China's structural reforms will slow the pace of its debt build-up but will not be enough to arrest it, and another credit rating cut for the country is possible down the road unless it gets its ballooning credit in check, officials at Moody's said.(Reuters Photo/Kim Kyung-Hoon)
China's Overseas Property Purchases, Investments Slump as Capital Controls Bite
BY :YAWEN CHEN AND ELIAS GLENN
FEBRUARY 17, 2017
Beijing. Property investment by Chinese companies plunged in January as authorities tightened restrictions on capital outflows to support the ailing yuan currency and ease pressure on the country's foreign exchange reserves.
Investment by Chinese firms in offshore properties — which has helped fuel sharp and often contentious home price rises from London to Vancouver — tumbled 84.3 percent in January from a year earlier, the commerce ministry said on Thursday (16/02), without giving the amount invested.
That helped drag China's outbound direct investment, or ODI, down 35.7 percent in January to 53.27 billion yuan ($7.77 billion), the weakest in 16 months. The data does not include investments by companies in the financial sector.
China tightened its grip on moving funds out of the country late last year as the yuan plumbed more than eight-year lows.
While Beijing says it supports legitimate overseas investment, regulators have warned they would pay close attention to "irrational" investment in property, entertainment, sports and other sectors.
The move has disrupted Chinese plans to buy global assets ranging from Italian soccer club AC Milan to a Hollywood studio.
Those involved in helping Chinese invest overseas say it is now much tougher to get money out of the country.
"All outbound property deals are heavily affected by the capital restrictions. We have changed our funding channels, to target investors who already have funds offshore," an investment manager at China Orient Summit Capital said, which operates property investment funds in Shanghai.
DTZ/Cushman & Wakefield expects the deal volume of China's outbound property investment to drop slightly in 2017 under the clampdown. It estimates Chinese investment in overseas commercial real estate alone reached a record $38.3 billion last year.
There are also signs that overseas property purchases by individual Chinese, which aren't included in ODI data, have also been impacted by capital controls.
"There has been a perceptible reduction in activity from Chinese buyers on the ground in [London's] Mayfair, but they have by no means disappeared," Tim Macpherson, head of London Residential at Carter Jonas, said ahead of Thursday's data.
In Vancouver, Canada's most expensive real estate market and a region popular with Chinese buyers, property sales plunged 39.5 percent in January from a year earlier, data from the Real Estate Board of Greater Vancouver showed.
Measures recently announced by Beijing include vetting transfers abroad of $5 million or more and increasing scrutiny on outbound corporate investments.
Chinese banks on Jan. 1 also began requiring customers purchasing foreign currency to specify how they will use the funds, while reminding them individuals are not allowed to invest in overseas property under the capital account.
Efforts to prop up the yuan currency led China's foreign exchange reserves to fall below the $3 trillion level in January for the first time in nearly six years. But the drop was less than expected, suggesting tighter controls are slowing capital flight.
"Risk warnings from regulators and short-term controls have achieved results," the State Administration of Foreign Exchange, or SAFE, said in a statement to Reuters last week.
Investment in the culture, sports, and entertainment industries fell 93.3 percent in January. But, showing authorities were indeed being more selective, investment in overseas manufacturing and information technology sectors rose 79.4 percent and 33.1 percent, respectively.
"Although ODI dropped in January, the overall structure is improving," ministry of commerce spokesman Sun Jiwen said.
Too Early to Tell
Agents advising Chinese buyers on overseas property say it remains to be seen how capital controls will impact sales in the long term, as many buyers have already moved money abroad.
"The so-called 'mainlanders' who bought these high-value properties have had their money transferred to Hong Kong one to two years ago," Vincent Cheung said, the executive director of valuation and advisory at Colliers International.
Large companies such as Fosun, China's largest private conglomerate, say they already have sufficient funds overseas.
And Chinese interest in overseas property remains strong, according to Jan Kot, the head of China at property portal Juwai.com, which saw a more than 90 percent jump in inquiries on its website in January from a year earlier.
The yuan is widely expected to fall further this year, according to a Reuters poll, while local Chinese governments are tightening restrictions to cool heated property prices at home.
Economists expect more forceful policing of capital controls this year, though China's financial system is notoriously porous, with speculators quickly able to find new ways to get money out.
"It will probably stem outflows for a few months but over the long-term with the Chinese economic fundamentals still poor there is still a great desire for people to try to bring their money out," Chua Han Teng said, a senior analyst at Fitch's BMI Research in Singapore.
"In the long term, it seems like outflows are likely to persist."