Chinese millionaires snub Aussie stocks-for-visa programme

Sydney

CHINESE millionaires who happily invested in Australian bonds and real estate to get residency visas are turning up their noses at small-cap stocks.

Just 19 people have sought permits since Australia overhauled requirements for its investor visas in July by forcing applicants to put at least A$1.5 million (S$1.5 million) of the A$5 million they need to spend in the country into smaller equities and another chunk into venture capital. The old system - which was in place since 2012 and drew more than 1,600 applicants primarily from China - let them choose low-risk government debt or popular property investments.

The developments are frustrating fund managers who were hoping for an influx of cash. Australian small-company shares are less volatile and much cheaper than their equivalents in China, which have been at the centre of a stock boom and a US$5 trillion bust.

"It's been a slow start," Douglas Loh, the Melbourne-based head of equities at Acorn Capital Ltd, which oversees about A$600 million, said in a phone interview. "The bottom line is that SIV (Significant Investor Visa) applicants want to be able to get permanent residency in Australia. They are not really looking to make a lot of money from the equity investment, but rather to protect their capital."

Millionaire migrants, almost all from China, ploughed A$3.8 billion into Australian assets since the government created the visa category in 2012. UBS Group AG, Eight Investment Partners and Acorn Capital are among firms with new small-cap equity funds to cater to the anticipated demand.

"It will take some time to get the message through that equity risk can be managed - that the Australian market is not a trading market like you see in China," said Acorn's Mr Loh. "The Chinese market is so volatile, but if you look at the Australian market, it's steady as she goes."

Australia retooled its SIV away from government bonds and residential real estate - assets that already attract large capital flows - towards investments that boost the country's long-term economic future.

Under the new rules, applicants must spend A$500,000 on funds investing in startup and small private companies, A$1.5 million on small-cap equity funds, and the other A$3 million on managed funds across Australian listed securities, eligible corporate bonds or notes, annuities and property. They need to stay invested for four years and live in Australia for 160 days of that period.

"The cost of the visa has gone up the risk curve," said David Chin, the Sydney-based managing director of Basis Point Consulting Pty. While Chinese people are willing to make risky investments in other circumstances, they view their immigration decisions differently, he said. "The visa is about wealth preservation and quality of life."

Chinese nationals accounted for 91 per cent of applications under the old programme, Goldman Sachs Group Inc estimates. Australia's rule changes came just as the world's second-biggest stock market started to crash. The Shanghai Composite Index, which tumbled 43 per cent before rebounding 24 per cent through Tuesday, is more than twice as volatile as the Australian benchmark equities gauge, Bloomberg data shows.

For smaller stocks, the disparity is even bigger. The S&P/ASX Small Ordinaries index traded on Tuesday at 15.5 times estimated earnings, compared with 61.8 on the ChiNext Composite Index in Shenzhen. The Chi- Next soared as much as 179 per cent this year through its peak in June before sliding 54 per cent to its September low. The measure added 0.3 per cent as at 10:05am local time on Wednesday, and is up 97 per cent in 2015.

"The revised settings for the Significant Investor Visa may impact on demand from applicants attracted to the previous framework's openness to residential real estate schemes and low-risk assets," the Department of Immigration and Border Protection said in an e-mail. "It is too soon to identify any ongoing trends."

While direct purchases of real estate didn't count towards the A$5 million total under the old rules, migrants could invest in residential property through managed funds. This has now been capped at A$300,000, or 6 per cent of their total investment. Chinese demand for Australian property is waning as an economic slowdown at home dents confidence, according to Credit Suisse Group AG.

Australia isn't alone in its bid to tempt wealthy investors in exchange for some of the rights that its citizens enjoy. In the US, EB-5 visas, set up in 1990, have a minimum US$1 million requirement to create jobs and boost capital investment from foreigners. In the UK, overseas nationals who want to invest £2 million (S$4.3 million) can get a decision on a visa within three weeks, though they need to apply to extend that after three years and four months. BLOOMBERG