China’s PBOC Tweaks Capital Controls


PBOC governor Zhou Xiaochuan is doing his best to keep China’s cash at home on the mainland

China’s richest man lost out on a $1 billion Hollywood acquisition and hundreds of middle-class Chinese homebuyers found themselves unable to make payments on homes in Malaysia and Melbourne after the country’s monetary authorities clamped down on capital outflows this year, ruining the plans of investors large and small.

So a headline in yesterday’s Financial Times trumpeting the lifting of capital controls in response to improving monetary conditions may have brought a sigh of relief to many. Apart from any symbolic value, however, the impact of the regulatory change may be limited, according to some analysts.

“There’s still a number of Chinese deals going on around the world, so I suspect this is just maybe tweaking the fine print slightly,” David Green-Morgan, Global Capital Markets Research Director at JLL in Singapore told Mingtiandi.

Small Change in Policy not a Change in the Wind

While the government has moved to stop capital going out of the country through a number of means, the recent change was an instruction by China’s central bank informing financial institutions that they are no longer required to maintain a balance of inflows and outflows when processing cross-border renminbi payments, the Financial Times indicated, citing individuals familiar with the matter. The new directives put an end to oral instructions from the PBOC in January which had required banks to ensure that their net capital outflows did not exceed inflows.

“I think it’s such a small change in the regulations that I don’t see it significantly impacting on the amount of money that’s flowing. Certainly in the real estate space we continue to see pretty strong demand from China on the residential side and the commercial side,” Green-Morgan said.

Despite some developers and investor complaining publicly about derailed deals, Hong Kong-listed mainland developer R&F Properties has committed to nearly $10 billion in new cross-border deals in 2017 and Chinese conglomerate HNA last month acquired a New York office tower for $2.2 billion while picking up a London property for $375 million.

Putting the Brakes on “Irrational Deals”

David Green-Morgan of JLL

David Green-Morgan of JLL

While cross-border acquisition have not come to an end, authorities in Beijing have moved to end what has been termed “irrational deals,” which included stricter scrutiny of overseas payments exceeding $5 million and official approval for non-core deals of more than $1 billion.

“I think maybe we’re seeing the guidance tailing off the M&A activity, and there seems to be a move back toward single asset, or portfolio, transactions, but I think perhaps this is a pause rather than a change of strategy,” says Green Morgan. “The longer-term trend is on continued Chinese outbound flows of capital into real estate and I think we’re still very early days in this trend.”

Dalian Wanda boss Wang Jianlin this week announced that officials had blocked his attempted $1 billion acquisition of Hollywood TV production company Dick Clark Productions, after some analysts had questioned both the valuation of the deal and Wanda’s experience in managing US entertainment businesses.

Despite this aborted deals, 2016 was a red-letter one for Chinese cross-border investment, with mainlanders spending a record $33 billion on overseas commercial and residential property, according to a JLL report, a year-on-year surge of 53 percent. However, China’s non-financial outbound foreign direct investment slumped nearly 49 percent in the first quarter of 2017 compared with the same period a year earlier, according to official data cited by Reuters.

Why China Turned off the Tap

The recent moves from the PBoC to ease the restrictions are the first known steps in deregulating outbound money flows since 2014. The broad goals of China’s capital controls are to limit drawdown on its foreign currency reserve and keep the RMB stable against the dollar, which is looking a little easier this year.

After a bad 2016, experiencing its largest fall against the dollar since 1994, China’s currency has risen 0.9 percent in 2017, but the country’s foreign-exchange reserves hit a four-year low in January. The central bank sold dollars to prop up the currency, which rose slightly in both February and March as the dollar showed signs of weakening.

In the first 11 months of 2016, $28 billion a month in RMB payments left the Middle Kingdom on average, according to data from the State Administration of Foreign Exchange, but that number fell dramatically to $6 billion in the three months to the end of February.

A report from DBS Group Research last week said that China now has more room to loosen controls on its currency and that this may be a trend in the future: “While lifting capital controls could jeopardise Beijing’s hard-earned stabilisation, the risk seems limited and tolerable for policymakers.”

Trend or No, Chinese Developers and Investors Are Hit by Capital Controls

Forest City Country Garden

Country Garden’s Forest City project in Malaysia has been hit by China’s capital controls

In addition to Wang Jianlin’s complaints about capital controls, R&F’s Properties founder and co-chair Zhang Li complained in an interview in mid-March that R&F had applied for $1 billion worth of overseas investment but had been waiting two months for approval from the authorities.

The unfolding drama of Country Garden’s Forest City project in Malaysia, which includes mainly Chinese buyers, has seen both the shuttering of mainland sales offices and a back-and-forth on whether or not Chinese buyers will be able to get refunds. Chinese buyers unable to get money out of the country to pay for their stakes in the $100 billion scheme could face penalties, according to a statement from Country Garden.