Understanding Chinese Investment (Part 2)

Well here we go with part 2 in our story about Chinese Investments. The first part briefly discussed SOEs and their powers in China. We're will continue with money going out of China, as today we're going to starting having a look at different types of Chinese investors and their abilities/limitations when it comes to investing overseas. The outflow of capital from China have had a major impact on the international economy, whether it be individual, institutional or corporate investments. More and more companies with global aspirations are selling their souls to the Chinese in hopes that they can get a piece of the highly lucrative Chinese market. In these next couple of short post I'll try and explain why this is easier said than done. Strap in and enjoy the ride.

  Part 2: The infamous Chinese Individual Investor

First we need to separate our investors into sections. In this post I will cover the individual. With the highest level of misplaced entitlement and rudeness, the individual Chinese investor comes in a variety of forms. We will primarily focus on two kinds here, roughly divided into A and B; the investor going solely for personal reasons (type A) and the investor on the hunt for returns (Type B). Note that there can be a very blurry line distinguishing the types and they often intersect. Type A investors are investing in e.g. European Golden Visa Schemes, United States EB-5 program and Australian 3-prone Immigration Investment. In short, they invest with an intent to receive a foreign passport or green card, whether it be to move to said country for health/education reasons or to obtain a better passport for increased travel options. Obviously there's also a third objective, applicable to both Type A and B, namely to move your assets out of China. The last point is actually one of the major reasons for the Chinese government to implement the fairly tough capital outflow restrictions that currently are imposed on individuals and companies. I'll get back to this in a bit.

Type A are a frustrating bunch to deal with. Armed with flip flops, massive wealth and a god complex, these guys have made their fortunes through varying degrees of legality. Signified by strong government connections, corruption and excellent ability to best twist anything to their favor, these investors have had a big effect on national economies in the past 5-10 years. For US, the EB5 program in 2013 and 2014 alone (on a $500k minimum investment per investor) injected about $5.8 billion to the economy and was set to create about 170.000 new American jobs (http://www.esa.doc.gov/sites/default/files/estimating-the-investment-and-job-creation-impact-of-the-eb-5-program_0.pdf). The program is currently on hold and undergoing re-structuring with the US senate and is due for a vote in September. But given the success of the program in the past, it should be up and running by years end.

In Europe, the golden visa scheme was created by the EU in an effort to help inject capital to the failing economies that were Spain, Portugal, Greece and Cyprus. Southern European countries and their citizens are not easily mistaken for hard laborers, so when they were handed this golden opportunity to decrease their national debts, they jumped on it without hesitation. A few years later, and rather unsurprisingly, only one out the four original countries have actually managed to pull themselves out of the crapper. Cyprus have managed to generate nearly €4 billion in the past three years and the program represents nearly 25% of it's GDP (http://www.ekathimerini.com/218358/article/ekathimerini/business/cyprus-golden-visa-program-raises-4-bln-euros). Chinese and Russian investors are primarily to thank for this (with a special nod to the black hole of finance and wealth that is the Bank of Cyprus).

Type B investors are generally wealthy families or successful business people that invest their money through family offices, wealth management funds or privately held VC/PE funds. Constantly aiming at double digit ROI, these are savvy business men and women that generally are concerned more with proper contracts and good DD rather than a fast way to get money out. As you generally won't deal with type B directly, there is very little that you need to know about them right now. Bottom line is that they're easier to deal with and will cause you less headaches. We will come back to type B in a later post when we're discussing institutional investors.

Now, let's get back to the capital restrictions we discussed earlier. Last year saw a record $94.2 billion is Chinese FDI (foreign direct investment, up a staggering 190% in US and 90% in Europe when compared to 2015(http://www.bakermckenzie.com/en/newsroom/2017/02/chinafdi/). Around 70% of the FDI is represented by privately owned institutional investors, but let's focus on the individuals.

Needless to say, this trend scared the government in a time where they're trying to maintain control and strength of a Chinese economy that's no longer reaching its financial goals. In an effort to curb the FDI, the government implemented heavy capital outflow restrictions across the board. All proposed investments and exchanges of currency are now scrutinized and, more often tan not, denied. For individuals, the quota for amount of money you can exchange from RMB every year is now lowered from $50k to $10k. Bank accounts are monitored more closely and banks are ordered to report any "unusual activity or repeating patterns" that they might find. Note that this is a country that's on the absolute forefront in cashless transfers, with a large portion of the population using online payment services like WeChat Pay and AliPay rather than cash or cards.

For an financial advisory company like ours, this has opened a flood gate of requests in relation to money moving solutions. As this is a business activity clearly not approved by the government, an entire underground market has opened up where companies charge ridiculous commissions to arrange for these transfers to take place. Money remittance, forex solutions and back to back loans are just some examples of services offered, with commissions ranging from about 2% all the way to 15-20% for very desperate clients. Crypto currencies have also been highlighted recently as a possible way for Chinese to get their RMB transferred offshore, with more and more Chinese people becoming engaged in the market. If you ever needed any indication that the Chinese economy is in complete disarray right now, look no further than this problem.

In the next part I will discuss more about institutional investors and how they deal with this problem. If you have any questions, suggestions or simply need clarification, let me know!