Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on March 20 - 26, 2017.

 

CHINA’s recent move to ­impose stricter capital controls has sparked fears that mega ­infrastructure projects and property development in Malaysia undertaken by China-based companies could face another stumbling block — a shortage of financing.

However, most industry observers believe the government-to-government (G-to-G) projects will not be affected as the measures taken by Beijing are mainly targeted at overseas real estate purchases. But private investment, especially in real estate projects in Malaysia, may face some hurdles.

When Chinese property developer, Country Garden Holdings Co Ltd, closed all its sales centres in China for its Forest City housing project in Johor last week, news reports said the closures were in response to the tighter capital controls that made it harder for citizens to move money offshore.

“It is true that the Chinese government is tightening capital controls by stepping up scrutiny on foreign exchange purchases by individuals. So, when you want to make outward remittance now, the government wants to know the details of the transactions. If you want to buy property overseas, you may not be allowed to do so now,” a banker from a China-based bank here tells The Edge.

China allows individuals to change up to US$50,000 (about RM222,154) worth of renminbi into foreign ­currencies each year. Prior to the tighter capital controls, they were also allowed to pool funds with other individuals to undertake property transactions overseas.

“Chinese private investment will be mainly affected. I don’t think G-to-G projects will be affected as they are part of large investment projects that have been approved,” says Andrew Sheng, a Distinguished Fellow of the Asia Global Institute, University of Hong Kong.

He says the tightening will affect China’s private investment overseas, but it also depends on the investee country’s circumstances.

Malaysia-China relations reached a new high last year following Prime Minister Datuk Seri Najib Razak’s visit to Beijing, where he signed 14 bilateral agreements worth a combined RM144 billion.

A senior manager from a China state-owned construction company says the group’s mega transport project in Malaysia has not been affected, and should be able to take off on time. “Government projects have always been under the Chinese government’s scrutiny. Funding will not be an issue,” he tells The Edge.

However, asset acquisitions by private individuals is another story.

“The stringent rules will have a ­significant impact on real estate ­markets all around the world, including Malaysia, as it targets real estate investment,” says Prof Zhang Jun, dean of the School of Economics, Fudan ­University.

According to him, the capital controls have always been there and ­Chinese are not allowed to acquire properties overseas. But in 2006, when foreign funds flowed into China sending its international reserves ballooning, Beijing relaxed the restrictions, allowing Chinese to invest in real ­estate elsewhere.

“At that time, the government ­allowed the Chinese to use their friends’ quota to acquire overseas real estate assets. Now, the government has shut the door; you only have a yearly quota of US$50,000. This will definitely limit Chinese’s ability to acquire properties overseas,” he explains.

Rich residents from first-tier cities may still have alternatives, such as setting up overseas accounts to do ­property transactions, Zhang says.

Zhang believes the tightening measures will not affect tourism as spending on travel is still allowed.

Continued capital outflows and the downward trend of the renminbi have exerted pressure on the Chinese government to tighten capital controls. The safeguard move may continue for a few years, according to him.

“I don’t think this is a short-term policy as the government does not want the RMB to continue to depreciate. The capital outflows have been controlled recently. So, I think it will continue for about a few years,” adds Zhang.

China’s foreign exchange reserves climbed back to more than US$3 trillion at the end of February, the first time since June.

According to Zhang, the clampdown is also in response to the US’s strong dollar policy under President Donald Trump and the anticipated Federal Reserve rate hikes.

“This will put pressure on the RMB and exaggerate the capital outflows. Under this scenario, I don’t think the Chinese government will loosen capital controls again,” he says.  China capital outflows last year surged to a record high of US$725 billion.

Many Chinese have rushed overseas to acquire ­assets in the past few years in anticipation that the RMB will drop against the dollar. The RMB has fallen 14.24% to 6.9020 against the dollar, from a high of 6.0498 over the last five years.

Sheng, the former chairman of the Hong Kong Securities and Futures Commission, concurs, saying the Chinese government is doing something that any regulator would do. He sees it as a macro-prudential measure, which has been adopted all over the world as the US dollar has been strengthening and the Fed may raise rate further.

“The choices are straight-forward: if the [US] interest rate goes up, either the domestic interest rate rises or there are more exchange controls, or the exchange rate depreciates — there are only three consequences when US interest rate rises,” he explains.

Zhang expects China’s economy to be stable. “I think the fundamentals are still intact. The only concern is the debt that has been accumulated in the last 10 years. Thus the Chinese government is trying to resolve the debt issue now. It is deliberately slowing down its ­economic growth to avoid a debt crisis,” Zhang says.

China expects slower economic growth of about 6.5% this year, compared with 6.7% last year.

Sheng says with savings of up to 50% to gross domestic product and as a net lender to the world, there is little risk of a debt crisis in China.

 

 

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