SINGAPORE – Deng Xiaoping, China’s former liberalizing premier who opened the once-closed nation to the outside world, once famously quipped that “if you open the window for fresh air, you have to expect some flies to blow in.”
It’s a maxim proving true in Singapore as the city-state welcomes a growing number of footloose, high-net-worth Chinese only to discover that not all of their capital is clean.
For China, 2023 was supposed to be a year of economic revival. Instead, Asia’s biggest economy has seen its biggest capital flight in years, an outflux pushing wealthy Chinese nationals to Singapore as an emigration safe haven amid sluggish growth, a regulatory crackdown on private enterprise and ever-expanding societal controls at home.
The inrush of Chinese money is being keenly felt in Singapore, regarded as the so-called “Switzerland of Asia” for its political neutrality and open banking facilities. High-net-worth individuals from mainland China and Hong Kong are believed to have contributed to record capital inflows into the city-state in the past two years.
That, in turn, has contributed to soaring property and rental prices that helped drive inflation to a 14-year high earlier this year. Meanwhile, anecdotes and images of “crazy rich” Chinese emigres flaunting their wealth in tough times have gone viral, with the outward displays of affluence rubbing many in Singapore the wrong way.
“It should not surprise us if Singaporeans are concerned and perceive their city-state is becoming a playground for the rich and feeling increasingly priced out,” said Eugene Tan, a political analyst and law professor at Singapore Management University (SMU), told Asia Times. “Political pressure on the government to address perceived inequality is clearly there.”
Indeed, Chinese capital inflows have become a politically sensitive issue, all the more so after local authorities arrested and charged 10 Chinese nationals in August for a range of crimes including money laundering linked to illicit proceeds from scams and illegal gambling.
Some S$2.8 billion (US$2 billion) in cash and other assets have so far been frozen or confiscated in the case. Among the accused are members of prestigious local golf clubs and donors to local charities who opted to emigrate and set up new businesses in Singapore.
One or more of those facing charges reportedly have links to single family offices set up by the ultra-rich to manage their money and investments and which previously were given tax incentives by the central bank.
This small Southeast Asian nation of 5.9 million has for decades provided banking and investment management services to wealthy individuals with the allure of low-income tax rates, zero levies on capital gains or inheritances, strong financial privacy laws and generous incentives for multinational firms to establish corporate headquarters.
Investors can also become permanent residents, though the minimum threshold for investment was raised considerably in March from a previous requirement of a S$2.5 million ($1.8 million) investment in a local business entity, fund or family office to at least S$10 million ($7.4 million). Around 200 people were granted PR through such investments from 2020 to 2022.
Geography and culture are also a draw for wealthy mainland Chinese looking for an exit strategy. Around 70% of Singapore’s population is ethnic Chinese, with Mandarin serving as one of the city-state’s widely spoken official languages. Popular provincial Chinese cuisines have also proliferated as more mainland Chinese work and emigrate to Singapore.
While Singapore’s government has said the recent arrests demonstrated its self-claimed zero-tolerance for crime – authorities have initiated a review of anti-money laundering rules for single family offices – the episode nonetheless raises “legitimate concerns whether the immigration regime is lax such that lawlessness is being ‘imported’ into Singapore,” SMU’s Tan said.
National University of Singapore (NUS) political scientist Chong Ja Ian said the money laundering case involving Chinese nationals is “indicative of the tension between wanting to maintain banking secrecy and ease of business to attract wealth on one hand, and the need for transparency and effective regulation on the other.” He added: “It is difficult to have your cake and eat it too.”
Investment management firms have seized on a variable capital company (VCC) scheme launched in Singapore in 2020, similar to those renowned in offshore hubs like the Cayman Islands and Luxembourg that provide tax and legal shelter for hedge funds, venture capital and private equity firms, among others. More than 1,000 VCCs have been established or re-domiciled in Singapore this year.
Singapore secured a record S$22.5 billion ($16.8 billion) in fixed asset investment commitments in 2022, nearly double last year’s S$11.8 billion ($8.8 billion). The asset management industry, meanwhile, oversaw S$4.9 trillion ($3.6 trillion) in 2022, according to the Monetary Authority of Singapore (MAS), the central bank, with 76% sourced from overseas and 88% invested in overseas assets.
Last year also saw an explosion in the number of family offices and single family offices managing the assets of the rich and sometimes famous. According to the MAS, the number of single family offices rose to 1,100 in 2022, up from just 400 in 2020.
The Boston Consulting Group estimates there are more than 800 multi-family offices in Singapore, compared to only 100 five years ago.
The boom in family offices raises questions about their upside for Singapore, said NUS’ Chong. He said family offices “tend to be light in terms of their personnel needs and often hire fund managers internationally. Moreover, if they are largely moving money around, this sort of portfolio investment tends not to directly benefit the local economy as much as foreign direct investment.”
Bloomberg, Financial Times and other international media outlets have cited fund managers in Singapore saying that, despite strong inflows of new money, family offices have largely shied from investing in capital markets, with accounts of wealthy newcomers instead spending lavishly on condominiums, luxury vehicles and golf club memberships.
Mainland Chinese were the top foreign buyers of private property in Singapore in 2022, according to property consultancy OrangeTee & Tie, comprising nearly one-quarter of the 425 recorded “luxury” home purchases, defined by values of at least S$5 million ($3.7 million).
