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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).

From Bricks ‘n Mortar:

China has an abundant supply of r2riches studies. Mr W was born in a village two hours out of Shanghai. His family was large; money scarce. With only an elementary-school education, Mr W aged 14 started working as an apprentice mason. He soon became a foreman.
In the early ’80’s, aged 21, Mr W, formed his own construction team and began bidding for projects. Twenty years later, his booming company had become one of the top private companies in China.
Nine years ago, looking for a sunrise industry, Mr W by then in his early 40’s, with a USD 25m investment, leapt into new media.
Leveraging local Government support and attracting young talent from all over China, Mr W is now declaring that in five years, half his company’s turnover (USD 1.2 B) will come from his new media venture.
When Mr W decides to undertake a project, he doesn’t procrastinate. And he’s not afraid to take risks.
His long-term goal is not only to be dominant in China, but to become one of the largest new media companies in the world.
His second platform is subsumed by the third, with his latest venture; building a massive theme park in China, with an investment of USD 500m.
Not yet 50, Mr W’s star continues to rise, unrestrained by his beginnings as an apprentice mason with no formal education beyond elementary school.
Mr Wu has stringent goals for his new venture – a focus on creativity; a unique cultural style. The number of visitors, boundless creativity; the return on investment has to be better than foreign benchmarks and achieved more quickly.

This is the man now looking at investment in Australia. Will it be new media, commercial projects, mining or infrastructure development; all options are on the table.

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.

Pharmaceutical entrepreneurs:

The YD’s are an interesting couple. They obtained a pharmaceutical license in China in 1980, just after Deng Xiaoping declared, “to be rich is glorious!”. Their province was not bound up in business development regulations at that time – they were fortunate.
They came to Australia open to investing in a range number of SME businesses in metropolitan and rural areas.
They are an interesting, low key couple; no ostentation, they dress simply; are friendly and open to advice and personal views on Australia.
They are proud of what they have achieved, but are anxious to move into this next phase of their lives.
Ms YD at the time of the company inception was teaching in an area of medicine in a local university; her partner (surprisingly) was a Philosophy professor.
In the early 1980’s the door opened slightly and they moved quickly. They worked tirelessly since that time and less than 12 months ago sold the company to a well known pharmaceutical MNC.
It is one thing to meet and discuss criteria in China, entirely another to travel around Australia meet various business people, discuss opportunities and absorb the lifestyle.
They frequently remark – “this is the life – this is how to live! We have never taken time off, how do we learn to live like this?”
Interesting question this – that it could be challenging to learn to relax?

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.

Corporate Finance in NW China:

The big lesson in life in NW China is – business does not come first in this part of China. First you relax together – “become friends”.
In November 2004, I had the chance to fly nearly five hours north of Shanghai to visit Urumqi a small city of 2.3 million people in Xinjiang province the most north western part of China – the largest province in China.
We flew up on a Thursday morning and were greeted inside the security area of the airport by the GM of the five star hotel owned by the local corporation seeking investment finance (the reason for the trip).
Day one – An interesting drive in from the airport to the centre of Urumqi. We had been provided two classic 1950’s American limos (one for me and my colleague, one apparently for the luggage). The drive took us past seething fruit, silk and carpet markets, mosques and a cityscape, definitely more Central Asian than Han Chinese. Different clothing, body shape and facial structures than in Eastern China. Interesting – it wasnt China, but of course , it was.
All main road signs were in Arabic and in Chinese. In the streets an occasional glimpse of an armed soldier accompanying each policeman on foot patrol. We were taken to lunch in our hotel in a private dining room twice the size of my apartment in Shanghai.
In the afternoon we were chauffeured around the various local markets, up to Red Hill with its red brick towers with wonderful views of the snow capped Tianshan mountains behind Urumqi and to Qinghai Mosque. I was beginning to understand, business does not come first in this part of China. First relaxation – “become friends”.
That evening the first of many banquets was organised and hosted in a local restaurant featuring Cantonese food owned by one of the GMs of a local construction company (also looking to do business in the future).
Endless rounds of toasting “gambei” and plates of food, arriving, queuing at the door without mercy.
The meal was hosted by Mr Mi (Chairman of the Hualing Group).
Across two separate rooms- Mr Mi moved from room to room during the evening; a multi-tasker, toasting the significant individuals in each group, those that represented potential “co-operation” in the near future.
One room is filled with the baijiu-fueled revelry from a Beijing Construction company. We were across and down the hall.
In our room sat the management team from a Guangdong (Southern China) Construction company. Each time Mr Mi appeared back in our room, one woman dominated the toasting with Mr Mi. She was apparently the daughter-in-law of the Premier of the Xinjiang Province. She ran a local investment company. Her male companion insisted on random karaoke outbursts as the baijiu took over. A couple of other local Govt officials made up the numbers, all deference and smiles.
There was much toasting, with the highly regarded rice wine, “Maotai” or baijiu which smells like nail polish remover and is about 70% proof – paint stripper!
The local dry red wine favoured here is branded, “Loulan”. It is high in tannin; set your “teeth-on-edge,” high. They have been growing wine here for 2,000 years but I assume have never thought it necessary to improve the taste.
We were chauffeured back to the hotel around 11:00pm – the other business guests from our party stayed up most of the night playing mahjong in one of the business lounges.
Day one in a suit.
The next three days always began in the same manner.
We would be told to be in the foyer at 8:30am and we would be collected by a representative of our host. We were of course never given an agenda, so we just assumed business would be discussed at some point. But until the middle of the third day no business discussions were initiated, and business was only brought up after we had visited the beautiful home of the Chairman of the Hualing Group.
Mr Mi insisted we stroll through his gardens, inspect his large outdoor meagerie of exotic tigers, peacocks; stroll through and taste fruit from his orchards; he had us grind maise in an old millstone – all in his garden; in a suit of course.
One day we ended up travelling 500 km along the Silk Road. It was 45 degrees C on an Autumn day as we arrived in Turpan, home to the indigenous Uyghurs.
I suppose staggering under a scorching sun in a suit along a potholed dusty track beside the mud brick ruins of Gaochang (a 2000 year old settlement) looking for water, was no less incongruous than that experienced the following day, riding a Khazaki horse in the mountains. That suit rode well.
The sturdy little Kazakhi horses took us high onto a ridge over-looking a beautiful valley to the south of Urumqi. Inside a large domed Kazakhi tent, the Chairman of the Hualing Group had organised cards, money, cushions, low rise tables laden with salads. The interior of the tent was strikingly bold with carpets in rainbow colours. Outside, locals cooked on a spit the most mouth watering lamb Id ever tasted. The gambling took three hours and eventually the money was redistributed – we returned for more dining, more toasting that evening-and the next.
Mr Mi, a significant high net worth individual also supported/funded a local school for 600 orphans, located next door to his home. Children are brought to him by the local Government from all over Xinjiang Province, following any of the many earthquakes in the southern region near Kashgar (Kash as the locals call it). The day we visited, twenty kids are playing soccer on “the only grassed soccer pitch in Urumqi”. The kids are happy and well dressed and run over to Mr Mi surrounding him and chattering to him as if he was their father.
Mr Mi also ran (in a large warehouse attached to the orphanage/school) a training workshop for the local unemployed. Mr Mi is quite the man. He is muslim and a Han Chinese. He started with one restaurant 15 years previously and was by the time of our meeting, worth over USD 400 m. Mr Mi is very low key but very business driven – an ironic statement, given the style of the visit, yet there was no other way to describe him. His need? Just, USD 200m finance to expand his abattoir and logistics business.

