with their high price quotations were low-weight and high-value were an ideal fake transaction – for a time.

SPHERES OF INFLUENCE

Migration agencies in China hold a great deal of sway over the decisions of future investor-migrants to Australia. Due to the language barrier, Chinese migrants to Australia cannot rely on Australian migration agencies as they cannot communicate with them directly.

 Stacey Martin says: “Most Chinese looking to migrate to Australia are understandably not familiar with Australia’s highly regulated financial and legal systems. With the power of guanxi, many prefer to trust those they know who many not have the necessary skills than to seek out experts they don’t yet know.”.