China to Lift Restrictions on Cross-Border Deals in Six Cities

China’s wave of outbound investment is expected to rise still higher this year as the government prepares to lift restrictions on cross-border capital flows for companies and individuals.

According to reports in the official Securities News, a pilot scheme allowing individuals to invest up to half of their assets overseas will be rolled out in six cities across China, in a move that could free up billions of dollars to flow into overseas real estate and securities. A report in the Wall Street Journal indicated that the State Council, China’s cabinet, is expected to announce the program in June.

The plan, which is referred to as QDII2, for qualified domestic individual investor (part 2), is a continuation of an earlier plan, and would remove the current limit on cross border capital flows of $50,000 per year for an individual investor, as well as lifting restrictions on corporate investments.

While the plan is expected to be rolled out in stages, the potential impact on real estate markets in global gateway cities such as New York, Sydney and London, which have already been inundated by Chinese real estate buyers, could be significant.

Rolling Out a New Program

The QDII2 program is slated to be rolled out this year in Shanghai, Tianjin, Chongqing, Wuhan, Shenzhen and Wenzhou, the Securities Times reported, citing anonymous sources. In Shanghai, it is expected to first be introduced in the city’s free trade zone (FTZ), but initiatives brought out in the FTZ are routinely allowed in other parts of the city within months. The Qianhai FTZ in Shenzhen is also said to be a target for early introduction.

The original QDII was introduced in 2007 and allows approved Chinese asset managers to sell mutual funds, comprised of foreign stocks and bonds, to domestic investors.

Under the new economic reform program, individuals with more than RMB1 million ($160,000) in assets would be allowed to freely purchase financial assets internationally, up to half of the value of their total assets. Press reports indicate that the plan may first be made available to employees at companies in the country’s free trade zones.

For corporate investors, the QDII2 program would raise the ceiling on purchases of overseas assets to as high as $1 billion, from the current limit of $300 million, the official newspaper said. This new plan would introduce even wider reforms than a measure announced on May 22nd that allowed finance companies to begin cross-border sales of funds between Hong Kong and Shanghai starting on July 1st.

The fund sales reform is initially limited to a fixed annual quota of RMB 600 billion yuan ($97 billion), split evenly in each direction. When QDII2 is officially announced, it is expected to be restricted to a similar type of quota, which would allow the government to gradually expand the program should be prove successful.

Reforms Aimed at Reforming Markets, Gaining IMF Approval

China has been gradually relaxing the grip of state agencies on the economy as a move to both unleash greater economic growth and push its political agenda with bodies such as the IMF.

By allowing cross border investments China hopes to flatten out the steep peaks and valleys of its real estate and stock markets, which routinely are whipsawed by rapid capital inflows and exits within the country’s closed financial system.

The reforming Communist state also has high hopes that the IMF will this year certify the Renminbi as a global exchange currency, allowing China to chip away at the grip of the US dollar on world financial markets.

More Wealthy Individuals and Companies to Send Money Overseas

While many of China’s wealthy citizens and companies have already been finding ways to work around the existing limits and make overseas acquisitions, the new reforms, which have yet to be formally announced or scheduled, will still be removing a significant barrier to outbound capital.

For global real estate markets, this increased outflow in funds is likely to drive prices higher in the world’s gateway cities, and spread the Chinese real estate boom even further geographically.

Australia already saw Chinese investment into its real estate market more than double from the 2012-2013 fiscal year to reach A$12.4 billion ($9.76 billion) in the fiscal year ending in March 2015.

In the US, total investment from China grew to $12 billion in 2014, and in Manhattan that capital inflow helped create a $1 billion increase in real estate investment to where Chinese bought $3.35 billion in homes, office buildings and retail space in 2014.
Now with the remaining barriers being rapidly taken down, the rate of increase in Chinese outbound real estate investment should continue to grow.