Savills: What do more strictly enforced capital controls mean for overseas property investment?

On 31 December 2016 the State Administration of Foreign Exchange announced that effective from 1 January 2017, individuals converting renminbi into US dollars would have to provide detailed information on how they planned to use the money abroad and to pledge that they will not use it to buy overseas property or investment-linked insurance products. Additionally, they will need to confirm they will not be lending quotas to other individuals. Those violating the foreign-exchange rules will be added to a watch list with their foreign-exchange quotas suspended for three years and will be subject to anti-money laundering investigations.

The announcement comes in response to concerns about continued outflow of capital by both individuals and institutions which has put pressure on the renminbi to depreciate further. They also follow suit with many other policies introduced in China over the last year that intend to better enforce existing regulations and eliminate loopholes rather than just introducing new regulations and restrictions.

The announcement is likely to make it harder for individuals to send money offshore and may therefore have a dampening effect on the volumes of overseas property purchases by Chinese nationals. Nevertheless, at the same time as making it more difficult to send money offshore, some have speculated that it is likely to encourage more individuals to attempt to send money offshore in case forex controls are tightened even further in the future.

Outflow of Chinese capital into overseas markets is expected to continue going forwards, no matter what policies are introduced, however stricter enforcement of regulations could help to slow the pace of outflow helping to stabilise exchange rates and place less pressure on China’s shrinking forex reserves.