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"Chinese Capital Controls and Forest City", a Commentary by Serina Rahman

2017/12, 21 March 2017

Recent news reports highlighting the closure of Forest City showrooms in China led to a flutter of speculation on the survival of Country Garden’s largest international mixed development project in Johor, Malaysia. In actual fact, restrictions on Chinese foreign currency exchange were announced in January 2017. The Xinhua news agency claims that these are not actually capital currency controls and Zhou Xiaochuan, China’s top central banker explained that these were targeted at ‘irrational investments’ in sports, entertainment and clubs that bring no benefit to China.

However, applicants for foreign exchange purchases are now made to pledge that the funds will not be used for overseas purchases of property and that they are not using any other citizen’s annual quota of US$50,000. More detailed plans for the exact use of monies requested are required and only non-investment related uses such as tourism, schooling, medical treatment and business travel are allowed. Violators of foreign exchange rules are added to watch lists, denied their foreign exchange quota for 3 years and are subject to anti-money laundering investigations. The new restrictions make it more difficult to purchase overseas property and deter those with no existing offshore assets and/or expertise in skirting the regulations.

Johor Chief Minister Khaled Nordin stated that Forest City sales will not be affected by the regulations. Country Garden representatives say that they are constantly updating their marketing and sales strategies to stay in line with national interests and regulations and had always targeted a wide clientele. They point to their sales galleries in upmarket neighbourhoods in Kuala Lumpur and Indonesia as evidence of this and explain that they also target buyers in Southeast Asia, South Korea, Japan, India and Europe.

A Bloomberg report on Chinese buyers of exclusive apartments in London states that about 30% of those who signed purchase contracts are now ‘facing problems’ in making initial payments. Real Estate Board of Vancouver data shows that Chinese property purchases in Vancouver, once a popular property destination plunged 39.5% in January 2017 compared to figures the previous year. The Financial Times reported that Forest City sold 18 billion yuan (USD 2.6 billion) of apartments in 2016, with 70% sold to Chinese nationals. There is little information on the financial fulfilment of these commitments although payments are known to be contingent on property completion phases and can be paid outside of Malaysia.

Lee Heng Guie, a Malaysian senior economist points out possible unexpected repercussions on tourism as many of the Chinese tourists to Malaysia are subsidised by the Forest City project as part of their marketing strategy. Tourists are taken on tours of Singapore and Malaysia, culminating with a visit to the Forest City showroom with purported 50% successful sales figures. With limitations on the movement of cash for property purchases, these tourist arrivals may dry up, adversely affecting Malaysian tourism earnings.

Property investment consultants note however that many buyers have already transferred their money to Hong Kong, and while new purchases might be slow in the short term, they now target those who already have funds offshore. China’s financial system is also known to be quite porous and determined investors will quickly find a way around new laws. With China’s foreign reserves and the value of the yuan both expected to decline further in 2017, these currency outflows are believed to continue in the long run.  

Dr Serina Rahman is Visiting Research Fellow under the Malaysia Program at the ISEAS-Yusof Ishak Institute.