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Moving money around – the Chinese way:

China, once a magnet for global money, is now watching cash stream out.

Wealthy Chinese citizens are frequently moving cash secretly through a flourishing network of money-transfer agents. Chinese companies, for their part, are making big-ticket foreign acquisitions, buying up natural resources and letting foreign profits accumulate overseas.

China hasn’t reported on capital inflows and outflows since last year, but it is possible to gauge more recent flows using trade data, foreign-exchange reserves numbers released Saturday and other economic statistics. A Wall Street Journal analysis of that data suggests that in the 12 months through September, about $225 billion flowed out of China, equivalent to about 3% of the nation’s economic output last year.

China officially maintains a closed capital account, meaning it restricts the ability of individuals and businesses to move money across its borders. Chinese individuals aren’t allowed to move more than $50,000 per year out of the country. Chinese companies can exchange yuan for foreign currencies only for approved business purposes, such as paying for imports or approved foreign investments.

In reality, the closed system has become more porous and the rules are routinely ignored. “The wealthy in China have always had an open capital account,” says Eswar Prasad, a Cornell University economist and former International Monetary Fund official.

China’s $50,000-a-year limit on moving capital out presented a problem for him. He says he got around the restriction by recruiting friends to move chunks of his money under their own names. Real-estate agents in China say that is a common practice that is largely tolerated by authorities.

For years, China’s economy benefited from large flows of cash into the country from exports and from foreign investors. Incoming dollars were exchanged for yuan at China’s central bank, putting more yuan into the economy. That made it easier for banks to lend and companies to grow, but it also stoked inflation and contributed to real-estate and stock-market bubbles.

The outflow helps explain why China’s banks have been slow to increase lending this year. Accelerated outflows might force China’s central bank to push the yuan to appreciate more strongly against foreign currencies, to encourage Chinese investors to keep their money in the country.

In 1998, during the Asian financial crisis, Indonesia saw the equivalent of 23% of its annual economic output leave the country—far higher than the 3% estimated to have exited China over the recent 12-month period. China’s economy is protected from such catastrophic outflows by its restrictions on capital movement and by its substantial foreign-currency reserves, currently $3.29 trillion.

The Journal’s $225 billion estimate for the year ended in September captures both legal capital outflow and some of the illicit flow. Several economists also have attempted to calculate outflow. Charles Dumas, an economist at Lombard Street Research, estimated net outflows of $300 billion over the same period.

One factor contributing to the reduced reserves is that Chinese exporters are keeping more of the money they make abroad in dollars, rather than converting it to yuan, economists say.

Because the $225 billion figure is derived from broad economic statistics, it is impossible to say how much of the outflow is legitimate personal and corporate transactions and how much was moved illegally or was the product of illegal activities.

A sprawling industry has developed to help Chinese get money out. Services range from the money-transfer agents to private jets that ferry money by customs officials unmolested, according to lawyers and brokers who help Chinese investors find investments abroad. Sometimes bank transfers by companies hide personal money being moved out, these people say. Another method is to piggyback personal cash atop legitimate export and import transactions, at times by using fake invoices, they say. People even carry bags of cash across the border.

Hong Kong, although part of China, has a separate financial system and currency—and no restrictions on outbound capital. Consequently, there are restrictions on mainland Chinese moving money to Hong Kong.

One legal way that some elite Chinese have gotten money offshore is by taking their companies public in Hong Kong, then selling shares.

Macau, like Hong Kong, is part of China but has its own financial system, and mainlanders face the same restrictions on moving money there. Gamblers frequently use the services of local “money lenders” in Macao, and subsequently need money to pay off their casino debts. The problem is getting it out of China.

Some punters use their company structures to transfer cash into accounts set up by associates elsewhere in China, claiming the transactions were for approved purchases. Then equivalent amounts in Hong Kong dollars would be deposited into separate accounts belonging to the entities that had lent the punters the gambling money.

“No funds actually cross the border, so this method is difficult to detect and impossible to measure,” says Stephen Green, head of China research at Standard Chartered Bank, who has studied Chinese money flows.

Its all part of the ‘brave new world’.

Xian – wealth out West

I initially had business dealings with Xian in 2005. A Taiwanese developer was seeking FDI for a new real estate project – that is another story with a unique lesson.
The West in China, is commonly spoken about as a vast region that is lagging behind the Eastern regions (Bohai, Yangtze and Pearl River Deltas)_yet, Xian, the ancient capital of China is in need of no assistance.
Xian is 1400 kms west of Shanghai. A nine million population with a GDP/capita of only USD 7k, however, a city that is booming.

The Hurun Report in 2011 states that Xian has 7,000 USD millionaires, including 300 citizens over the USD 16m threshold.
Xian was the capital of China 2,200 years ago when the first Emperor to unite all of China, Qin Shi Huang, ruled. Qin Shi Huang outshone beyond China by his Terracotta Warriors.In 2009 we visited Xian again, the circumstances of these trips were more profitable.
It is certainly interesting watching the locals creatively use their guangxi.
This was one ‘guangxi scenario’ in Xian, it involved the head of the local Aerospace Development Corporation.
A Ms Qiu (architect) wanted to do business with a Mr Y from the Aerospace company. To get an introduction she called her old classmate (a strong connection in China).
The husband of said wife worked with Mr Y. The husband, prior to the first meeting (the dinner we attended in Xian) contacted a Professor friend from his old university. The Professor contacted my colleague and another Professor at his university.
A couple of taps of the magic wand and we all appear a couple of weeks later in Xian. Why these associations? (I’m there as the token white man).
Mr Y wants some “assistance’ with his English paper; an English Professor appears from Shanghai. The original Professor wants to do business in Xian and brings my colleague to explore commercialising and taking the Aerospace technology to other cities in China. So behind the Maotai, the incessant toasting, the bruised livers and the never-ending cuisine, the evening continues. One of the meals was up in the nearby mountains; visiting a fish farm and restaurant for more drinking, toasting and food. Those evenings expanded into reciprocal Shanghai visits by all parties and further discussions.
Downtown Xian has this marvellous wall marching around the rectangular heart of the CBD, it manages to mesh and not be overshadowed by the sprawling commercial developments. The 14 km long, 1400 year old wall replete with watch towers is stunning.
On one visit we met with a Xian Town Planner who was recreating a modern version of ancient Xian as part of massive developments in Qujiang District on the outskirts of Xian.
He had been so impressed with a visit to Christchurch he decided to emulate that NZ city’s layout and of course hired an Australian Architect to recreate the design back in Xian (work that one out).

