The peak travel season for Chinese traveling abroad is the so-called Golden week, which begins on October 1. At this time in many countries around the world are trying to serve wealthy tourists from China.
Foreign research shows that Chinese consumption abroad have grown explosively over the last year. Citing data from the world tourism organization (World Tourism Organization), the Chinese media the “Daily economic news” reported that the cost of Chinese abroad in 2013, 2014 and 2015 amounted to $129 billion, $155 billion and $292 billion respectively.
The Chinese tourism Academy predicts that 589 million Chinese will travel abroad in the beginning of October, during the Golden week, and will break the records of consumption of previous years. This trend in the behavior of Chinese tourists once again attracted everyone’s attention.
The world Federation of tourist cities (World Tourism Cities Federation) released a report on 20 September, which States that the number of tourists from China in 2015 amounted to 120 million, 18% more than in 2013 (98 million people). The cost of Chinese tourists abroad has increased significantly by 30.3%, to $215 billion.
In a report published in September noted that in 2015 there were of 2.59 million Chinese tourists in the U.S., 18% more year on year. Their total spending reached $26 900 million, the daily expenditure amounted to $74 million.
The outflow of capital?
China suffers from a lack of tourism, Chinese tourists spend more money abroad than foreign tourists in China. Foreign experts suspect that there are capital outflows, disguised thanks to the huge growth in data consumption.
Bloomberg News on 22 September published a report called “Suitcases full of cash: data on the tourism expenditures of Chinese testify to the outflow of capital”. Brad Setser, senior fellow at the Council on foreign relations and a former official of the U.S. Treasury, told Bloomberg that the analysis of expenses of Chinese tourists in some of the most popular destinations have shown that the consumption of Chinese tourists abroad is much higher than the expenditures of foreign tourists in China.
For example, in the period between 2013 and June of 2016, the deficit of the tourism in China has soared from $77 billion to $206 billion, according to Bloomberg. This is a huge increase — 168%. At the same time, the number of Chinese and foreign tourists for the same period increased only 18%.
Taking into account the fact that the yuan has ceased to grow in 2013, the consumption of Chinese tourists abroad was not supposed to increase dramatically.
Setser, believes that the discrepancies in data show that Chinese tourists can leave large amounts of cash abroad, buying real estate there during his studies, signing insurance packages in Hong Kong and donating money deposited abroad.
Buy insurance policies in Hong Kong
In a report published by the Chinese Academy of tourism and Union Pay International in early September, stated that by the end of 2016 the number of Chinese tourists in total will reach 133 million people, and Hong Kong remains the most popular destination.
Although the retail sector in Hong Kong remains sluggish, the insurance industry, which is regarded as an important channel for capital outflow, hitting new records.
According to figures released by the Office of the insurance Commissioner in Hong Kong, premiums for insurance of tourists from mainland China amounted to 30.1 billion Hong Kong dollars during the first six months of 2016. It is close to the amount for the entire 2015 year and 11% more compared to the same period last year. Only in the second quarter of the new insurance premium of guests from mainland China soared by 168% yoy, 26% QoQ and amounted to 16.9 billion Hong Kong dollars.
Insiders in the insurance industry in Hong Kong announced that the Chinese government has tightened control over high-ranking officials traveling abroad, they use every opportunity to export their wealth. This is often done by investing in insurance policies for tens of millions of dollars.
Since the beginning of this year, the Chinese government has implemented a number of measures to limit the outflow of capital by insurance, including setting a limit of $5,000 for UnionPay transactions, banning electronic payment of premiums for life insurance and introducing more stringent rules for investment-related insurance.
In addition, since September 1, Chinese mainland should sign a special Declaration when buying insurance policies in Hong Kong, which lists 10 major consumer risks. Agents of the Hong Kong insurance companies are also required to sign an agreement refraining from extortion in mainland China.
However, senior insurance broker Amy (a pseudonym) said: “Buying insurance is nearly the only safe way of transferring capital abroad at present”. If the government completely ban it, to stop the outflow of capital due to insurance purchase is difficult.
Amy, who rose to the rank of Million Dollar Round Table (which requires minimal amounts of 1.9 million Hong Kong dollars when obtaining insurance this year) after only one year of experience in the industry has mostly wealthy clients from mainland China, such as presidents of banks and entrepreneurs who are willing to sign a million dollar policy.
Chinese leader XI Jinping during the anti-corruption campaign has set a rule according to which many high-ranking officials, including government officials, presidents of banks may leave the country only once or twice a year, and then only with restrictions.
So Amy says, “Whenever they come to Hong Kong, they handle the most important to them with requests, such as immigration issues for their children, buying insurance policies, or withdrawal of assets abroad”.
