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More holes than fingers? Beijing struggles to plug capital flight
[SHANGHAI] As a slick slide presentation runs for the well-heeled investors jammed into the banqueting hall of Shanghai's Renaissance Yangtze Hotel, an image flashes up of a grinning Chinese man pushing a wheelbarrow full of cash into Europe.
Another slide features a car bearing a Chinese flag preparing to drive into a pit.
For wealthy Chinese, desperate to avoid further falls in a currency that has shed 6 per cent against the dollar since August, the message is clear.
"The yuan will keep depreciating as time goes by, so we should swap the money we have in hand into tangible assets," Li Xiaodong, chairman of Canaan Capital, tells his audience, while exhorting them to pull their money out of China while the going is still good and pour it into property in Spain and Portugal.
Canaan Capital is one of a swarm of asset management firms leaping to profit from Beijing's latest policy headache: the swelling crowd of Chinese individuals and firms trying to get their money out of the world's second biggest economy as its growth slows to a quarter-century low.
Weak real estate prices and the gyrations of the stock market, which plunged as much as 40 per cent in a summer meltdown last year and has tumbled around 17 per cent so far this year, have only encouraged the trend to seek better returns elsewhere.
The risk for policymakers is that so much money will exit China it will undo their efforts to cut the cost of credit domestically and reinvigorate flagging productive investment.
In graphs and numbers, Mr Li's slideshow ran through some of the reasons why many of the 600 or so people who packed into his talk in late December are sceptical that the wobbly economy is turning around soon: an aging society, slowing growth, and the slide of the yuan against the dollar.
"Where was Li Kashing heading? He was heading to Europe," Mr Li quipped, drawing laughs for his reference to the Hong Kong multibillionaire, who has been trimming his exposure at home and buying utilities and telecoms assets in the West.
Thanks to incremental reforms to China's capital account enacted while the yuan was still strong, it is easier than ever for Chinese companies and individuals to get money out legally.
They can buy property, or invest in offshore stocks, bonds or managed hedge funds; they can purchase offshore life insurance that can be used as collateral for further loans, or even buy a foreign company outright.
And their scope is not limited to Europe. One Shanghai-based investment company, Zengda, plans to guide Chinese money into mines, land and gas projects in Africa.
Others use trade and even tourism transactions to get money out of the country - contributing to the US$200 to US$500 billion Chinese tourists are estimated to spend abroad annually.
The trend has grown so rapidly that some international banks are bolstering their wealth management divisions, encouraged by data showing money pouring out of China.
China's central bank and commercial banks sold a net 629 billion yuan (S$136.6 billion) worth of foreign exchange in December, nearly triple the figure for the previous month.
One way of investing money overseas is through the Qualified Domestic Institutional Investor (QDII) pilot programme, which allows Chinese mutual funds to buy offshore stocks.
"Clients come to me now, realizing that hedging makes sense," said a private wealth manager at an international investment bank who spoke on condition of anonymity. "I heard the QDII scheme was so popular that some brokerage firms were charging 6 per cent just to use the quota, but people are still paying. They're afraid of depreciation."
A second investment management source in Shanghai confirmed that the costs of borrowing QDII quota had shot up in recent weeks amid surging demand and short supply.
China Asset Management (Hong Kong) Ltd has recently launched a 150 million yuan (S$32.6 million) hedge fund under QDII to invest overseas and is charging mainland investors 1 per cent annually as a channel fee, in addition to subscription and management fees, according to sales document seen by Reuters.
HAPPY TO HELP
Policymakers fret that, instead of putting money into the research and development China wants to move its firms up the value chain, the executive elite will pour it into the elegant condos in downtown Lisbon that Canaan Capital is selling.
Unfortunately for Beijing, it is going to be very difficult to stem the tide, given many of the channels being used are legal and, in some ways, beneficial.
Beijing has, for example, been trying to make it easier for domestic companies to acquire overseas assets, seen as a way to increase Chinese influence and help firms move up the value chain by acquiring foreign competitors.
Any move to slow capital flight being disguised as M&A could impede strategic investments as well.
Beijing has also been trying to increase the international usage of the yuan, a project that could collapse if foreigners saw their money getting trapped in China.
Moreover, many of the funds are using the free trade zones China has rolled out in the last few years as part of a major reform push, which were specifically designed to make it easier for capital to cross the borders.
As a result, fund managers say that so far Beijing moved cautiously in its efforts to close the taps, halting quota issuance for easily controllable channels such as the QDII programme, for instance, and pressing banks to tighten outflows.
Whether regulators will be forced to go further to defend monetary stability remains in question, but few expect the demand to go away. "The huge level of individual and corporate savings which exist in China at present obviously cannot find a reasonable return on investment in China," said Hao Zhou, Commerzbank analyst in Singapore. "Consequently there is every chance that capital flight can become a long-standing affair."