China's investment migration market

Despite the pandemic, Hong Kong is experiencing a record summer of overseas real estate exhibitions.

We are in the midst of a global pandemic that has changed the world forever, which we are still trying to come to terms with and which is likely to continue into 2021. Nevertheless, overseas real estate shows continue to take place in Hong Kong at near record numbers. Although there have been downturns in Hong Kong in each wave (there have been three), the impact on overseas real estate exhibitions is less with each wave, with exhibitions taking place around 30 times a week.

Since 2018, I have been tracking overseas real estate exhibitions, mainly in three Asian cities - Singapore, Kuala Lumpur and Hong Kong. The latter faced Covid-19 for the first time in January and we saw a decline in exhibitions, although they increased during March. Overseas property shows continued in Kuala Lumpur and Singapore until March, when both of these cities were blocked, and only recently began individual shows in late July. 

We have seen a number of trends over the past 12 months, starting with changes in the location of the exhibitions, the marketing of overseas real estate, and the countries from which the projects on offer in Hong Kong are sourced. 

12 months ago, you could see projects from 15-20 different countries in a month. However, since February 2020, the number of countries offered to Hong Kong buyers has dropped significantly to less than 10 in a typical month. One reason for this is personal familiarity: agents believed that consumers were less likely to make a purchase if they could not travel or if they had not been to the target country/city before. Developers and principal agents are also unable to travel to Hong Kong to increase sales.

Protests and unrest in the second half of 2019 led to a record number of overseas real estate shows in South Africa; mostly 35+ shows per week, and even 50+ in one week. 

Demand for Malaysia has plummeted.

Apart from looking for options to take capital abroad, locals were also looking for an immigration “plan B”. Real estate in Malaysia has attracted unprecedented interest. From July to October 2019, 222 Malaysian property exhibitions were held, peaking at 80 in September and regularly accounting for more than 30% of all exhibitions in Hong Kong. However, since October, Malaysia's share of overseas property exhibitions has fallen below 30% and often below 20%.

So far in 2020, there have only been two weeks in which 10 or more Malaysian real estate exhibitions have been held. Compare this to 2019, which has seen 17 weeks of 10+ Malaysia real estate shows since mid-July. In the last three weeks of July 2020, Malaysia represented less than 15% of exhibitions in Hong Kong (less than four per week) and continues to decline.

Last year, the MM2H visa to Malaysia was the most popular investment visa in the world. In fact, visa issuance was halted at the end of 2019, with over 90% of applications rejected and officially suspended in July 2020.

Demand for the UK is on the rise.

By the end of May 2020, property from the UK has started to pick up after a relatively quiet start to the year in terms of showings. Hong Kong's National Security Act - the UK's answer to this (offering a pathway to citizenship for BN (O), as well as the UK stamp duty vacation and foreign buyers' tax coming next year) has sparked interest in UK property to unprecedented levels in Hong Kong.

What is more interesting is the percentage of UK exhibitions as a percentage of total exhibitions. As it has been over 30% since mid-June, in the last two weeks of July, UK property exhibitions accounted for more than half of the total number of exhibitions in the city. This trend has continued into August and is unlikely to change in the short term.

Although in the short term the absolute number of shows in August will decline (due to the 'third wave' in Hong Kong), the UK will maintain its strong market share in the short to medium term. Immigration is driving a growing share of property demand for Hong Kong residents, which has led to demand for a wider range of property types, as well as lower project sales (as there are more projects).

The nature of overseas property demand in Hong Kong has changed markedly over the past 12 months - premiums are now being charged on properties that have immigration benefits.

Why China's investment migration market has not recovered (and probably won't for some time to come).

Although China seems to have become a global leader in terms of post-pandemic recovery, China's investment migration market is still far from its pre-Covid conditions. At recent industry summits, the most frequently asked question was: why has China's investment migration market not yet recovered?

Not only has the volume of applications not returned: there is nothing to indicate that a recovery is even beginning, despite a big push among large migration firms to launch marketing plans aimed at making up for lost revenue during the pandemic (meeting perceived pent-up demand) most investment migration agencies in China have adopted ambitious marketing plans to make up for the losses caused by the pandemic in the first half of the year.

A quick glance at the results on Baidu is revealing: a keyword search for “investment migration” [ed: 投资 移民] immediately displays media advertising by prominent Chinese agencies. They are spending as much money on online advertising as before, if not more. So, what are Chinese migrant investors waiting for?

The fact is that the stagnation of China's investment migration market has nothing to do with a pandemic. The real problem of the Chinese investment migration market is the sword of Damocles hanging over the head of HNWIs in China. The two edges of the sword symbolize mobility and privacy respectively.

First Blade of the Sword - Mobility Restrictions

Simply put, Chinese applicants are currently unable to achieve global freedom of movement in any practical sense. There are three main reasons for this.

The threat of hukou

First is the fear of losing your hukou (home registration). Suppose you have obtained a residence permit in another country and plan to settle there. This would be grounds for revoking your hukou. The importance of hukou to a Chinese person is as important as citizenship because having a hukou means that you are entitled to national and local social welfare programs (e.g., government health insurance, education, pensions, etc.) and the right to invest in a particular area of China (especially real estate investment). For the vast majority of Chinese investors, real estate investments make up the lion's share of their portfolios. Their love for real estate investments is also reflected in the growing popularity of golden visas in the Chinese market.

