China is cracking down on its citizens skirting around the country’s tight capital controls to get money out of the country to buy residential property overseas in a move that analysts say will further slow demand in the Australia market.

China’s foreign exchange regulator has reported an increase in the number of forex violations this year, including the number of foreign currency transfer irregularities for individuals trying to get money out of the country to buy property overseas. Economists said this was further evidence that Beijing was more closely monitoring transactions that authorities had turned a blind eye to in the past.

The State Administration of Foreign Exchange earlier this month published a list of 20 irregularities, which included four related to property deals, in a move designed to send a warning to investors it said were trying to get money out of the country through networks of “underground banks” or illegally pooling individual currency.

It is believed the number of individuals fined in the published cases is only a fraction of the thousands of people finding a way to skirt China’s $US50,000 ($70,000) foreign exchange quota, which is a limit on the amount of local currency an individual can send overseas each year.

Outside the Shanghai offices of property agency Ausin, which has closed down.
Outside the Shanghai offices of property agency Ausin, which has closed down. Michael Smith

Warning

The decision to publish the cases, which involved millions of dollars in fines, is seen as a warning that the government is less willing to tolerate what is considered a grey area in the country’s capital control rules. Liu Xuezhi, an economist at China’s Bank of Communications, said this showed Beijing’s crackdown on offshore commercial deals was being extended to individual investors.

“The government regulation on foreign currency is becoming more thorough. They are extending supervision from corporates to individuals,” he told The Australian Financial Review.

“The tight control on foreign capital will be maintained for the next one or two years. This would bring an impact to the Chinese investors who are planning to buy properties overseas, including Australia.”

Zong Liang, a senior researcher with the Bank of China, said he expected the move to more closely monitor transactions would stay in place for the next five years and weaken the appetite for Chinese investors in Australian property.

“The Chinese government doesn’t encourage this irrational overseas investment,” he said. “The overseas property investment will be more rational in the future. There could be an impact on the Australian property market due to shrinking demand from China.”

China, under growing pressure to stabilise its economy as growth slows and Donald Trump’s trade tariffs dampen confidence, is not expected to relinquish controls on capital outflows any time soon. The local currency, known as the yuan or renminbi, has fallen about 10 per cent against the US dollar so far this year to its lowest since the global financial crisis.

Quotas pooled

​Out of the 20 cases reported on October 22,  four related to incidents where investors were illegally pooling the quotas belonging to a large number of individuals to get enough capital out of the country to buy property, or channelling funds through so called “underground banks”.

One person in Guangdong Province sent 4.25 million yuan ($874,000) to an underground bank, which was then asked to send the money to his relatives’ overseas account to buy property. He was fined 340,000 yuan, the regulator said..

In Zhejiang Province, an underground bank was used to transfer 13 million yuan to an overseas bank account to pay a residential mortgage and other expenses. That individual was fined 650,000 yuan.

In Guangdong Province, in southern China, the $US50,000 quotas of 33 individuals were combined to transfer £1.2 million ($2.2 million) out of the country to buy overseas property. That individual was fined 530,000 yuan. In October,  a Hong Kong citizen was fined 1.53 million yuan for transferring 17 million yuan to underground banks before exchanging the money to an overseas account to buy property.

The cases followed 23 reported in August for foreign exchange irregularities. Four of those related to overseas property deals. One company in Wuhan in central China was fined 2.18 million yuan after transferring $US4.54 million overseas.

Another individual transferred 15 million yuan through underground banks to buy property and was fined 1.45 million yuan. One person in Guangdong used 68 individual quotas to transfer £2.48 million to buy properties overseas and was fined 1.5 million yuan.

Illegal moves

In a case that was not specifically identified as a property deal, the regulator also reported illegal measures to transfer $5.74 million in Australian dollars between September 2015 and May 2017.

Chinese investors face growing hurdles getting money offshore to buy property at the same time as Australian banks are restricting loans to foreign buyers.  The collapse of property sales agency Ausin earlier this year resulted in 130 failed residential property settlements in Australia.

More than 100 Chinese property investors say they have lost millions of dollars in deposits and payments for off-the-plan houses and apartments in Sydney, Melbourne and Brisbane following the Ausin collapse. Some told The Australian Financial Review last week they paid the full amount for the properties directly to Ausin because they did not know another way to get their money out of China, and they could no longer get mortgages with Australian banks.

A new public database by the Australian National University showed Chinese commercial investment in Australia peaked in 2016 at $14.9 billion, before falling to $8.9 billion last year.

by Michael Smith
Financial Review

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