Getting money out of China for real estate: It's Complicated (but it continues)

As I noted last month, the Real Deal reported on its Shanghai Showcase event:

The subject of capital controls and how the Chinese government wields them came up during virtually all of the day’s discussions. Smart investors can get money out of mainland China, said Jennifer Wang, a wealth management executive with PricewaterhouseCoopers. “There’s some practical ways to get the money out, to work around the policy restrictions,” she said. But when pressed by TRD Editor-in-chief Stuart Elliott to elaborate on those “practical ways,” Wang became notably shy.

That's interesting. So let's take a look at some of the discussion about this, since it could be relevant to condo purchases in Brooklyn, such as 550 Vanderbilt.

In December 2016, attorney Dan Harris, a specialist in law in China, wrote a five-part series on his China Law blog, beginning with Getting Money Out of China: It’s Complicated. Responding to realtor asking how the Chinese buyer of a $2 million house could move money out of China, he wrote:

China law forbids anyone from sending out of China more than USD$50,000 in any given year without government approval and it is virtually impossible to get this approval to buy a house overseas. So the odds are overwhelming that we will not be successfully in helping this person get more than $50,000 out of China and we are not going to help in getting the money out illegally. There are sometimes some legal workarounds, but for us to know if there are any in this case, we would need to be retained and we would need to know a lot more facts. 

Harris noted that he advises those on the sell side to "consider requiring larger initial nonrefundable deposits from overseas buyers." He expressed caution about various schemes including bitcoin and company-to-company transfers.

In the second part of the series, he noted that his first post generated enormous response, noting:

Again, though, most of the requests deal with the purchasing of single family homes and, people, slapping together 3-5 single family homes and calling it a fund is not likely to make any difference with the Chinese government allowing money to leave!

But he focused on business issues. In the third part, he suggested that a key factor "is simply whether the Chinese government wants the money to leave for its intended purpose or not," especially for business purposes. Ranking potential scenarios, he wrote:

Are you kidding me deals. We are not aware of a single instance where the Chinese government has said, “yes sure, go ahead and send that $5 million so you can buy a luxury condo in Vancouver or New York.” Sorry.

In the fourth part, Harris noted:

China’s regulations on sending money out of China have not changed. There is no limit on the amount a compliant Chinese company can send abroad. But Chinese banks — acting on instructions from Beijing — are becoming much stricter with remittances. This new strictness has come about in an effort to limit capital outflows and to make sure taxes are paid in China before money leaves the country.

In the fifth part, aimed at foreign companies, he advised on tactics to increase the odds of payment, including significant upfront payments.

What about real estate buyers?

On 3/27/17, the Real Deal published The death of the all-cash Chinese buyer – and what it means for NYC banks, citing the impact of "new capital controls that required Chinese citizens to disclose the purpose of their foreign investments."

This came after China barred citizens from moving more than $50,000 out of the country, "though many Chinese investors found a way around those limitations by diverting money into business accounts or through a network of banks in Hong Kong."

A stunning statistic: "Between April 2015 and March 2016, Chinese buyers paid all cash in 71 percent of U.S. real estate deals," while 20% got mortgages from U.S. lenders, and 6% from Chinese lenders. (Presumably that includes some buyers at 550 Vanderbilt.) More recently, smaller banks have devised new ways to structure mortgages, lending 50% or more of the property value, the Real Deal reported.

The Wall Street Journal's Mansion Global reported 5/3/17 that Pendulum Swing of China’s Regulatory Controls Could Divert More Capital to U.S., noting that in April China has reversed the guidance issued in January:

Although the government still limits Chinese citizens from converting more than US$50,000 annually and requires them to avow that the money will not be used in property purchases in foreign countries, allowing renminbi to outflow to offshore markets will open doors for investors to move money around.

On 5/27/17, the South China Morning Post, in WHY ARE MIDDLE CLASS CHINESE MOVING THEIR MONEY ABROAD?, suggested that "a couple of fibs and a willing accomplice" made capital outflow possible. Motivations include fear of a Chinese housing bubble or further devaluation of the yuan (after a 2015 devaluation), or a location for their children to attend school.

The article notes that banks are hardly stringent in enforcing disclosure requirements for those moving more than $50,000 abroad:

Some turn to underground banks or other, even more dubious options. For a small fee, there are men in Shenzhen who will wrap as many banknotes as possible around their legs and smuggle the money into neighbouring Hong Kong, which operates under a different economic system to mainland China and does not restrict currency exchange. 

Others rely on friends and relatives to convert their money into US dollars and wire their money out – a process called “smurfing” in the banking industry, or “ants moving their house” in Chinese.

One place that's become attractive is Thailand, where housing prices are low.

Then again, CNBC reported 7/7/17 that China's crackdown on money fleeing the country looks like it's working, indicating growth in China's foreign exchange reserves, which had previously been used to buy back yuan in response to the cash flight.

But Bloomberg News reported 9/28/17 that Chinese Money Is Still Leaking Into the World's Housing Markets, noting that "the curbs have prompted buyers to look for cheaper homes in smaller cities, making down payments more manageable." That surely impacts New York.

But how do they get the money out? The summary:

It turns out that the traditional routes still apply: faking explanations on bank documentation for money transfers; borrowing the bank accounts and foreign-exchange quotas of friends or relatives to make multiple small transfers that move a large sum, an illicit method sometimes called “smurfing”...
In some cases, wealthy individuals already have cash abroad or friends with access to foreign currency who are willing to lend the money overseas and be repaid in yuan on the mainland.
Larger payments can be routed through underground banks, many based in Hong Kong, which accept Chinese yuan onshore and put dollars into a client’s offshore account. Yet the increased scrutiny has driven transaction fees as high as 3 percent this year, from typical levels below 1.5 percent last year, the people said.