Riddle me this: As we all know by now, China is bleeding capital, with a record $725 billion in outflows last year alone. Accordingly, the ChiComs have been flipping their lid, imposing new capital controls left and right to try and stop the bleeding. One of the most straightforward of these capital controls limits each Chinese citizen to $50,000 worth of foreign exchange transactions a year. In other words, if they want to buy anything overseas or even park their money in an overseas (dollar-denominated) account, they’re stuck at $50,000 a year.
So why do Chinese nationals account for the vast majority of the US government’s EB-5 immigrant investor program, a program that issues visas for immigrants that invest at least $500,000 in a new American business? Wouldn’t it require 10 years of diligent savings before a Chinese investor could possibly amass the needed capital to qualify for the visa in the first place?
The answer to this seemingly insoluble puzzle isn’t so hard to find, of course. Capital controls don’t work. They just incentivize people to find creative ways around them. Like “smurfing.” This unlikely term has been applied to the process of breaking down large amounts of cash into smaller chunks so they can be moved abroad without triggering capital controls. One smurfer helpfully explained his process to Bloomberg earlier this month:
“Our suggestion to the client is to open three to four personal accounts in the U.S. or line up three to four friends’ accounts, so they can split the money and wire it to different personal accounts without being put on a blacklist by the Chinese authorities,” said a Shanghai-based real estate agent who gave the surname Dong. “It may require a trip to the States to do so to facilitate the process.”
Whatever the case, Uncle Sam is now acting like any seller in any market would when there proves to be strong demand for their product: They’re jacking up the price. If new amendments to the program are passed, it’s going to cost those hopeful Chinese immigrants $1,350,000 to buy their way into the States.
Well, OK, not quite. Actually, the rise in minimum investment capital is not market driven, but politically driven. The EB-5 program has been under attack for a very long time because it’s a giant, wide open door for crony corruption, Ponzi schemes and kickback operations, and, oh by the way, it doesn’t actually increase employment as it was intended to do. (Did I mention Trump’s son-in-law got $50 million from EB-5 funding for his Trump Bay Street project in Jersey City?) The raise in minimum investment under the program to $1.35 million would be as good as scrapping it altogether as it is estimated applications for EB-5 visas would drop by as much as 90% at that price point.
So while there may be time left for an EB-5 bubble from Chinese investors, that window may be closing.
But here’s the funny denouement to this whole story: All those capital controls that China has been plastering over their economy to stop the hemorrhaging of yuan overseas? They may actually be working! News came earlier this month that for the first time in nearly 3 years China has enjoyed net capital inflows.
But as the old adage goes, “Be careful what you wish for, you just might get it.” The internationalization of the yuan and the expansion of the Chinese economy overseas, which has been a linchpin of the Chinese government strategy for working its way out from under its own debt bubble is now in trouble. As major yuan fund operators are now noting, it’s almost impossible to invest in projects overseas now because of all of the new capital controls in place. Now they’re forced to turn back inwards, canceling their projects abroad.
Hmmm. Capital controls that people smurf their way around. Capital inflows derailing government objectives. EB-5s that fail to increase employment. It’s almost as if central planning never quite works out as intended…