Increasing interest in Fixed Assets

If we look at investments reported in Australia by Chinese companies – both state owned and private, these invested a total of $3.2 billion in Australia in 2011, an 86 per cent increase from 2010.
A senior trade official from the Chinese Embassy, Shi Ziming, was reported recently saying, “Chinese private companies were likely to lead the next wave of Chinese investment abroad despite the present dominance of state-owned enterprises. Private companies accounted for more than 50 per cent of Chinese investment abroad last year. Private enterprises will definitely play a more and more important role in the process of the nation’s outbound investment activities.”

This is certainly our experience. If we look at the significant clients coming to us over the last 15 – 18 months via our Shanghai office, they are predominantly company owners representing a range of manufacturing, medical, IT, service and property development sectors. They are anxious to make investments in real assets in Australia.

Chinese private investment in Australia is still to develop real momentum, despite what is happening in other western economies.

With an eye on Chinese overseas real estate investment – compare Sydney or Melbourne with the activity in London. In 2011 Chinese buyers accounted for 28% of all prime London property sales and 54% by sales value in the prime central London area, where houses go for 5 million pounds ($8 million) on average, according to a recent report by Savills research.

“If the money from China were to start flowing into London at the same rate it does from billionaires in other countries, we would expect the value of ultra-prime London properties to grow by as much as 15%,” Yolande Barnes, head of Savills residential research told China Daily.

Putting the billionaires to one side – China’s middle-class population (defined as those with annual income of at least US$17,000) has reached more than 100 million as of 2011, while the number of HNWI’s worth more than 10 million yuan (US$1.5 million) is estimated to be 825,000, according to Hurun Report (2011).
Classifications come and go, but the wealth marches on.
In recent visits our clients have shown great interest in real assets in Australia. The real assets attracting particular interest include commercial and residential real estate, agricultural land and to a much lesser extent, precious metals and commodities.
They are buying selectively and typically have a long term view.

Learning to Read

Whatever commercial skills serve you well in the west do not necessarily translate across to life, doing business in the Middle Kingdom – often, nothing survives this transition between anz and sino cultures.
Yes guanxi (relationship/connectedness) is important and of course, this is not gained by flying in and out, nor spending weeks on the road, being wined, dined, presenting and being presented to. All this does is fill your bags on your return (to blue sky and fresh water) with business cards and ‘business cases’ – but you are no clearer as to what is compelling, profitable, right or wrong for your particular circumstances.
Opportunities abound, prospects overwhelm; never enough time to consider, question, evaluate, – weeks need 10 days, but each week wouldn’t be long enough….doing business in China it as if you were looking into a barrel of squirming, seething eels….each entity constantly writhing, sliding, improvising – rarely is one stationary.
You may or may not speak Mandarin – I dont think that is important – but – you do have to learn to read people and situations FAST. It will save you time, money and the need to drink appalling alcohol, gambei’g your way unnecessarily through another liver or two.
Our years living and working in China since 2003 have allowed us to run the gambit, continue, learn, adapt and break through into real opportunity, maintaining guanxi with significant investors. Now, confidence and anticipation.

Investors in Inner Mongolia:

In early September this year we flew north from Shanghai to hold a number of meetings in two cities in Inner Mongolia. The interest from the locals was not in bricks’nmortar, but in rural businesses in Australia.
The prospects we met had assets from USD 50m to USD 100m. Australia was unknown territory, the US not so.
Their back grounds ranged from finance, real estate development to mines. Only one gentleman was Mongolian, the others, Han; living in Inner Mongolia for a number of generations. Beijing was the place they gravitated towards- perhaps it would be easier to meet them there in future.
Driving across Inner Mongolia provided an interesting slice of history. We made time to visit certain G.Khan/Mongolian Museums. As most artifacts had been destroyed during the Cultural Revloution, one was more of an art gallery (this is the way we believe they looked).
The rolling lush pastures of Western Inner Mongolia were in stark contrast to the sharp, treeless, shale hills and valleys of the central zone.
These people are hardy. The dust (that begins here and plagues central Beijing each Spring) swirled mercilessly in the lee of the hills, the homes squalid and single level in the rural areas.
Yet fortunes have been made here in minerals; coal the main industry.
Each city in complete contrast to the other. One unplanned, sprawling, rutted roads, old construction, with much of the new high-rise stalled and unfinished.
The other city neatly laid out, orderly with obvious signs of Govt over-investment; quality roads with little traffic and streets lined with high rise dwellings finished and often empty.
The locals we met (the top 1%) were contented with their life style. The prospects from each of the two city’s despised the inhabitants of the other. The tea was similar to Tibetan tea, salt, soup, butter and other ‘delicacies’.
The money is there and a williness to look abroad.
Inner Mongolia – Population 24,706,321; GDP (2011 – US$ 8,854 per capita (6th region in China). This is surprisingly high.
Ethnic composition Han – 79%; Mongol – 17%; Manchu – 2%; then the rest.