Chinese foreign buying binge gives authorities a headache
Wealth managers help rich Chinese skirt the central government's measures to curb capital outflows. They move cash overseas, creating many problems
Wealth managers like Huang Qing are tormenting the authorities in Beijing.
China’s central government has introduced a slew of measures to curb capital outflows in recent years as it seeks to prevent a sudden plunge in the yuan. They include cracking down on underground banks and sales of foreign insurance products that are more like investments, increasing scrutiny of overseas deals, and keeping tight restrictions on foreign currency purchases by individuals.
Yet Huang says he still finds legitimate ways to move his clients money overseas, creating a headache for China’s central bank as it seeks to keep the currency, which is also known as the renminbi, relatively stable.
“Over the past year, we have helped many clients allocate their wealth into US dollar assets, and the biggest obstacle we encountered was how to move renminbi overseas in a proper, legal manner,” Huang, Shanghai manager at CreditEase, which specializes in managing money for wealthy Chinese investors, recently told a forum in Shanghai.
CreditEase, which has been raising money from Chinese investors to buy property assets in the United States and Europe, sets an investment minimum threshold of US$150,000, but Beijing caps individual foreign currency purchases at US$50,000 a year.
“So, we had to use the US$50,000 quotas from all their family members, both old and young, to meet our investment threshold. This is what we have been beating our brains out to do for our clients over the past year,” said Huang.
It is paying off.
Since last April, CreditEase has successfully raised more than $300 million from Chinese investors for two dollar-denominated real estate funds, and is now launching a third.
We had to use the US$50,000 quotas from all their family members, both old and young, to meet our investment threshold. This is what we have been beating our brains out to do for our clients over the past year
It is this kind of activity that has increased demand for the dollar and pressured the Chinese currency. The yuan has declined to its weakest levels against the dollar in six years, touching 6.7869 last Friday.
During the first nine months of this year, individuals and companies made net foreign exchange purchases of US$243.4 billion, according to China’s forex regulator, though the pace is down from the US$465.9 billion recorded in 2015 when a plunge in Chinese stock markets unnerved investors.
Meanwhile, China’s foreign currency reserves have fallen to US$3.17 trillion at the end of September, from a US$3.99 trillion peak in June 2014, indicating that the Chinese government sold US dollars to prop up the yuan’s value.
Big Corporate Flows
It’s not only individuals who have engaged in moving their assets overseas.
China’s outward direct investment (ODI) surged 71% during the first six months of 2016 to US$121.4 billion, as Chinese companies bought assets overseas, according to the State Administration of Foreign Exchange (SAFE).
China’s outbound acquisition boom has been fueled by Beijing’s strategy to develop overseas markets by helping to finance infrastructure, easy access to liquidity in China, and the lower valuations of many overseas assets when compared with those in China, said Samson Lambert Lo, head of mergers and acquisitions for UBS in Asia.
Financial institutions have been using the yuan’s recent depreciation to push more people to increase their foreign exposure.
“Attack is the best form of defense,” Chinese wealth manager Jupai Holdings Ltd, which had US$3.90 billion under management at the end of June, said in a recent advertisement on the messaging app WeChat. “Allocating US dollar assets can effectively hedge against yuan depreciation risks,” the ad said.
The Chinese government has been seeking to dispel concerns there will be further yuan depreciation.
Wang Chunying, a spokeswoman for SAFE, told a news conference on October 21 that recent strong dollar purchases were driven by seasonal factors such as the summer tourism season.
The official media has also weighed in. “Yuan’s recent depreciation against the dollar was mainly the result of dollar strength … but it doesn’t mean yuan is entering a one-way deprecation path,” the overseas edition of the People’s Daily wrote on Oct 19.
The Communist Party’s mouthpiece added that the yuan will remain “basically stable” in the mid- to long-term.