China is in the process of rolling out its 7th nationwide census, which mainly focuses on general information about permanent residents, such as name, ID number, gender, age, ethnic group, education, industry, occupation, and population movement, among others. In a video and telephone conference in June 2020, the Ministry of Public Security of the People's Republic of China issued an order to verify hukou statuses on a national scale, causing potential Chinese applicants to fear that their migration plans could have a negative impact on their assets in China and thus effectively force them to abandon their plans to avoid losing their hukou.

Application of the prohibition on dual citizenship

The second reason relates to China's stance on dual citizenship. While this is not a new topic, the pandemic has brought it to the forefront again. If a Chinese citizen wants to achieve global mobility, a second passport will not really facilitate this. From a legal standpoint, obtaining a second passport is in itself a violation of Chinese law. Many of those who have acquired a second passport and have not yet renounced their Chinese citizenship have been forced to recognize their dual citizenship upon returning to China from pandemic-affected areas. This is because if you enter China on an alternative passport, you will (in most cases) need a visa of the appropriate duration.

China has already developed its biological identification system and applied it to passports and other identity documents. Once it is discovered that you have dual citizenship, you will face pressure from all sides and sometimes even more serious problems.

For example, media in China reported in August 2019 that Xiang Sun, founder and president of Hebei Sinogiant Steel Investment Co., Ltd, a well-known steel group in China, had acquired St. Kitts and Nevis citizenship through the CIP system in 2011. After his dual citizenship situation was revealed that same month, he was fired from the National People's Congress of Hebei Province. Although the Chinese media did not make follow-up reports, the deterrent effect of the story of what happened to a successful entrepreneur who often appeared on lists of Chinese wealthy individuals was understandably huge. Without government support, this entrepreneur could not have resorted to the local financial system to invest, obtain financing, or even work normally with other state-owned enterprises. He was even criticized and condemned in his normal far from business and finance, life.

Ban on passport renewals and low-value travel

The third reason relates to the travel document freeze and general travel ban imposed by China as part of its response to the pandemic. Earlier this year, the Chinese government implemented a measure ostensibly aimed at curbing the spread of the pandemic. Chinese citizens were temporarily banned from leaving the country and passport renewals were suspended indefinitely. This measure immediately hindered most offshore businesses, especially in the financial and migration areas, such as opening a bank account, renewing accounts, or obtaining travel documents.

When China's National Immigration Administration issued an order to ban any unnecessary movement of people across the border, a chill swept through the already struggling investment migration industry. Since the pandemic began, China has closed 46 land ports, 66 border access points and suspended visa services, while discouraging and prohibiting unimportant and non-urgent movement of mainlanders across the border, such as for tourism or to visit relatives and friends abroad.

Enforcement of capital controls

There are restrictions on cross-border capital transfers. While this has been a “mandatory regulation” in the past, there have indeed been several “flexible” ways to circumvent it, and these tools have effectively ensured that Chinese capital flows abroad. To some extent, offshore companies, especially in the financial industry, relied heavily on these “hidden” services. However, since 2018, the Chinese government has been paying special attention to this issue and has introduced several tough countermeasures.

The second blade of the sword is privacy restrictions

The other edge of the sword epitomizes privacy. While the vast majority of investment migration firms say they make protecting client privacy a priority, there have been no viable plans to protect the privacy of HNWIs in China. We usually associate privacy with security. In China, no one can realistically expect privacy.

Privacy

Immigration itself is an individual behavior and is completely unrelated to politics. In the early stage of the rise of China's investment migration market, firms could not use the word “immigration” directly in their marketing campaigns, and this action would likely be subject to punishment by competent institutions or authorities. Although most restrictions in this regard have been relaxed in recent years, China's investment migration market is still in an uncomfortable position.

The investment migration industry in China is not entirely legitimate in a strictly legal sense. On the one hand, migration is allowed by law. On the other hand, personal overseas investment is considered illegal. Thus, China's investment migration industry has fallen into a gray area from a legal perspective.

As soon as the competent authorities discover a politically exposed person among the applicants or learn that a firm has helped some applicant to transfer capital abroad, the identities of all clients that the investment migration firm has assisted in the past will be revealed. No firm or individual can stand up to the state apparatus. Of course, there have been instances where immigration firms have not had efficient workflows and immigration consultants have not been able to remain silent and disclose client information. Combined with potential conflicts of interest, this private information - once disclosed - will spread quickly, and some celebrities even unwittingly become “publicity players” for investment migration programs. Even worse, these exposed public figures have been portrayed on social media as “flawed businessmen” who “impersonated” Chinese and made money in China.

Untouchability of wealth

China is likely to be the first country to introduce a sovereign digital currency, namely a system called Digital Currency Electronic Payments (DCEP). It has launched pilot programs in several of its cities. The first group of subjects consists of national civil servants whose salaries will be paid in digital currency in the future. DCEP provides limited anonymity, which means that government agencies have the right to investigate illegal transactions and other agencies do not have access to consumers' payment data. This digital currency does not support cross-border transactions or foreign currency exchanges and is strictly registered by government agencies. While this move will help fight money laundering to some extent, it also indicates that the privacy of personal assets will become a thing of the past.