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Home / Business / China introduces new capital controls, targets foreign property purchases, while Yuan falls to 11-year low

China introduces new capital controls, targets foreign property purchases, while Yuan falls to 11-year low

"Money wiring abroad is not allowed for the purpose of purchasing real estate or insurance products": Banker in China

China's State Foreign Administration (SAFE) has rolled out a new set of currency controls to cut capital flight from China to other countries, specifically targeting real estate investments from Chinese individuals and companies. This new set of currency controls includes limits for real estate investors that make obtaining money through foreign debt almost impossible and more stringent oversight of China's banks handling these transactions.

These new rules for banks kick in when SAFE declares the economic situation in China "abnormal", which will then allow SAFE to settle on bank outflows. However, according to the Nikkei Asian Review, SAFE had not revealed what criteria would be used to classify the situation as "abnormal" and transfers of foreign locations could be blocked by SAFE's incident.

When SAFE considers the situation "abnormal," banks are investigated more closely and will be graded on the amount of yuan they give to other countries and the amount of foreign currency they sell. If they are cheated on too many of these types of activities, SAFE may place restrictions on their other banking activities.

In addition, the Agency has ordered banks to obtain more documentation before processing transfers of funds to other countries. For example, parents who want to pay for school fees for their child in the United States must submit a letter of acceptance from the American University. For other types of money transfers to other countries, different types of documents must be submitted to the bank, such as a work permit.

The idea seems to be to let Chinese citizens go abroad and do normal things, such as working or studying, but not investing in foreign property.

"Wiring of money abroad is not allowed for the purpose of purchasing real estate or insurance products," said a representative at a Chinese bank in Stage 2 to Nikkei.

Chinese real Real estate developers investing in foreign real estate projects are faced with stricter limits on the issuance of bonds and loans in foreign currency. Issuing debt in foreign currency was a favorite way to finance foreign real estate ventures. Now, most of these developers are burdened with heavy debts in foreign currency debt and hamstrung by low credit rating. The total currency debt of these real estate developers was $ 1

70 billion in July, based on an estimate quoted by Nikkei.

The decreasing value of the Chinese yuan against foreign currencies has made it even more difficult for these companies to service their debt in foreign currency. And the yuan has had a good trip.

The yuan fell to 7.17 yuan to the US dollar on Thursday, an 11-year low, before recovering slightly Friday to 7.15 yuan to the US dollar. Back in 2012 through 2016, when much of this debt in foreign currency was issued, the yuan ranged from 6.1 to 6.4 yuan to dollar.

The National Development and Reform Commission, quoted by Nikkei, told these property developers that you can now only issue foreign currency debt with maturity of one year or less, and only to refinance existing debt, but not to raise new funds . This will mainly prevent these companies that are already overburdened with debt from financing new foreign real estate investments.

China's currency balance has been relatively stable – $ 3.1 trillion in July 2019 – since the panic of 2015-2016 when reserves plummeted from nearly a quarter from $ 4 trillion to close to $ 3 trillion, and capital flight was halted by capital controls set in works at the time (chart via Trading Economics):

The year 2016 – when much of the panic-filled currency control was rolled out – was also the year for high property purchases by Chinese entities in the United States. When it comes to buying homes from buyers from China and Hong Kong, they plunged 58% over the past two years to $ 13.4 billion for the 12-month period through March 2019, according to a recent report by the National Association of Realtors.

In Australia, falling home purchases by Chinese buyers are said to have contributed to the routine of house prices in Sydney and Melbourne.

Similar dynamics have played out in Vancouver, BC. But the BC government has also tried to reduce the influx of money from foreign foreign investors over the past two years via various tax policy changes, and is now trying to lift the money laundering covers through real estate.

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