It was interesting to read the recent news about China’s escalating crackdown on capital outflows, and how it might affect Chinese investment in Napa Valley. The crackdown is already impacting Chinese spending in various real estate markets. “In London, Chinese citizens who clamored to purchase flats at the city’s tallest apartment tower three months ago are now struggling to transfer their down payments,” according to an article from Bloomberg. Inquiries about real estate in Silicon Valley have also declined since the start of the year.
In previous blog posts, I wrote about Napa Valley being a popular destination for Chinese investors and tourists, as well as the recent increase in Chinese investment in Napa Valley real estate. For high-net worth Chinese buyers, acquiring vineyards in the world’s most prestigious wine growing regions (France, Italy, Australia, South Africa and the U.S.) is a luxury investment, especially if made in the U.S. These buyers also see a pretty good return on their investment.
Because it has become more difficult to send money offshore, Chinese investors making first-time purchases may be deterred from buying real estate overseas. How that may impact Chinese investment in Napa Valley is not yet clear. I know from my Chinese buyers that corporations making business investments can still get $200 million a year out of the country without raising eyebrows, but the process will be longer and more difficult than it was in 2016.
The outflow of capital from China hit a new high in October last year, fueling depreciation of the renminbi (RMB), according to an article from Forbes. In the first half of 2016, Chinese buyers acquired an estimated $15 billion in overseas real estate, with the U.S. a top destination, according to Forbes. Overseas purchases by Chinese companies reached $146 billion in the first 10 months of 2016, surpassing the previous year’s record of $121 billion, according to data from China’s Ministry of Commerce.
The change that sent shudders through the real estate world came in a statement from the State Administration of Foreign Exchange on Dec. 31, right before the reset of Chinese citizens’ annual foreign currency quotas, according to the Bloomberg article. Among other requirements, all buyers of foreign exchange must now also sign a pledge promising not to use their $50,000 quotas for offshore property investment. Violators will be added to a government watch list, denied access to foreign currency for three years and subjected to money-laundering investigations, according to the State Administration of Foreign Exchange.
“Less than a month after China announced fresh curbs on overseas payments, anecdotal reports from realtors, homeowners and developers suggest the restrictions are already weighing on the world’s biggest real estate buying spree,” according to Bloomberg. “While no one expects Chinese demand to disappear anytime soon, the clampdown is deterring first-time buyers who lack offshore assets and the expertise to skirt tighter capital controls.”
While the use of foreign currency for real estate has long been banned, the regulator’s call for additional documentation seemed to signal that the government is serious about cracking down, according to the Bloomberg article.
Brokers say motivated Chinese investors can usually find ways around tightened capital controls. And some buyers are eager to buy offshore property before authorities clamp down any further.
“A more complete picture of Chinese demand may only emerge after the Lunar New Year holiday, when wealthier buyers often combine overseas property hunting with sightseeing,” according to Bloomberg.