Mainland Chinese buyers have become a dominant force in real estate markets across the world. The Chinese government crackdown on outflows earlier this year severely throttled that money. While this money has been throttled, it’s still appearing in certain markets, most notably the United States. We wanted to know how exactly this is still happens, so we connected with Dr. Joseph Wang – a Bitcoin and Chinese capital outflow expert.
The Hong Kong based Dr. Joseph Wang is an OG of monitoring China’s capital flows and Bitcoin. He currently serves as Chief Science Officer at BitQuant, a fintech that specializes in technologies for the upcoming China yuan renminbi equities option market, as well as options and futures for digital currencies. He previously served as Vice President of Quantitative Research for JP Morgan, the sixth largest bank in the world. He’s got a ton of street cred, but even more important – he monitors China’s capital outflows to seek business opportunities.
Using Bitcoin Is The Worst Way To Get Money Out of China
Wang knows first hand that Bitcoin isn’t very popular for evading China’s capital controls. Two years ago he started a company designed to specifically facilitate this. “The trouble is there are too many ways of moving money out of China,” Wang explains. “It turns out that Bitcoin was not competitive two years ago.” Basically, there’s cheaper and faster ways to circumvent capital controls that he later explains.
“Also, it turns out that Bitcoin transactions are extremely traceable which eliminates it has a means of moving money that someone would do in secret.” Wang continued to explain. “The big use that we are using for bitcoin is EB-5 visas to the United States.” For those that don’t know, the EB-5 visa is a millionaire investment scheme, where investors put US$1 million towards a project that creates jobs, in exchange for a US Visa. In 2014, it was estimated that 9,128 EB-5 visas were issued to Chinese nationals. Interesting considering capital controls have a limit of US$50,000 per year. So these 9,128 people either started moving money out of China 20 years ago to participate in the visa program, or they’re circumventing capital controls.
Bitcoin Is Highly Traceable
It’s well known that the Chinese government has set up shop in local bitcoin exchanges to “monitor compliance” with anti-money laundering laws. “The fact that bitcoin can be traceable is in fact a good thing for both the Chinese and US governments.” Says Wang. “One reason that the Chinese government is not particularly negative about bitcoin is that the net impact for bitcoin by capital controls is zero or maybe even positive. Bitcoin is very, very heavily used by Russians to move cash *into* China to buy Chinese goods.”
“The fact that bitcoin can be traceable is in fact a good thing for both the Chinese and US governments.”
— Dr. Joseph Wang
Bitcoin in China is also a little different from the rest of the world, since the People’s Bank of China (PBoC) got involved. The PBoC met with local Bitcoin exchanges this year, and shortly after the exchanges halted the ability to withdraw coins – some for up to four months. Withdrawals now have daily limits, can only be withdrawn in yuan, and must be approved by the exchange. So much for being an anonymous, stateless currency in China.
You can withdraw in a foreign country however, since it doesn’t impact China’s capital reserves. Officially the government frowns on it, but that’s a problem for the country it is withdrawn in to solve. The only thing is, there’s much cheaper ways to circumvent capital controls.
There’s Better Ways To Dodge Capital Controls
Turns out Bitcoin presents more risk to individuals compared to China’s homegrown solution to circumventing capital controls – hot money brokers. These are financial experts that specialize in assisting with the evasion of local capital controls. According to Wang, “fake invoicing” is the most popular method. He goes on to explain “There are a dozen ways of moving money, but it basically involves buying something (art, insurance, whatever), Moving it across the border and selling it.”
“There are a dozen ways of moving money, but it basically involves buying something (art, insurance, whatever), Moving it across the border and selling it.”
— Dr. Joseph Wang
Hot money brokers are substantially cheaper than using Bitcoin exchanges. Wang estimates current fees to be in the range of 0.1% to 0.2%, compared to the lowest Bitcoin exchange fees at 0.2% on the deposit and withdrawal. This makes fees at hot money brokers as low as $1,000 per million dollars, much lower than the $4,000 in fees you would pay to use Bitcoin. While hot money brokers are basically money laundering, it appears to be a widely known and accepted business across Mainland China.
Beijing has an interesting way of dealing with capital outflows. While they closely monitor many methods, they don’t actively pursue shutting them down. They often watch from afar, and if capital reserves aren’t impacted, or their reputation isn’t damaged, they allow them to continue. The PBoC announced they were going to deploy a massive anti-money laundering framework, designed to further halt capital outflows. We’ll have to see if they were serious, or if this was just to win reputation points with international countries.
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BitCoins are NOT a currency, and do not effect currency reserves. It is not unlike a piece of art.
With a piece of art, an artist creates a work of art, and sells it. Minimal financial investment for a hopefully large return on ‘creativity’. This item now only has value as long as someone wants to buy and pay for it. If no one wants it, it is valueless. Many people think bitcoins are simply a fad. In time, as demand diminishes, they will have no value. Art, on the other hand, seems to have enduring value. Good art is always in demand. It has enduring wealth. Far less speculative.
