Chinese stampede upsets markets

Billions of dollars from opaque sources in China may be flowing into Myanmar each year, causing excessive volatility in areas such as the local real estate market, according to experts.

Flows have increased recently as Chinese political and business leaders respond to efforts to curb corruption, causing many to look abroad to store their ill-gotten money.

These capital flows are distorting markets through the region, and, to some extent, the world, said Sean Turnell, associate professor of economics at Australia’s Macquarie University.

One manifestation of this is felt in the rising Myanmar real estate market, but this experience is mirrored in many countries, including Australia – where hot Chinese money is creating a very serious real estate “bubble” in Sydney, he said.

Experts say these “hot” money inflows are often entering Myanmar asset markets, such as real estate, gems and jade, sometimes in a bid to be beyond the reach of Beijing authorities.

Although the real estate sector is notoriously volatile in Myanmar, the jade and gems sector are also affected by similar flows. Mr Turnell said jade is a simple, ancient and easily understood and negotiated instrument for storing and transferring value, and it has seen large swings in export volumes in recent years.

“It is no accident that jade sector has been volatile,” he said.

Of official jade exports, US$1.3 billion out of a total $1.5 billion goes to China each year, according to the Ministry of Commerce’s statistics, while far more is thought to exit the country through illicit channels.

“Hot Chinese money will create difficulties for macroeconomic management, not just as setting monetary policy, but also in the emergence of market bubbles whose ‘bursting’ can cause great damage – not just the losses that follow, but also for notions of market integrity,” he said.

While managing these inflows is important, it will also be difficult to stem the tide. Even countries with well-established regulatory regimes have difficulty with these “hot” capital flows, though it is crucial to attempt to address the problem.

China has launched a well-publicised anti-corruption drive initiated by president Xi Jinping, which has contributed to the recent capital flows to Myanmar.

Mr Turnell said some Chinese political officials and businesspeople are responding to Beijing’s efforts to get a handle on their internal corruption by joining a “stampede” of capital out of the country.

“The volumes are so large, the problem so acute. In all of it we have to ascribe blame too where it is primarily due – China,” he said.

“China is exporting its instability, its corruption, its lack of faith in its own institutions,” he added.

Government officials say that while they generally have strong cooperation with their Chinese counterparts, money laundering is one area where connections need to be improved. China’s Yangon embassy did not return several requests for interviews for this article.

The Chinese government has asked for Myanmar assistance in areas like robbery or finding fugitives, but has yet to ask for assistance in a money laundering case, said U Kyaw Win Thein, Financial Investigation Unit deputy chief and a police colonel.

Although these Chinese capital flows are a significant problem, they are not the only instance of money laundering that occur in the country.

Myanmar is working to be removed from international body Financial Action Task Force (FATF)’s annual list that designates high risk and non-cooperative jurisdictions.

The FATF noted that Myanmar has made a high-level political commit-ment to work with the organisation, but has not made sufficient progress in implementing its action plan, in an October update. Myanmar for its part has passed a new anti-money laundering law in March 2014 but yet to publish the follow-up regulations governing how the law will work in practice. While Myanmar’s Financial Investigation Unit has signed agreements with seven countries on combating money laundering, China is not yet one of them.

“China is also a member of FATF,” said U Kyaw Win Thein. “But we will only be able to cooperate in crossborder [money laundering] affairs after signing an agreement, which is very complex.” He added there have been some successful anti-money laundering moves. The government has also seized about $200 million worth of kyat during about 70 anti-monitoring stings over the past decade. Still, the government’s anti-money laundering efforts could be more pointed.

A Central Bank of Myanmar director requesting anonymity said it is not just the burden of the Central Bank to prevent money laundering, as coordinated action must involve several government branches. The director said he advocated for one single government unit to be set up and become responsible for overseeing the issue.

Currently, the Ministry of Home Affairs and the Myanmar Investment Commission are to check the background of money when it enters the country as an FDI inflow, while the Central Bank’s Financial Information, Inspection and Survey Department is responsible for money remittances.

Much of this illegal Chinese capital ends up in the property market. Though Myanmar has not allowed foreigners to buy property for most of its recent history, some foreigners have used local citizens’ identity. Some regional governments seem to fail to inform the central government when this happens, said Ministry of Commerce economic advisor U Maung Aung.

While Mandalay has gained a reputation as the property market that is the most affected city by Chinese capital outflows, there have been other areas that have attracted foreign buyers, such as areas in Yangon Region.

“Regional governments or [the Ministry of] Home Affairs must know this information – probably they are ignoring it,” he said. “Even senior Chinese officials are involved in this tangle, and businesspeople as well,” he said.

The problem can impact domestic security, as well as serving as a barrier to legitimate foreign direct investment. Bankers say the amount of unofficial money circulation may be larger than the legitimate size of flows. Kanbawza Bank vice president and former deputy governor of the Central Bank U Than Lwin said banks may control 40pc of money circulation while the black market comprises 60pc.

“Money coming from outside the country should flow through the banks to more easily control [money laundering]. The Central Bank should set strong policies to narrow the market,” he said.

Property is not the only asset that has been used for money laundering. Automobiles, gold and US dollars have also been affected by speculation in Myanmar, said U Win Myint, secretary of parliament’s Bank and Monetary Affairs Development Committee.

“A lack of law enforcement and authorities avoiding their duty to watch speculators are the main reasons,” he said. “On the other hand, the government doesn’t have a lot of experience.” U Win Myint also said that Chinese buyers are not the main cause of the real estate price spike.


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