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Attitudes to Chinese money

There is a raft of cases around the world involving money seemingly of Chinese origin. Here's a Q&A on the issue.

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Q. Is there really a massive growth in money coming out of China?

A. The answer requires context. Only a little more than a decade ago, China was more or less a closed economy. Its currency was, to all intents and purposes, not convertible. It had to conduct international trade in hard currency i.e. foreign currency which, then, essentially meant the USD. Much of that money never went into China and was held by Chinese interests (which meant government-linked companies) offshore and used in international trade. It was a big deal when HSBC and Standard Chartered, who have very long histories in China (indeed, HSBC stands for Hong Kong and Shanghai Banking Corporation) and were given licences to conduct trade in rimimbi (aka the yuan). As China has liberalised internally, there have been many instances of substantial personal wealth, some of it dubious.

As China opened up its trade and financial dealings, there was a period where a significant number of government officials (which, to all intents and purposes had, until that time, been everyone in a management position because almost all enterprises were state owned) were discovered to have greatly enriched themselves at the expense of what was, by definition, the public purse. During that period, a substantial amount of proceeds of corruption and embezzlement were expatriated. This was clear capital flight. By no means all of those sending money abroad escaped to enjoy it. Private enterprise has flourished in China in the past decade and some people have accumulated extraordinary wealth in a variety of sectors. Periodically, news comes out that some of them have acted in a manner that the State deems inappropriate or criminal. Many have expatriated substantial sums. But that is not the only money coming out of China. China is following the USA's lead of building a foreign empire with its own money. It is this which, alongside China's expansionist actions in the Pacific, is causing the USA's hissy fit with China.

The amounts of money flowing into infrastructure loans in developing countries is vast but that is not the only way that the empire is being built: China is also entering into joint ventures with both developing and developed countries with a mix of money, labour and equipment. Fifteen years ago, it was unusual to see light rail rolling stock that were not built by Seimens or Bombadier. Now, across Asia, Chinese rolling stock is almost the norm.

So the answer is yes, there is a dramatic increase in money flowing out of China but that increase is against a base of close to nil only a decade and a half ago.

Q. Is this capital flight or flight capital?

A. While China still exercises control over citizens leaving the country, it is nowhere near as strict as it was, again, about 15 years ago. True, exit visas to visit Macau are subject to occasional restrictions but in general so long as certain formalities are followed, the restrictions are not much more onerous than on those wanting to make a trip out of The Philippines, for example. Even so, China expects, in most cases, its citizens to go back and not to run away. That does not stop the rich putting money overseas in case they want to follow it (that's flight capital). Far more common, reports seem to suggest, is that of capital flight - putting money overseas where it is hoped the Chinese authorities won't find it or because it is felt that there are better or more stable investment opportunities.

It is this that has led to, in some countries, huge amounts of Chinese money pouring into property markets. Melbourne, for example, has seen its property market in some districts heavily distorted by Chinese electing to live near each other where there are schools, restaurants and supermarkets that cater to their cultural needs. In Istanbul airport there is a booth set up to welcome Chinese property buyers. But sometimes there is a backlash: when Malaysia kicked out former Prime Minister Najib, one of the first things the incoming government, led by Mahathir, did was to restrain a large development that had been approved with the primary intention of selling units to mainland Chinese investors, creating what would have been something of a ghetto close to the border with SIngapore. In Portugal, there were at one time the cheapest golden passports in the developed world: considerable concern was expressed at the large number of Chinese taking up the offer and, once more, distorting the property market.

Q. That sounds like there's no end to it.

A. These things are cyclical. Earlier this year, the Chinese government became concerned at the amount of money flowing out of the country for overseas investment by individuals. In many places, the runaway train that certain property markets had become hit the buffers. Melbourne saw prices start to fall (they have, in recent weeks, begun a significant bounce-back) and a CNBC report in July this year said that foreign purchases in the USA had fallen by 36% over a one year period as Chinese money dried up. But these things have a way of working themselves out as markets react then take account of shocks.

Q. Does this mean that there is no Chinese money chasing residential properties around the world?

A. Far from it. FIrst, there is the money that's already outside China. Secondly, reports indicate that there is an increasing outflow of money from Hong Kong in the light of the riots and social, political and commercial uncertainty there. A very significant proportion of that is understood to be Chinese money that had been parked in Hong Kong. However, it may not be readily identifiable as money of Chinese origin. The one country, two systems approach which has left Hong Kong financially independent has continued the porous financial border between Hong Kong and Canton/Guandong that existed prior to 1997. With businesses straddling the border, it is almost artificial to talk of Chinese and Hong Kong originated money in many cases. Many Hong Kongers are very wealthy on paper but have very little liquidity because property prices are very high. It is not unreasonable to assume that this increases the proportion of Chinese money coming out of Hong Kong. The condition of the HK property market does not augur well for the short term. As HK has become a worrisome place, there are rumours of several countries courting those in a position to escape with money in the bank. Singapore is said to be a favourite destination but it's far too expensive for most of those already tied into an HK flat. Indonesia is having one of its periodic anti-Chinese times. Also Indonesia, along with Thailand, has considerable restrictions on foreign ownership of property. Malaysia, on the other hand, has recently been trying to find ways to deal with a huge overhand of unsold residential properties around the country. A new scheme will allow foreigners to buy flats below the usual financial threshold and there are reports that this is encouraging HK residents to consider a second home in Malaysia where prices are a fraction of those in HK.

Q. No need to worry, then?

A. That's a bold suggestion. No, there's plenty of reason to worry. There's a lot of money of Chinese origin already hiding in the property sectors in the USA, particularly in California, and in Australia. Increasing scrutiny of those purchases has lead to an increase in money laundering investigations and, in Australia, a number of properties have been seized because of alleged links to criminal finance. From a financial crime risk perspective, that means that all of those who have been involved in the purchase of expensive properties by overseas buyers, including but hot only the Chinese, should review their records. This is crossfire that could cause significant harm to businesses involved in the transactions.

But there is something else. The Chinese government, directly or through government-linked companies or investment vehicles, has build up a large portfolio of significant commercial buildings. If for some reason it was decided that all of those should be sold en masse, there could be huge destabilisation of, for example, the commercial property market in New York.

Q, Is there any good news?

A. When it comes to international money flows there's always good news and bad news. It's new money coming into economies and therefore artificially inflating the good news for the incumbent government. But it's bad news for property buyers who see prices rise. And for banks, it's good (locals have to borrow more money so the bank earns more) and it's bad. The bad is because as money starts to flow out of Hong Kong in ever more sizeable amounts, undertaking any form of due diligence on that money is likely to show that a significant slug of it is coming from China via Hong Kong. This is going to cause a due diligence nightmare and those who decide to wing it may well find themselves subject to increased scrutiny especially in countries where international transfers are automatically reported to the Central Bank and/or the FIU.

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