But buying art does not have any effect on currency holdings or reserve holdings of a country, if it is bought within the country, and is locally produced. When it is sold outside of the country, the income in foreign dollars is not a product of a monetary exchange – the buying or selling of currency. The ‘dollar wealth’ stays in the country, and therefore is of no concern to a government that only want to keep currency wealth in the country.
When an American buys a piece of Chinese jewelry that cost a minimal amount to make in China, for thousands of dollars in America, there is no currency exchange involved. Only if the American money is brought back to China is there a need for currency exchange. And the entire purpose is to gain foreign wealth outside of China, that stays outside of China, that does NOT involve renminbi, which stays in China.
The Chinese government has long figured this out about manufactured goods in general. Manufacture a product in China, exclusively with Chinese raw materials, and pay the entire cost of production in renminbi. Export it directly, with no middleman, still maintaining ownership of it. Sell it for foreign dollars, and do not repatriate these dollars. No effects on currency reserve. Exporting value, not currency. The trick is, generating enough wealth from sales internally (profit) to pay for the local production of exported goods. To work, this demands a strong local internal economy, with excess internally generated wealth to support the exported wealth. Since the state owns the sources of raw materials, the only ‘cost’ to the government is in resource depletion.
Of course, this does not seem cogent when viewed from a capitalist, neoliberal Western perspective, but it makes entire sense when analysed from a Marxist perspective. Eliminate profit from the equation, and you have a totally different equation. ‘Profit’ becomes ‘Capital for Expansion’, not ‘Wealth Accumulation in Private hands’.
So of course the Chinese state will find ways of accumulating foreign wealth and foreign currency without effecting currency reserves or internal wealth.
However, if one has been paying close attention to China, one would recognize that China is no longer interested in exporting their internal resources to fill the shelves of WalMart, just to gain foreign currency and foreign wealth. This method does deplete the country of ‘natural wealth’, and eventually the well runs dry. They are now keeping these resources for their own citizens. So they are now looking at means of acquiring foreign currency without currency exchanges or depletion of natural resources. They are trading non-resource-intensive but high-value goods (artwork and jewelry) directly for foreign currency. Sending a ring, which takes very little local resources to produce, out of the country and selling it for a substantial amount of greenbacks effects the country’s ‘internal wealth’ minimally, but gains substantial amounts of foreign ‘wealth’. Leaving it in greenbacks does not effect the renminbi internally.
The American internal economy was irreversibly destined to collapse when the Americans let their currency become a global currency. They lost control of where the greenback ‘wealth’ was located, and the monetary wealth was sucked out of the country. Foreign nationals OUTSIDE of the country accumulated the greenbacks, and didn’t repatriate them. America DOES have a trade wealth deficit – in greenbacks themselves leaving the country. China is generating foreign wealth AND keeping the renminbi wealth inside the country.
China has discovered and perfected the art of the old circus ‘carny’ – how to part the mark of their hard-earned money without exchanging anything of value for it, yet convincing the mark that they have gotten the best side of the deal.
The American Dollar will be a global currently so long as it is a Petro Dollar and tied to oil wealth. All oil currently trades on the American Dollar. Pretty sure Trump chose Rex Tillerson, head of big oil and friends with Putin and his oil buddies, so they could secure the Petro Dollar for that very reason. China does try to bypass trading on the American Dollar. Because they are cheats and frauds and think that special rules exist for them. Well, they don’t. China also lacks American financial industry that creates financial instruments out of thin air and generates money by trading equities and other financial products with global investors in their US wealth casino. As long as China is still trading illegally with North Korea, against UN sanctions, then they are never going to be at the same table as the US, not to mention them supplying arms to Qatar, new ISIS hotbed. Nice try, no cigar. But that’s the Chinese for you. Zero ethics, cheap, and they follow the dollar to their demise. One look at the level of their air pollution that kills thousands of their slaves, I mean their citizens, annually should tell you something of their morals and their regard for their own countrymen and environment.
With respect to the EB-5 visa program, consider that the Chinese government is allowing this willingly, because along with emigration, they are supporting the exportation of Chinese CULTURE. As long as the renminbi does not leave the country, and these millionaires take their culture and Chinese influence with them, China is content. After all, they have over a billion people, and more millionaires than anyone, they can afford to loose a few. These Chinese millionaires are not integrating into the American melting pot, they are preserving their own culture in a foreign land. Just look at the Chinese cultural influences in Vancouver, for example. The more the Chinese culture becomes mainstream in foreign lands, the more dominant it becomes in the global zeitgeist. And the fact that these are very wealthy individuals, not prone to societal pressures to ‘assimilate’, only reinforces the cultural identity.