Why China?

Mainland Chinese investors have economic firepower and Australia is an attractive target for many reasons, not the least of which are a strong currency, the respect for rule of law, a stable economy and a country offering a peaceful (if not a slightly quiet) lifestyle.
When we established our wealth management company in Shanghai in 2006 (following our move there in 2003), the intention had been to attract Chinese investment in Australian real assets, principally new residential homes and apartments. Additionally, we gave access to a range of mutual funds in a number of geographic markets and sectors.
As a means of offering services to a wider range of local entrepreneurs, we acted as a broker providing access to SME finance and arranged Australian finance for Chinese investors purchasing property in Australia.

Interest in foreign property always eclipsed the take up of foreign mutual funds when the local A-shares” on the Shanghai stock exchange or their equivalents in Hong Kong known as “H-shares” offered such high returns. During the GFC the demand from our clients for overseas property investment remained relatively constant.

In 2010 we began to sense a changing appetite amongst certain high net worth individuals (HNWI’s). They began showing interest in going beyond the acquisition of residential investments and exploring the option of equity investments in the SME sector. Conversely at the larger end of town there was an increasing appetite for larger scale property developments and investments in mining or mining related companies.

The Chinese presence in Australia is growing across a wide number of sectors. There is substantial direct investment in property, a growing interest in larger scale mixed use property development and wide ranging investments in the rural sector.
There are significant inroads being made by the big Chinese banks in the Australian financial services market.
Five years ago there were two Chinese banks in Australia; now there are eight. Chinese banks are moving to the foreground, even as it appears the European banks are withdrawing.

Bank of China and Industrial and Commercial Bank of China (ICBC) are now the most active here in Australia. ICBC is China’s largest bank and its long-term strategy is to become the world’s largest retail bank. There are already ICBC ATMs in Perth, Sydney, Melbourne and Brisbane. In China, ICBC has 16,000 branches and 270 million customers.

The mainland Chinese customers as they come to Australia will obviously utilise their banking infrastructure.

We have clients currently doing due diligence on a range of SME businesses across the hospitality, real estate development, services, rural sectors. In the rural sector there is strong interest in beef stations, fruit farms and vineyards.

In Australia as in China, banks are a difficult call for most SME business owners; banks in both countries are hesitant and risk adverse when it comes to lending to the SME segment. The Chinese investors understand this and are keen explore opportunities to offer debt or equity financing to company owners in the Australian SME sector.

The incoming investors do not require majority control, they prefer to invest in sectors that are an extension of their expertise (and fortunes) in China.

Our Chinese clients are typically entrepreneurial, aged early 30’s to late 40’s; often university educated; their backgrounds are real estate development, manufacturing, IT with an emerging focus on the services sector. AUD 3-5 m are typical investment amounts, with AUD 100k set as a minimum threshold in the SME sector. AUD 20-50m at the larger end.

We prefer to match an Australian business with the background of the Chinese investor. The Chinese investor will typically not wish to be involved in the day to day management, deferring to local expertise, and is content with reasonable but safe returns on investment. ‘Return of their money’ in most cases is more important than ‘return on their money’.