July 15, 2014

Money-Laundering, Housing Trick: An Open Secret

ECNS reports on China. “Record-high payments will come due for China’s real estate investment trusts (REITs) next year, but they may not have the money to pay back their investors, the Shanghai Securities News said. Data from the China Trustee Association show that as of March 31, unpaid REIT amounted to 115 million yuan ($18.5 million), which was 10.4 percent of all industries’ unpaid trust products. Trust products worth 203.5 billion yuan ($32.8 billion) will enter maturity in 2015, doubling this year’s volume, according to Use Trust, a website specializing in the trust industry ‘China’s REIT default is unavoidable this or next year,’ said Yao Wei, economist at Société Générale’s Hong Kong arm. He said the industry is at a turning point, with a huge imbalance in demand and supply.”

“China is taking measures to crack down on off-balance-sheet lending, or shadow banking, which includes trust companies and wealth management products issued by banks. However, given the amount of loans and lending that developers have, Yao said ‘the cooling property market will definitely take a toll on China’s financial system.’”

The Taipei Times. “A looming correction in the Chinese property market poses the biggest threat to China’s economic growth, which may show more evident signs of slowdown next quarter due to an imbalanced supply and demand, Hong Kong-based UBS chief economist Wang Tao said. ‘The imminent corrections would have more to do with an overestimated demand from urbanization rather than a volley of tightening measures,’ Wang told a teleconference.”

“The urbanization trend has fostered a real demand of 3 million apartment units, whereas the builders and developers have put 11 million on the market, steeply raising inventory in cities across the country, she said.”

From China Daily. “For Li, a Beijinger who has grown up and lived in China’s capital city all her life, the city’s skyrocketing housing prices turned out to be a windfall. Last year, she sold her only living space in the city, an old two-bedroom apartment in Shuangjing, Chaoyang district, for 3 million yuan ($483,300), which in turn made it possible for her to buy six houses in Houston, Texas in the US.”

“Li rents out each of her properties in Houston for more than $400 per month, and still lives in her original apartment in Beijing, but this time on rent. Her rental income collected in the US minus the amount she pays for her apartment in Beijing comes to 10,000 yuan per month, meaning that Li’s annual earnings from her ‘housing trick’ will be more than 100,000 yuan.”

“Of course, Li is not the only Chinese enthusiastic about the US property market. Buyers from the Chinese mainland, Hong Kong and Taiwan purchased about a quarter of international sales of US properties, according to a report by the US-based National Association of Realtors (NAR). For the period April 2013 through March 2014, the estimated investment from the Chinese totaled $22 billion, with 76 percent of purchases in cash, said the report.”

From Bloomberg. “For years, wealthy Chinese have been transferring billions worth of their money overseas, snapping up pricey real estate in markets despite their country’s currency restrictions. Now, one way they could be doing it is clearer. Last week, when China Central Television leveled money-laundering allegations against Bank of China Ltd., the state-run broadcaster’s report prompted the revelation of a previously unannounced government program that enables individuals to transfer their yuan and convert it into dollars or other currencies overseas.”

“China needed to improve its oversight of capital flows after $2.7 trillion in unexplained funds moved overseas in the decade prior to 2012, Anthony Neoh, a former government adviser who helped the country open up to foreign money managers, said last year, citing data from Integrity International. Those funds fueled property bubbles in cities such as Hong Kong instead of being invested in domestic assets, he said. ‘We know the demand to move abroad is there,’ said ANZ’s Zhou. ‘Even if you impose various restrictions, the money will find its way out of the country, via underground banks and other means.’”

Business Spectator. “China’s major banks have halted an experimental program, sanctioned by the country’s central bank, that helped citizens transfer large sums overseas despite government capital controls, according to people with knowledge of the matter. Analysts and economists have widely acknowledged that China’s closed capital-account system has become more porous and that the rules are routinely circumvented. A 2008 report by the PBOC said that up to 18,000 corrupt officials and employees of state-owned enterprises had fled abroad or gone into hiding since the mid-1990s, and that they were suspected of having taken $US123 billion with them. A favoured method, according to the PBOC report, involved squirreling cash away with the help of loved ones emigrating abroad.”

“Until recently, Bank of China had been offering the yuan-transfer services to its wealthy clients, according to officials with knowledge of the bank’s operations. In its statement last week, the bank said that the services were limited to clients who seek to emigrate through investments — gaining residency rights abroad by putting money into businesses in the host country — or to buy property overseas. It also said that it has in place a procedure that requires the bank to check the sources and purposes of clients’ funds. ‘It’s a very important policy initiative, but CCTV is making a very bad name out of it,’ said Ligang Liu, chief China economist at ANZ Bank in Hong Kong.”

From Forbes. “Bank of China, naturally, had competition helping the Chinese put their money offshore. Said an employee of a major state bank speaking anonymously to the South China Morning Post, ‘BOC is not the only bank providing these kinds of services. All major banks do.’ A Swiss banker called the involvement of the big Chinese institutions ‘an open secret.’”

“CCTV’s public attack on the bank suggests infighting among top leaders because officials knew they could punish adversaries for violations of capital control rules. A sure sign of weakness in a political system is a purge, and in China there have been many of them recently. The significance of CCTV’s attack on Bank of China is that struggles among senior leaders have broken out into a new arena. The Communist Party, which looked so sturdy in recent times, is beginning to come apart. Now, personal struggles are tarring the image of the critical institutions of the one-party state. This cannot be a good sign for Chinese stability.”

Bits Bucket for July 15, 2014

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