Real Estate

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

China's latest great wall against capital outflows is likely to be as effective at stemming overseas real estate purchases as the real thing was at keeping out invaders.

The country's foreign-exchange regulator is requiring citizens who want to move money abroad to provide extra information on bank forms introduced Jan. 1, including a pledge that the funds won't be used to purchase property.

Beijing has made several attempts in recent months to rein in the nation's voracious appetite for overseas bricks and mortar. In November, the government imposed a ban on foreign property purchases worth $1 billion or more by state-owned enterprises. Now, even the $50,000 that every individual is allowed to convert each calendar year can henceforth be used only for non-investment purposes such as travel or medical services.

Flooding Out
Mainland Chinese buying of overseas real estate has been soaring
Sources: RCA, Knight Frank Research

About 70 percent of Chinese outbound property deals between 2013 and the first half of this year were valued at less than $1 billion, according to CBRE Research, so the November tightening presented little impediment. But neither will taking the $50,000 annual quota out of the equation make much difference.

The amount is too small to finance even the most modest of purchases in global real estate hot spots such as London, Vancouver, Sydney and Hong Kong that are favored by Chinese buyers. If mainland purchasers have been able to move abroad the sums needed to buy in these cities, it's difficult to see how restrictions on one relatively trivial channel will have much of an impact.

LA Leads the Way
U.S. cities topped the five most-preferred destinations for emigration and overseas property purchases by rich Chinese surveyed by Hurun
Sources: Immigration & the Chinese HNWI 2016, by Visas Consulting Group and Hurun Report

Unofficial conduits for moving money out of China abound. The continued demand for dollar-denominated insurance policies in Hong Kong -- even after the use of China UnionPay Co. credit and debit cards was outlawed for such purchases -- is evidence enough of that.

One popular tactic is known as "smurfing" -- breaking sums down into small increments that avoid official scrutiny, named after the little blue cartoon characters who as small individuals constitute a larger whole. People needing to move large amounts out of China can recruit friends and relatives to help carry the load in this way.

Offshore trading companies -- with the cover of export and import invoicing -- have more leeway to move money in and out of the country, offering another route that can be used to finance overseas property purchases. China has acknowledged a problem with fake invoicing. Still, a more stringent clampdown would risk disrupting trade at a time of weak growth.

This is the rub for China's foreign-exchange regulators. Capital controls are inevitably porous, especially for a country that's as plugged into the global trade and economic system as China. And the demand for offshore property remains seemingly insatiable.

Rich Chinese aim to have at least a third of their wealth outside the country and real estate is their most popular overseas investment, according to the Hurun Research Institute. About 60 percent of individuals surveyed said they plan to buy offshore property in the next three years, the wealth researcher said in an October report.

The reasons for the exodus are well known. China's economy is slowing, domestic real estate is becoming increasingly unaffordable and the yuan is depreciating. In these circumstances, foreign property promises capital preservation. Until these fundamental factors turn around, Chinese authorities will be pushing against the tide.

The greatest value of the latest controls may be in the signal they send to the general population: China is serious about reining in outflows, and those who are caught abusing the system will be dealt with severely. That may give some buyers pause.

But the history of such endeavors shows that people care much more about preserving their wealth than observing the letter of the law. This is another clampdown that will fail.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net