China’s Crackdown on Capital Outflows

The Chinese government’s extensive crackdown on money exiting the country could hit the Australian property market hard, as private Chinese investors could experience problems settling on deals, following implications of tighter controls on capital outflows, which were announced late last year by various Chinese government departments.

The measures, which involve the stricter monitoring of existing rules and a crackdown on the nature of overseas investments by private and state-owned enterprises, were designed to help stabilise the renminbi (the official currency of the People’s Republic of China), following record amounts of capital exiting the country.

Simon Gleave, KPMG’s head of financial services in China commented –
“Last year an estimated [$1.04 trillion] flowed out of China. It is an astonishing amount of money to be leaving the country when you have a closed capital account,”.

Foreign investments in Australia by Chinese companies could be dealt a serious blow, particularly if Chinese authorities consider these investments to be of a speculative nature rather than as part of the company’s core business.

Under the new measures, an offshore investment by a state-owned enterprise in its core areas would be approved, such as a state-owned bank buying into an offshore bank. However, if a company was looking to make a very large offshore transaction or one outside its core business (such as a state-owned bank investing in mining), then authorities would take a much tougher approach to requests to take foreign exchange out of the country.

Beijing’s crackdown follows a plummet in the country’s level of foreign exchange reserves, from approximately US$4trn in mid-2014 to approximately US$3trn at the moment.

Purchase of Australian Urban Property
The following individuals are not required to seek approval from the Australian Foreign Investment Review Board (FIRB) for the purchase of Australian residential real estate:
• Australian citizens living abroad purchasing either in their own name or through an Australian corporation or a trust;
• Foreign nationals who are the holders of permanent resident visas or are holders, or are entitled to hold, a ‘special category visa’ purchasing either in their own name or through an Australian corporation or a trust; and
• foreign nationals purchasing, as joint tenants, with their Australian citizen spouse.

Foreign persons are normally given approval to buy:
• Vacant land for development, including house and land packages where construction has not commenced, subject to a condition imposed under the Foreign Acquisitions and Takeovers Act 1975 (FATA) that construction is completed within 4 years of their application being approved for residential developments, or continuous construction is commenced within 5 years for commercial developments; and
• New dwellings such as house and land packages, home units and townhouses purchased ‘off the plan’ that is under construction or newly constructed, but never occupied or previously sold. ‘Off the plan’ sales to foreigners are only permitted for new development projects or extensively refurbished commercial structures, which have been converted to residential, on condition that no more than half the dwellings in a development are sold to foreign persons.
• Certain categories of foreign nationals, who hold a visa that permits them to reside in Australia continuously for at least the next 12 months, may be given approval to purchase established residential real estate (that is, second hand dwellings) for use as their principal place of residence (that is, not for rental purposes) while in Australia. A condition of such purchases is that the dwelling must be sold when the foreign nationals’ temporary resident visas expire, they leave Australia, or the property is no longer used as their principal place of residence.
• Foreign companies, with an established substantial business in Australia, buying for named senior executives resident in Australia for periods longer than 12 months, may be eligible for approval provided the accommodation is sold when no longer required for this purpose. Whether a company is eligible, and the number of properties that may be acquired, will depend upon the extent of the foreign company’s operations and assets in Australia. Unless there are special circumstances, foreign companies normally will not be permitted to buy more than two houses under this category. Foreign companies would not be eligible under this category where the property would represent a significant proportion of its assets in Australia.
Proposals by foreign persons to acquire developed residential real estate that do not fall within the above categories are subject to the FATA, but are not normally approved.