Singapore’s residential real estate prices spiked 14% last year, according to data from real estate consultancy firm Knight Frank.
To cool the market, authorities introduced in April an eyewatering 60% property tax for foreign buyers and even higher levies imposed on Singaporeans and permanent residents who purchase second homes. Foreign buying reportedly accounted for 7% of all property transactions in the first quarter of this year, up from about 6% from 2017 to 2019.
Demand from foreign buyers has since fallen to about 4% of total transactions so far in 2023. Residential property prices have since moderated from up 11.4 % year on year in the first quarter of 2023 to 4.4% by the third quarter, according to the MAS, which on November 27 said private rents should continue to fall as a large number of new units are slated for completion.
In April, the MAS strongly refuted a Financial Times article claiming it had tacitly directed bankers and regulators to avoid discussing the origin of growing capital inflows. “We haven’t been told explicitly not to talk about [China] but there is a sense in the financial services industry that talking about it publicly will not be welcomed,” an unnamed executive was quoted saying in the report.
Singapore has sought to avoid perceptions that it is capitalizing on China’s woes, with the central bank cautioning wealth managers against aggressively courting business from Hong Kong as the territory faced heated political turmoil in 2019 and lost waves of foreign businesses and executives due to perceived extreme Covid-19 lockdowns.
More recently, Singaporean officials have denied any pressure from Beijing in connection with recent money laundering-related arrests of Chinese nationals.
“There has been some speculation circulating in news outlets – internationally and domestically – that this operation was carried out at the behest of China. This is completely untrue,” Josephine Teo, Singapore’s second minister for home affairs, told parliament in early October in reference to the August arrests, which included individuals wanted in China for scams and illegal online gambling.
The perception that Singapore has acted in response to Chinese pressure “makes for eye-catching headlines but fails to recognize Singapore’s acute sensitivity to its sovereignty being trampled on,” said SMU’s Tan. He said that while it is imperative to deal with illegal activities with a transboundary dimension, “Singapore will not be pushed or bullied into being a policeman for China.”
If Singapore comes to be seen as a safe destination to skirt Beijing’s efforts to limit capital outflows, that could “introduce complications” in Singapore-China ties, said NUS’ Chong. “It is a risk that Singapore has to manage if it continues to attract significant wealth and the PRC economy finds itself needing more funds to boost growth or to address its debt challenges,” he said.
Despite talk of pent-up consumer demand, China’s economy has not delivered the post-pandemic rebound many had forecasted. Growth in the world’s second-largest economy has instead sputtered while a widening interest rate gap with the United States has helped to push the renminbi to a 16-year low, making it one of Asia’s worst-performing currencies this year with a 6% decline measured against the US dollar.
Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis SA, said that China has, despite a large trade surplus, seen net capital outflows in 2023 for the first time in four years, pointing to negative foreign direct investment (FDI) flows. Hawkish policy from the US Federal Reserve, she added, has stoked fixed-income outflows and depreciation pressure on the renminbi.
China’s data points to foreign firms operating in the country not only declining to reinvest their earnings but also – for the first time – becoming large net sellers of their existing investments to Chinese companies and repatriating the funds. FDI outflows exceeded $100 billion in the first three quarters of 2023 and are likely to grow further based on current trends, analysts say.
“The recent moderation of the Fed’s tone is helping to revert depreciation pressure and should also help stem off the capital outflows,” said Herrero in presentation slides reviewed by Asia Times. She added that net capital outflows have persisted in China’s stock markets, fueled by decelerating economic growth, negative industrial profits and a real estate crisis.
Despite initially bullish expectations, Chinese stocks have been among the world’s worst performers in 2023, with a year-to-date loss of 9% for the MSCI China Index, following a 23.6% drop in 2022 and 22.8% in 2021. According to Bloomberg data, Chinese stocks listed in Hong Kong, Shanghai, Shenzhen and New York have charted a $955 billion market capitalization loss this year.
As for complaints of Singapore becoming increasingly unaffordable for locals, Nydia Ngiow, a managing director at BowerGroupAsia, a policy advisory firm, said “such sentiments did not stem from the recent influx of Chinese nationals. Singapore’s rapid economic development in the last few decades has thrived on business- and wealth-friendly policies, which inevitably resulted in increasing inequality.”
Ngiow noted that Singapore government policies have taken a “leftward shift” in recent years, even as it has sought to court the wealthy. “Examples of these measures include increased taxes on high incomes and luxury goods, including luxury cars, and a proportionate increase in taxation based on the value of private property,” Ngiow said.
The city-state this year imposed a whopping 320% tax on high-end vehicles with an open market value higher than S$80,000 ($59,560), up from a previous rate of 220%. Authorities likewise raised the personal income tax rate for top-tier earners, targeting the top 1.2% of personal income taxpayers, in 2022 alongside upward adjustments to luxury property taxes.
“While the exodus of Chinese nationals to Singapore is no doubt a sticking point for the country, as it highlights the number of ultra-wealthy, this is unlikely to significantly strain ties between China and Singapore,” Ngiow added, noting that deep economic cooperation and large investment flows between the two countries “goes a lot deeper than disagreements over a few millionaires.”
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