No reprieve from Chinese capital controls

Industry observers expecting President Xi to signal an easing of restrictions have been left disappointed.

Addressing an audience of 2,300 delegates at the 19th National Congress’s opening ceremony in Beijing, Chinese president Xi Jinping spoke for an unexpectedly long three-plus-hours, outlining his government’s ideology for the next five years.

The week-long party congress, held every five years, gives the world a window into China’s broad policy focus instead of outlining specific initiatives. Even then, those hoping to hear in President Xi’s speech a message of potential capital controls easing, or any hint to that effect, were left disappointed.

Chinese regulators have limited overseas investments with stringent controls on the conversion of the yuan into foreign currencies over the past two years, with ultimate aim of preserving its foreign reserves.

All this year, PERE has had conversations with many Chinese investors and their cross-border partners who were pinning their hopes on the National Congress event to provide clarity on when the controls will be lifted. Reading into the Chinese leader’s speech, one observer told PERE this week that he expects the controls to continue for at least another 12 months.

This is because restrictions on outbound investments are no longer only about maintaining foreign reserves and a stable yuan. In fact, this September marked the first net increase in China’s foreign exchange reserves after 22 months, according to media reports. Increasingly, the controls are also being seen as a way to address the financial risk building up among overleveraged Chinese conglomerates. In his speech President Xi reiterated the government’s commitment to preventing financial risks, according to CBRE’s analysis of the keynote address.

With the added focus on financial risk, the rules themselves have also been formalized. For real estate this came to a head in August when further guidance on Chinese overseas investments was issued, outlining real estate as a “restricted sector” where irrational acquisitions would be stopped. PERE has heard anecdotal examples of how some major Chinese insurance companies are now reluctant to even invest their offshore balance sheet capital – which was increasingly as a way around the capital controls – into overseas property assets. This is because insurers do not want to be publicly seen going against government policy, one executive told PERE.

But, while China’s banking regulator has been reportedly directing local banks to scrutinize lending to Dalian Wanda Group, Anbang Insurance and HNA among others for their overseas projects, groups are being encouraged to go overseas when it dovetails with China’s One Belt, One Road initiative. Earlier this week, the state media Xinhua News Agency reportedly praised HNA Group’s $1 billion purchase of Singapore’s CWT because of its alignment with the ambitious infrastructure scheme.

As such, the composition of Chinese outbound investors is changing, with government-backed entities becoming the biggest international investors. CBRE estimates that Chinese SWFs invested $13.2 billion in the first half of 2017, compared with $3.4 billion in the second half of 2016. By contrast, overseas investments by insurance companies dropped to $4 billion in H1 2017 versus $7.2 billion in H2 2016.

So even while the enforcement of capital controls continues, and many investors are forced to sit on the sidelines, China overall remains an active investor in global property markets.