The boom of Chinese investment in U.S. commercial real estate, which lasted from 2014–2017, has been largely curtailed by China’s enactment of foreign exchange currency controls. But what are the actual effects of this policy, and what do the Chinese government’s underlying motivations tell us about when we can expect capital controls to end?

Anbang Insurance Group Co.’s multibillion-dollar hotel buying spree seems to have stopped, Dalian Wanda Group Co. is now a seller, Ping An Insurance Group Co.’s U.S. team is quiet, and Chinese institutions have recently become net sellers. The Wall Street Journal reports Chinese investors sold $1.29 billion of U.S. commercial real estate in second quarter 2018, while purchasing only $126.2 million of property. This marked the first quarter these investors were net sellers since 2008, according to data from Real Capital Analytics.

Acquisition departments at firms such as Anbang and Wanda have largely disbanded or scaled down, and many outbound private equity players have reverted back to the domestic Chinese real estate activities in which they were engaged before the outbound swell began circa 2014 (see “Acquisition and sales of U.S. real estate by Chinese companies, Q1 2014–Q2 2018,” page 60).

The capital controls have had significant effect. China’s direct investments abroad in 2017 dropped 19.3 percent from a year earlier to $158.29 billion, the first year-over-year decline since data was first released in 2003. One of China’s leading financial news organizations, Caixin Global, reported this past September that China’s 2017 investment in the overseas real estate sector declined 55 percent to $6.8 billion.

Chinese outbound capital flows have been further hurt by political factors. “The China-U.S. outbound cross-border real estate climate has been negatively impacted by the geopolitical climate,” David Blumenfeld, a Hong Kong–based partner at Paul Hastings, told The Wall Street Journal this past July. In the United States, politicians have grown wary of security risks associated with foreign ownership of certain assets deemed strategically important, so The Committee on Foreign Investment in the United States (CFIUS) has blocked several large deals backed by Chinese institutional investors. Furthermore, President Trump’s trade war with China adds to an aura of uncertainty that likely makes Chinese buyers think twice before investing in large U.S. real estate projects.

High-net-worth investors seem to have been less affected by the capital controls. Although it’s easier for the government to keep tabs on large outbound deals by prolific institutional players — they can simply read about each investment in the headlines — it’s much harder for the government to keep track of China’s 1.6 million millionaires as they diversify into overseas investment opportunities. In 2018, the Chinese government published case studies of individuals being punished for sending their money overseas for “unauthorized” purposes, such as investing in real estate, as an attempt to reign in such activity. Certainly, it has become more difficult for wealthy Chinese to send money overseas. Gray-market channels have become fewer and farther between, and clients report banks ask in-depth questions about the purpose of foreign transfers even as small as $10,000.

But the data indicates overseas investment remains strong. The National Association of Realtors in the United States reports 2018 home purchases from China at near record-setting levels, on par with 2017 data. Anecdotal evidence also indicates Chinese single-family-home investment remains strong and “normal” compared with years past, although the average price per house seems to be a bit lower, likely because it is challenging to get capital out of the country.

How could this be possible? Even though it is harder to move money out of the country now, the demand to diversify beyond China’s borders is as strong as ever. Business-minded Chinese individuals are increasingly concerned about the Chinese economy and looking for ways to park wealth in more stable environments (see “HNW investor capital on the move, 2010–2018,” left).

THE MOTIVATION BEHIND CAPITAL CONTROLS

Let’s consider Beijing’s motivation for implementing these capital controls, and perhaps that will help us predict when such policies may end.

In 2016, Beijing knew investors were fretting about the Chinese economic situation and began to use the People’s Bank of China’s foreign currency reserves to prop up the yuan. Up to that point, investors had been anticipating a depreciating yuan, so the sooner they could purchase dollar- or euro-denominated assets, the sooner they could begin to see exchange rate profits even beyond the returns generated by the real estate assets themselves. That mindset significantly contributed to the Chinese buying frenzy.

But the government wanted to keep the money within China’s borders. It wanted investors to keep placing capital in domestic real estate and stock markets. Foreign currency reserves rapidly depleted from 2015 through 2017, as the authorities worked to stabilize the renminbi. Stern talks with institutional CEOs, a government takeover of Anbang, and convictions for executives, such as Anbang’s Wu Xiaohui, all helped convince China’s institutions to slow down or halt their overseas expansion plans. The GDP annual growth rate is the lowest level in decades, and the government has made it clear it wants money to stay within China.

Recently, as the trade war has plodded on, China has continued to deploy its foreign currency reserves to prop up the yuan. This not only stabilizes China’s foreign exchange rate, it also encourages investors to keep their capital within China. Looking into the future to speculate about next steps, we see the PBOC still has $3.07 trillion remaining in its foreign currency reserves, a significant arsenal.

WHAT’S NEXT?

The end of 2018 saw China’s economy heading into a severe nosedive, with weak December export statistics. China’s exports to the United States fell 3.5 percent on the year, significantly underperforming shipments to Europe, even though the European economy seems to be much more sluggish than the United States’. Overall, Chinese exports were down 4.4 percent, reports The Wall Street Journal. China’s imports are down, consumer confidence is weak, and stock markets have been in bear territory.

For the time being, Beijing’s leadership is going to keep capital within China’s borders as much as possible. They still have significant foreign currency reserves to allow them breathing room to support the renminbi. Trump will push for freer capital markets, trade balance, and fair competition for foreign companies in China. Time will tell which side gives in the most.

For a time, the stars aligned: The dollar was appreciating, the U.S. economy was growing, Chinese stock markets were down, U.S. real estate was coming out of a down cycle, and the Chinese government was encouraging global pursuits. But times have changed, and capital controls may well be in effect for the foreseeable future. Just as the Japanese U.S. real estate buying spree came to an end, the headlines of major Chinese purchases seem to be in the rear-view mirror.

Ben Briggs is executive vice president of international business for Briggs Freeman Sotheby’s International Realty, lead author of the book Chinese Institutions’ Definitive Guide to USA Commercial Real Estate, and managing director of the co-working investment fund for Briggs Global Capital.