The world became ‘Westernized’ because of an American cultural exportation driven by wealthy American individuals entrenching themselves in foreign lands, but retaining their Western culture. Now, the Chinese are ‘Easternizing’ the world, in the same fashion.
To understand what is happening in China, you have to look at their GOALS. These goals are NOT Western-driven goals, but Eastern-driven goals. They have no intentions of making AMERICA great, or of contributing to the Westernization of the world.
The US engages in similar tactics, although more bluntly. Replacing governments, providing low cost loans for overseas business development, etc.
People are just scared because they’d rather the devil they know than the devil they don’t.
I believe you do understand. That is exactly what I said – the West has been spreading Westernization throughout the world, using their wealth.
Now, it is time for the Chinese to do the same thing.
An old adage in war – anything you can do, the enemy can also do – once they learn how to do it. And learn how to do it they will. The Chinese are very good learners.
Given a few more decades, the world will be just as Oriented as it is Westernized today.
But the difference is, America has done it through military might and military intimidation as bullying tactics. The Chinese are doing it subtly, without military action. However, even this is changing. Although China has yet to station its troops in other areas of conflict, it appears ready to do so. There is a direct route from China to Afghanistan to Iran to Iraq to Syria, and China is a leading trading partner of all of these countries, including military agreements with all of them. A direct land trade route would suit them just fine. (China is a leading supplier to Quatar. )
While America makes enemies and war, China makes friends and trade routes.
http://www.huffingtonpost.com/joseph-braude/why-china-and-saudi-arabi_b_12194702.html
Sorry to burst your Asian bubble, but its far more likely that Trump and Putin are going to come to an agreement over Syria, then they’ll wipe out that pathetic fat pig of a dictator Kim Jong Un, obliterate the sad excuse for a country that is NK, and then China will be their b!tch, and will keep making Trump’s hats and ties in their sweat shops. Who’s laughing now?
Oh, so China is supplying Qatar with terrorist arms, the most recently sidelined middle east country for their involvement with fostering ISIS? And how is that a good thing? The chinese have no ethics in business. As you’ve just illustrated here, and there are many other examples of them selling out the world for their own cheap or fraudulent objectives.
The Chinese are corrupt as a people. And they go around the world buying up parts of it to use for themselves, i.e. now they’re pillaging Africa’s natural resources, building false “islands” in the South China Seas for military control, Canadian Real estate, etc etc etc. I mean, hello, Sino Forest scandal anyone? Several million of B.C. lumber on the books, on paper, when they really had zero actual lumber in their tangible inventory. Of course, the company was headquartered in China but was stretching its greedy little blood sucking tentacles over to Canadian resources to suck up a bit of money, and faking it, to boot. Enough already. No other culture feels the need to slap their language’s characters on the side of every single bank. Stay in your country and stop exploiting the rest of the world for your gain. Your overpopulation is your own problem. With such small penises, I guess they feel they need to overcompensate by pumping out several billion people, and now that’s our problem.
Are you learning to speak Chinese? It will soon be a requisite language for financial dealings.
“Ching chong ching chong, I have a tiny dong, Ming mog ming mog, I’m going to eat a dog”. There, I think I’ve learned the “requisite” language.
Maybe you should learn to build a railroad.
Do you speak English, or should I say “Engrish”? Yes. You speak English. I think we’re done here.
Where did you go?
I got a notification that you blabbered some response to me, but it is no longer here.
Deleted posts?
Or did you learn the hard way about the truths of my ‘traceable’ statement?
[…] Evading Chinese Capital Controls 101, With Bitcoin Expert Dr. Joseph Wang Mainland Chinese buyers spent over US$100 billion on international real estate last year. Due to improved capital controls rolled out by the Chinese government, this number is expected to drop more than 20% in 2017. While that sounds like a lot, we wanted to find out how exactly the other US$80 billion is going to get out of the country? We connected with Dr. Joseph Wang, a Hong Kong based financial expert to walk us through the methods being used, and how much they cost. Smuggling money out of the country is surprisingly cheap. […]
Oh hai sweetie, your comment is meaningless, since this blog is written in English. Maybe come back when you have a relevant point.
Or maybe he should just crawl back under his rock.
You are aware that you can be tracked? Disqus, WordPress, every major commercial forum platform, they ALL have back door hacks. Https security is useless once the message is inside the data bank. If this message gets to your computer screen, and you respond to it, the path can be traced. It’s called metadata. Unfortunately for you, the Chinese are the world’s experts at it. There isn’t a thing that happens on the Internet that they can not monitor.
I know for certain that I am monitored.
Fortunately for you, low-level troll life isn’t worth their effort. Usually.
However, I CAN guarantee you that you are in the data banks of some intelligence organization or another. And every response you give just adds to the data.
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