• Americas

China has pulled back; what brought us to this point – and where to now?

By Xinyi McKinny, Senior Managing Director, China Direct Investment, San Francisco Bay Area and Los Angeles

Chinese capital is not going away. With a tightening capital policy in China, Chinese commercial real estate (CRE) investment in the U.S. has dropped 55 per cent, from $16.2 Billion USD to $7.3 Billion, which is still 66 per cent more than the 2014 investment volume.
Chinese capital will continue flow to the U.S. CRE market, but as time proceeds – with more rationale.

While maintaining its global no. 2 economic rank; China’s economic growth slowed down in 2017, but has also grown healthier. With a large amount of localized wealth creation in China, new wealth will inevitably flow into global real estate.

With more wealth creation in China through other sectors, Chinese investors are more eager to put their capital gains into commercial real estate, especially somewhere with growth potential and a stabilized political environment. The U.S. is on the top of the list. Chinese enterprises bring their mentality to the U.S. when technology and manufacturing businesses expand into U.S. markets.

In 2017, with the CRE market reaching a record high while inventory has remained low. Overall foreign investment has dropped 33 per cent in 2017. Meanwhile, the strength of the American dollar has failed to create inspiration within the Chinese investment community. Looking forward, the U.K.’s CRE market has had lots of opportunities while the Pound is weak. The CRE investment in U.K. raised 580 percent, from $1.5B USD in 2016 to $10.2B USD in 2017, despite the new capital control policy in China.

China’s 2018 capital control policy is not new to Chinese enterprise. The circular in November 2016 kicked off the process from the perspective of China inbound investment in U.S. CRE and it gained momentum through verbal statements and bureaucratic action in the beginning of the year that weighed on transaction activity before the 18 August 2017 release of the formal policy framework solidified the new regime.

The hallmark of Chinese policy is that it sounds like law/policy but provides regulators essentially unlimited scope for action. In this context, formalizing the framework and issuing a seemingly redundant “code of conduct” both serves to add some concrete barriers and control mechanisms on investment but more importantly serves as a signal that the regime does not intend to reduce scrutiny of deals even as the currency / foreign exchange pressures that initially gave rise to this whole process have (perhaps temporarily) abated.


  • 2014 – China starts experiencing capital outflows.
  • August 2015 – RMB (‘Ren Min Bi’ – currency of the People’s Republic of China) weakens sharply, sell-off in Chinese equities, capital flows worsen.
  • October 2015 – People’s Bank of China (PBOC) begins implementing new capital controls on foreign exchange market.
  • January 2016 – PBOC puts in place reserve requirements on offshore deposits – so far mostly targeting banks and overall liquidity.
  • September 2016 – $50K USD foreign exchange limit for individuals more stringently enforced – at greatest impact on financial assets, residential real estate.
  • November 2016 – Draft circular requiring approval for all investments by State Owned Enterprises (SOE) over $10B or $1B if outside core business and all real estate deals over $1B.
  • Late 2016 – Hospitality, entertainment, real estate and sports teams’ deals verbally singled out for scrutiny and opprobrium by regulators, but no formal policy.
  • Early 2017 – Deal flow decline, particularly by onshore entities while offshore entities and those with substantial offshore assets (and therefore ability to fund) continue to do deals.
  • Early 2017 – State Administration of Foreign Exchange does not deny applications, instead, they let the application sit without approval.
  • August 2017 – State council releases prohibited/restricted/encouraged investment paradigm for private enterprises.
  • August 2017 – Finance ministry cracks down on investments by SOEs – though this seems to be mostly aimed at bad infrastructure deals in Africa, Asia.
  • November 2017 – Controls tightened requiring regulatory approval for foreign acquisitions conducted through offshore entities as often done by Fosun, Anbgang, HNA, Dalian Wanda, etc.
  • December 2017 – 36 point code of conduct for private firms released requiring companies to report investment plans and receive approval for deals in sensitive countries and businesses. Similar code for SOEs forthcoming.

With the Chinese government tightening Capital control, trophy asset acquisitions will be reduced significantly in 2018. But deals under $250 million will be increasingly more common and successful. Chinese investors may trend in favor of long term real estate holdings with regards to this market paradigm shift.

When the U.S. CRE market softens, we will see more Chinese capital flow in all asset regions.

Xinyi McKinnyAs the Senior Managing Director for China Direct Investment, Xinyi is a licensed architect who has managed the full implementation lifecycle from pre-design to substantial completion work, including planning, schematic design, construction document development, consultant coordination and construction administration. She is a LEED Accredited Professional since 2008. Xinyi obtained her Real Estate study from University of California, Berkeley, Masters of Business Administration program (MBA). Xinyi is fluent in English and Chinese.

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