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US$100b Chinese city in the sea is hit by capital controls

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Sales gallery of the Forest City, a mega development project in Johor Bahru, Johor, Malaysia.

[SINGAPORE] The $100 billion city rising from the sea next to Singapore has hit a roadblock: China's capital controls.

The dream of a Malaysian version of Shenzhen - largely funded by Chinese developers and buyers - with hotels, offices, golf courses, tech parks and thousands of ritzy new apartments, is having to adapt after China's government clamped down on an exodus of money for investment in overseas property.

Developers' sales offices in China that once brought in buyers by the hundreds are now pushing developments in Chinese cities. Subsidized junkets that flew in prospective buyers to development sites in the southern Malaysian state of Johor have dwindled. And some buyers who paid deposits for yet-to-be-built homes are considering canceling their purchases.

"I feel I'm on the horns of a dilemma," said Michelle Gao, who paid about 600,000 yuan (S$121,991) toward the 1.2 million yuan cost of a two-bedroom apartment at Country Garden Holdings Co's vast Forest City development. "If the project relies so much on Chinese buyers like me, how on earth are they able to sell in future? Will the construction ever finish?" The crackdown on outflows of money from China has spooked some buyers. While Chinese citizens are allowed an annual foreign exchange quota of $50,000, the government said in December that all buyers of foreign exchange must sign a pledge that they won't use their quotas for offshore property investment. Violators would be added to a watch list, denied access to foreign currency for three years and be subject to a money-laundering investigation.

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The restriction threatens to take the wind out of residential property sales in cities around the world where prices have been driven in the past few years by buyers from China. Few projects are likely to be affected as much as the Chinese-financed developments in Johor, some of which had relied on mainland customers for as much as 90 percent of sales.

Six Chinese buyers interviewed for this story said they paid a 10 per cent down-payment to Country Garden in showrooms in China by swiping debit or credit cards or using payment services like Alipay. They said the property agents are now telling them they need to go to Hong Kong, Singapore, Malaysia or Macau to swipe their cards to pay the balance of installments, or wire funds to Country Garden's overseas accounts.

Many are worried that would still make them liable under China's foreign exchange rules. This month, the Chinese government said domestic banks will have to provide daily reports of clients' overseas transactions of more than 1,000 yuan.

"I was told it can still be done from Hong Kong, but I'm just scared now," said buyer Elaine Xiao. "I don't know what punishment I may get." Country Garden said the controls have not had a material effect on sales and construction at Forest City is continuing. It has completed a luxury hotel and handed over the first batch of 132 apartments on May 1.

The Johor developments stem from Iskandar Malaysia, a government effort to leverage Singapore's success by building a new metropolis near the causeway that connects the island state to the Malaysian city of Johor Bahru. When the 20-year project was announced in 2006, it envisaged a total investment of 383 billion ringgit (S$124.1 billion) and much of the early investment came from Singapore.

But then Chinese developers like Country Garden and Greenland Holdings Group Co moved in with projects that dwarfed those of their Malaysian and Singaporean rivals. Country Garden's "Forest City" alone called for a $100 billion high-rise town to be built on artificial islands within a few hundred yards of Singapore.

The projects were marketed in China, and thousands paid deposits for apartments that cost as much as double the rate per square meter of homes for Malaysian buyers in Johor Bahru.

Country Garden announced on June 20 it would proceed with stage 2 of the Forest City development, a $280 million plan that includes golf courses, an international school and another hotel. The developer said in April it was in discussion with fewer than 60 Chinese buyers who indicated their intention to cancel bookings. The company said it sold 16,000 residential units in Forest City last year.

Country Garden said earlier it had stopped marketing Forest City in its sales galleries in China and ceased organizing tours to its Johor projects for would-be buyers. Its agents in China are pushing domestic projects in the country's tropical southern resort of Sanya and the seaside city of Beihai.

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