Interview: Dan Harris on China’s “money moving” problems, effects on business, investment in Washington
By Wen Liu Feb. 23, 2016
Not that Dan Harris really needs it, but his China Law Blog just got an even wider readership, or publicity, over the past week. One of his recent posts on China’s money moving problems caught the attention of not only the editors of the Wall Street Journal, but also publishers of major news outlets in China, from the government-owned Global Times to the popular micro-blogging site Sina Weibo. Why? In this particular post, Harris talked about how a Chinese company had approached him for help with a clever idea of moving money to the U.S. What was the company really trying to do? What’s happening with China’s money? Harris has certainly got an interesting story to tell and an illustrative way to help us understand China’s capital outflow or flight that is much talked about these days and any effects on Washington state companies.
WCWD: On Feb. 14, Valentine’s Day, you posted on your China Law Blog a different kind of courtship story: “Getting Money out of China by Losing in Arbitration,” about a Chinese company seeking your help to send money to the U.S. by losing an imaginary legal case. Could you give the readers a general idea about this “proposition” that you declined?
Dan Harris: Sure. A foreign “advisor” to a Chinese company wanted my firm to bring an arbitration on its behalf in Seattle. When I probed further regarding the nature of the arbitration, it became clear to me that the whole thing was going to be a fake. The plaintiff would be a United States company that my law firm would form and we would also need to draft a contract that called for arbitration in Seattle and that the Chinese company would be sued for having breached. In other words, the entire case would be a fake, set up so that the United States plaintiff company would win and the Chinese company would lose. Why would a Chinese company go through so much trouble to lose a rigged arbitration? Just so that it could take the arbitration order to a Chinese bank and use that to justify sending millions of dollars to the United States.
WCWD: Two days later, the Wall Street Journal picked up your story in their ChinaRealTime column with this title, “China Capital Flight 2.0: Lose A Lawsuit On Purpose.” On Feb. 19, in China, Global Times, Reference News and numerous other news sites all had this story: “U.S. media: A Chinese company trying to lose a fake lawsuit to transfer funds abroad,” basically reciting the WSJ story on your blog. Why do you think is this speedy and vast interest in your blog post?
Dan Harris: I think it was because everyone knows that it is getting far tougher to get money out of China, but the Chinese government consistently denies it. This arbitration scam helped to prove both that there is a strong desire within China to get money out and that getting money out is not easy. The fact that this way to get money out was both new and interesting certainly did not hurt. Though a number of people wrote me or commented on our China Law Facebook page to say that this idea of intentionally losing a rigged foreign litigation or arbitration was not new.
WCWD: You and your colleague Steve Dickinson both blogged or talked about the difficulties now getting money out of China by both business and individual investors. So what is exactly happening to China’s capital or RMB?
Dan Harris: What is happening is that China is concerned about capital flight, but it has not formally changed any laws or regulations about getting money out of China. The Chinese government does not want to formally change anything because to do so would likely only increase fears and that in turn might only accelerate the capital flight. So what it has done instead is to tell banks to essentially do what they can to slow the stream of money leaving China.
I know a ton of expats there who have always been able to send money out of China (at least up to the USD$50,000 per year that is allowed), but have had to go to their banks 3-5 days in a row before the money will be sent. They will literally be told, “Come back tomorrow” at the beginning of their effort to get money out. My firm’s China lawyers have been getting a steady stream of calls in the last few months from American companies and realtors for our assistance in figuring out why the money they are expecting from China is not coming. The problem is that it is often very hard to tell whether the money not coming is because of the banks in China or because someone in China wants to use the banks in China as a convenient excuse for not paying.
WCWD: But China’s central bank governor Zhou Xiaochuan said last week that there was a need to distinguish capital outflows from capital flight. A few days ago, China’s Commerce Ministry said that China was not witnessing any signs of capital flight, and that there was no basis for continued depreciation of the Yuan. So does China have a capital flight or not in your opinion?
Dan Harris: I am not an economist and so I cannot opine whether China right now has a capital flight problem. But I can say that something is happening in China that is making it more difficult to get money out.
WCWD: Regardless of what the Chinese government says, as you mentioned in your blog, you get a lot of “money problem” calls from realtors and foreign partners of Chinese companies regarding their not getting paid from China. What does this mean to Washington state companies doing business with China and the Puget Sound real estate market so favored by wealthy Chinese home buyers, for instance?
Dan Harris: It means that selling homes to Chinese citizens is only going to get more difficult. Here is a dirty little secret about this. For years we have represented both Chinese real estate buyers and American real estate sellers that wanted our advice on how to get out of their US real estate deal in a way that will make it very difficult to sue them. Figuring out such a way has always been very easy and because of this, the deal does not get done. I am confident that the number of failed deals between US real estate sellers and Chinese real estate buyers is only going to increase. If you are a realtor or a US seller, you are going to have to ask yourself if “going international” is going to be worth the hassle. My favorite way to get out of selling to a Chinese buyer (this is usually done when the US seller is approached by a domestic buyer who wants to pay more) is to ask the Chinese buyer to show exactly where the money comes from that is being used to buy the house, so as to confirm that it is all being done legally. Chinese buyers generally do not want to show where the money came from.
We are also dealing with a couple of companies that were supposed to receive investment funds from Chinese companies. The Chinese government approved the investments but the funds have now been delayed, leaving us to have to figure out whether the delay is government/bank induced or whether the investor is simply using increased capital controls as an excuse for not sending the funds.