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Investment for Expats in China

Submitted: August 2013

In China, expats should be concerned with beating inflation and taxes to preserve the value of their savings.

Inflation is actually a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with inflation in China. If you plan to return to your home country, you might prefer beating the inflation rate of that country.

Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside China but you invest in any RMB-denominated assets, you are effectively making a currency bet.

Inflation in China

Chinese inflation has historically been quite volatile. However, China’s macroeconomic fundamentals are constantly changing, and it wouldn’t be surprising to see inflation rates becoming less and less volatile. This is because there are signs that Chinese policymakers are getting more and more concerned with inflation, especially in the housing market.

In a low volatility scenario, inflation should stay between 2 and 4%. In a high volatility scenario, this interval would be wider (-2% to 8% over the past decade).

As the Chinese economy has too much money to invest, it is hard to find inflation-busting yields through Chinese real estate or savings accounts. Therefore, trading in securities or transferring money abroad can be a serious option.

For more information on monetary policy, see Foreign Exchange for Expats in China.

For more information on the Chinese housing market, see Property Investment for Expats in China.

For more information on transferring money from China, see Money Transfers for Expats in China.

Savings accounts

RMB-denominated savings accounts generally have a very low yield. However, term deposits are more likely to attract an inflation-busting yield. Typically, yields on a 1-year term savings account exceed 3%.

Yields can shrink even lower if the central bank decides to lower the prime rate.

Chinese securities (costs)

Do consider carefully the applicable transaction costs if you wish to trade Chinese securities. Here are the main costs you should be aware of:

  • Broker’s commission fees
  • Minimum commission fees
  • Any other applicable fees that may be charged by your broker.

Chinese securities (overview)

Foreign nationals are restricted from investing in Shanghai-listed companies (especially A-shares). It is nonetheless possible to invest in unit trusts whose purpose is to invest in Chinese companies (higher fees may apply). These unit trusts are designed to provide a fair exposure to the Chinese stock market, but they cannot fully reflect the Shanghai Composite Index because of foreign investment restrictions.

Be wary of volatility when you invest in securities. Volatility is heavily dependent on the underlying risk. However, higher risk normally means higher reward, and some securities may be low-risk. Additionally, stock market variations are very dependent on interest rates. If they are going up, stock prices should go down. At the moment, interest rates in China are high and they can go either way. See Foreign Exchange for Expats in China.

You are responsible for deciding how much risk you want to take on. There is no set answer to this question, as this largely depends on your personal circumstances. A qualified wealth manager may assist you regarding this matter. See Wealth Management for Expats in China.

On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.

FX risks

There is a lot of speculation surrounding the Chinese yuan exchange rate. A lot of money can be made on currency bets, but a lot of money can be lost as well. (see the introductory paragraphs for hidden currency bets when you are an expat).

Market participants throughout the world largely believe that the Chinese yuan is doomed to appreciate. This is probably a self-fulfilling prophecy: if the world believes the RMB will appreciate, it will actually appreciate, no matter the macroeconomic fundamentals. Things may become less funny when the music stops though.

China is an emerging country, and emerging economies are strongly subject to “hot money” flows. Hot money refers to money that frequently moves across borders in order to make profits on FX capital gains or interest rate differentials (carry trade strategies). In many cases, hot money flows in by borrowing in a low-yield currency (USD, HKD, CHF or JPY) in order to invest in a high-yield currency. As most emerging countries have high-yield currencies, their currencies tend to appreciate steadily over a long period but they are potentially exposed to very sharp downturns. Major examples include, but are not limited to:

  • 1994 Mexican crisis
  • 1997 East Asian crisis
  • 1998 Russian crisis

In the case of today’s China, hot money flows are more about expected FX capital gains than interest rate differentials.

As an expatriate, you don’t necessarily want to be a speculator. Therefore, it is essential that you take some steps to reduce your FX exposure. If you park your money in a currency which you eventually intend to spend, you have little FX exposure. Otherwise, you are effectively making a currency bet.

Example

Shigeru is a Japanese citizen who has been posted to Shanghai for three years. He will return to Japan later on.

His net salary is RMB500,000 per year, but he intends to spend only RMB250,000 per year. He thinks it would be appropriate to save an additional RMB100,000 for a rainy day whilst he is China.

Shigeru is effectively making a currency bet if he fails to convert 500,000*3 – 250,000*3 – 100,000 = RMB650,000 into Japanese yens.

Alternatively, FX exposure can be reduced (or increased) through the purchase of relevant derivative products (e.g. FX options, swaps or forward contracts). Derivatives can be highly effective but they are quite complex, especially for individuals with little financial education. It is advisable to seek professional advice before taking action. See Wealth Management for Expats in China.

Overseas investments generally

If you wish to invest in overseas assets, there are a few points you need to check:

Retaining overseas assets might be helpful if you plan to return to your home country. That should spare you the money transfer hassle.

Taxation

The first thing to check is your residence status for tax purposes.

Your worldwide investment income is taxable in China if you are resident in China. If you are non-resident, you are liable to tax in China on your Chinese-source income only. If you are a qualifying “non-domiciled” individual, you may apply for concessional tax treatment whereby your foreign-source income may be tax-exempt in China for up to five years.

Foreign withholding taxes may be levied on your foreign-source investment income. Additionally, investment income may be taxable in your home country if you are still resident there for tax purposes.

Investment income, including capital gains, is generally taxed at 20%. Dividends paid by certain listed-companies are taxed as follows:

Holding period

Tax rate (%)

More than one year

5

Less than one year but more than one month

10

Less than one month

20

 

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