Faced with a depreciating currency and an acceleration of elites running for the exit, China is actually beginning to enforce capital controls. The official individual FX limit is $50,000 per year. But for those with the right connections, RMB flowed out of China like water. The amount of illegal capital repatriation from China has been estimated in the trillions of USD. Now that is all changed. Xi Jinping is hell bent on transitioning the Chinese economy into one lead by domestic consumption rather than by investment. GDP growth has slowed, and at the same time the strengthening USD has forced the PBOC to allow the RMB to weaken.
Property markets in favoured jurisdictions have seen furious buying by cash rich Chinese. The Chinese hoard levitated property prices in Vancouver, Sydney, New York City, and parts of California. The explosive growth is about to come to an abrupt halt, if the PBOC has it way. They have instructed banks to begin enforcing the $50,000 limit and to look through the ultimate beneficiary account to determine if bundling of funds is occurring. [AFR]
The crackdown from Beijing has seen Chinese banks setting up watch lists for unusual transactions, according to one bank manager, who asked not to be named as he was not authorised to speak about the policy.
He said the operation was aimed at cracking down on a practice whereby family and friends of those wanting to purchase a property overseas all transfer US$50,000 into an overseas account. That’s the limit each Chinese individual is allowed to move out of the country each year.
The purchaser then pays back his friends and family in China and uses the money from the overseas account to put down a deposit on the property.
However, banks are now tracking the source of funds for overseas bank accounts that have received more than US$200,000 within 90 days, according to the bank manager, who works in Shanghai for one of the major state-owned banks.
“We have always had this policy but now it has been restated and is being enforced more strictly,” he said.
“In the past we could find a way around these rules but now all those ways have been blocked.”
“I’m sure this would be having an impact on overseas property purchases,” he said.
Sydney and Melbourne are starting to feel the pinch [AFR].
Chinese purchases of Australian property have dropped significantly in the past month, according to agents, as buyers struggle to shift money out of the country following Beijing’s move to tighten capital controls.
One Chinese agent said the latest efforts by the central government to avoid large capital outflows were having a “significant impact” on his business.
“It has affected 70 to 80 per cent of current transactions and some have already been suspended,” said the agent who asked not to be named.
The tighter foreign exchange rules are also set to impact the federal government’s relaunched Significant Investor Visa (SIV), which provides fast-tracked residency for those investing at least $5 million into Australia.
“I think it will be big, big trouble for the SIV program because the amount of money is just too large,” said one Shanghai-based adviser, who sells Australian property and advises wealthy clients on their migration plans.
Only seven SIV applications have been submitted since the new rules were introduced on July 1, which require investors to put their money into riskier assets such as venture capital and emerging companies.
The fall 2013 Bitcoin bubble was fuelled by speculation that Chinese investors would be able to send their capital abroad by using Bitcoin. The problem was the grey channels were by and large much cheaper and easier than using Bitcoin. Therefore the massive inflows never materialised. The situation is grossly different now. The PBOC is actively enforcing the controls and the avenues open to the Chinese are rapidly disappearing.
The big question for anyone attempting sell RMB / buy Bitcoin then sell Bitcoin / buy USD (or another G10 currency) is liquidity. I took data from Bitcoinity.org about trading volumes for BTCCNY and BTCUSD. For the Chinese exchanges I divided their reported volume by 2 because they double count trades. Over the past 30 days the average daily trading volume was 82,400 BTC. To minimise price impact, assume that you trade 30% in line with volume. At a BTCCNY rate of 1,500 CNY, that comes to a total of 51,180,000 CNY of Bitcoin that can be traded per day with minimal price impact. I did the same calculations for the top BTCUSD exchanges, and the amount is 39,366,600 CNY. Because you need convert RMB -> BTC -> USD, I assume that 39,366,600 CNY worth of BTC can be traded each day with minimal price impact.
Chinese people love property. It is one of the preferred vehicles in which park their cash abroad. The other benefit is they can ship their families off to obtain passports in better jurisdictions. The below table shows how many equivalent houses Chinese buyers could purchase each day using Bitcoin.
|City||Median House Price||Equivalent Houses|
|Arcadia California||1,084,500 USD||5.7|
|New York City||572,800 USD||10.79|
According to the National Realtors Organisation, for the 12 months ending March 2014 Chinese people bought $22 billion in property in America. Per day that equates to roughly 368 million CNY, or over 9 days worth of Bitcoin trading. This happens each day, and this is just for America. Chinese will not all rush to use Bitcoin as a method of wealth transfer, but with no other options they will get creative. The largest Bitcoin exchanges globally are in China. In China, you can wire CNY to the exchange, buy Bitcoin, and remit Bitcoin outwards in under 30 minutes for 0 fee. The foundation is there, and now there is a real pain point. As the capital account of China deteriorates due to slowing global growth, a stronger USD, and competitive devaluation by their trading partners, the only way out may be Bitcoin.