As they bypass the restriction on currency exchange? Amy says they use their UnionPay cards as many times as required by the transaction.
Bloomberg reported that in connection with limitation of $5000 per transaction, one insurance agent used a map more than 800 times to perform insurance deal for 28 million Hong Kong dollars.
Universal life insurance
Of all the types of insurance policies universal life insurance that combines insurance and life and investments is preferred.
Amy explained that buyers can take mortgage loans in banks or financial companies to buy a policy and then cash out 80% of premiums in Hong Kong. They can then use the money to refinance to pay for immigration costs, or for other purposes.
Midland Immigration Consultancy data show that the income of residents of mainland China who migrated to Hong Kong through the investment channel and invested in insurance policies increased from 30 to 55% in the last three years.
Tommy Lai, CEO of Midland Financial Group, says that the majority of customers purchasing insurance policies universal life insurance, come from mainland China. They tend to purchase policies in the amount of from 3 to 5 million Hong Kong dollars or more.
“Some customers want to withdraw their assets, while others use them to avoid inheritance taxes when transferring funds to the children,” said Lai.
Lai added that when buying expensive insurance policies are very strict requirements for health of buyers.
Real estate markets in the USA and Canada
In addition to insurance policies in Hong Kong is another important direction of outflow of capital to foreign real estate markets.
Real estate Agency CBRE recently reported that in the first half of 2016 cross-border investments in Chinese real estate amounted to $16.1 billion, which is more than twice the investments of Americans in the same period last year.
The phenomenon of Chinese students buying and selling real estate in Vancouver, alarmed local residents and the government in recent times.
According to the Vancouver Sun, the nine buyers of real estate in the district of point grey over 57 million canadian dollars — Chinese students. One of them, Xuan Qihuan, bought the mansion on West eighth street for the 19 million canadian dollars and sold it for 35 million in may this year, with a profit of $ 16 million.
The canadian government recently introduced measures to prevent the purchase of real estate by residents of mainland China, thereby pushing up prices. Once in July in the province of British Columbia introduced a tax of 15% on the transfer of property to foreign buyers in the greater Vancouver, real estate sales to foreign buyers between 2 August and 31 August fell sharply by as much as 97% compared to the period between 10 June and 1 August.
During his visit to Canada (from 21 September to 24 September) Chinese Premier Li Keqiang signed an agreement on joint use and return of confiscated assets, it is the first agreement of China with another country for the recovery of criminal proceeds.
The agreement is of great importance, as Canada, behind only the United States, is the second most popular destination for Chinese corrupt officials. More than a quarter of the 100 richest wanted the Chinese in Canada.
Observers are concerned about the impact of this agreement on the withdrawal of assets of Chinese officials and the prevention of capital outflows.
The Wall Street Journal reported that Chinese investors pumped $12.9 billion this year for the U.S. real estate market, the equivalent of $14 billion, which they invested in 2015. The money goes to the purchase of luxury homes in new York, Boston, Chicago, Los Angeles and Miami.
A recent report by the National Association of realtors, notes that Chinese property buyers have spent a total of $27.3 billion in the US from April 2015 to March 2016, it is three times more than the $8.9 billion invested by Canadians. The average price of $542 084 was also the highest among foreign buyers of U.S. real estate.
Lawrence Yun, chief economist of the realtors Association, said that Chinese buyers have a wonderful advantage, about 71% of them pay cash for the property.
Hong Kong is an important platform for capital outflows
Due to the devaluation of the yuan in August 2015, mainland funds flowing into the Hong Kong real estate market.
In the first half of this year there were more than 10 residential units, sold for $500 million Hong Kong dollars. There have been claims that almost half of buyers — rich people from mainland China.
For example, Chen Juntang, Baron of Shenzhen and the Chairman of Cheung Kei group spent HK $7 billion last year to purchase real estate in Hong Kong, including the apartments in Opus Hong Kong and houses in the district to Victoria Peak with the highest price per square foot in the world.
China’s foreign exchange reserves stabilized at about $3.2 trillion since February, but started to decline again in July and August. In August, China’s foreign exchange reserves fell to the lowest level in four and a half years, and the rate of decline was almost four times higher than in July.
Hong Kong is an important platform for capital outflows from the mainland with a large number of channels. Tommy Lai said that wealthy individuals tend to buy stocks, overseas projects for acquisition of companies and real estate and insurance policies.
He believes that the unstable political situation in China created a crisis of confidence among residents of the mainland, prompting “many wealthy people to try various means to bring their money from China.”
Lai said that a wave of capital outflows, will definitely lead to a credit crisis in China, exacerbating deflationary pressures in the country. Hong Kong will probably remain the main platform for capital outflows from the mainland, and it will force the government to raise interest rates that could eventually lead to instability in the economy.
