Chinese citizens investing in US financial markets?

[audelair]

As an American, I feel fortunate to have access to the most developed and advanced financial markets in the world to invest my retirement savings in a diversified portfolio of stocks and bonds. Being an American, I have taken it for granted. In addition, we have access to lots of information to learn about investing (of course we are also inundated with terrible advice from Wall Street, but that is a different story altogether).

 

I have looked briefly into the feasibility of nonresident aliens to set up a brokerage account in the US, and it seems like it is very accessible. Setting up a taxpayer ID number is easy, and most major brokerages allow a nonresident alien to set up an account. The tax implications simply involve a 30% taxation on dividends (we as Americans get taxed anyway, albeit at a lower qualified rate for now). Additionally capital gains are untaxed by the IRS. I believe the only additional issue is that Chinese citizens would legally be required to pay taxes on earnings to the Chinese goverment (although I would be very surprised if anyone would actually declare proceeds from stock/fund sales to the Chinese government!).

 

Another issue is that nonresident aliens would be unable to invest in mutual/index funds directly with major institutions (like Fidelity or Vanguard). On the other hand, they can build a diversified portfolio of investments with exchange-traded-funds (ETF's), which is just as good (in my opinion, even better than traditional mutual funds). In short, they would be able to purchase anything sold on the major stock exchanges (including ETF's).

 

So it's seems easy for a Chinese citizen to send their money to America and invest in global assets (including investing in China stocks, if they are interested).

 

I am just wondering if anyone knows whether it is popular for Chinese citizens to do something like this? Most people I know (relatives and friends) are only interested in putting money away in a savings account in China. They have no knowledge of the financial markets outside of China. Additionally, I doubt they would feel comfortable sending their money overseas (seems so far away to them!).

 

I have not really talked to any friends or relatives in China regarding this, because it is hard for me to communicate all the risks involved, and I strongly believe that anyone should personally understand exactly what they are exposing themselves to before putting their hard-earned money down. But I am very curious to know whether overseas investing has started to become popular yet in China? My very limited research on it shows that it is very easy to do, and totally available to them. And I also think it's a GREAT idea for them to spread their assets around.

 

I'd be curious to hear any thoughts on this and whether it's possible that Chinese individuals will start taking part in the global capital markets (if they haven't already).

[audelair]

Interesting concept. The US uses ADRs (American Depository Receipts) for a lot of foreign stocks and trading is all in US funds. I wonder if the Chinese market has something similar?

 

I also wonder about getting funds out of China to fund a US broker account. Seems to me that would be the biggest hangup.

 

I know that in Taiwan, the available mutual funds have very high fees and commissions, and I would imagine many countries suffer from that, including China. I know it's even popular for Europeans to send money to US brokerages due to the low cost and efficient system that we have here.

 

I'm also curious about getting funds to China. My wife seemed to have no problem wiring a substantial sum of money out of China, and many of her friends have done the same thing (due to study abroad). Are there occasional problems involved with wiring out of China?

[skibum]

My wife is a Chinese citizen and she invests in the US stock markets. But I don't think that is what you are looking for.

Many Chinese stocks are listed here for consumption by USCs.

In China there is a dual system with one market in $ and the other in RMB. Both are for Chinese stocks.

Chinese can invest here by signing up with a broker here and bringing $. The SEC makes the rules.

One problem may be the language and understanding the financials printed in English.

Frankly, I am most comfortable with what I know best and if I was Chinese living there, I would stick with Chinese stocks.

Have you seen the storefronts with the people watching stock prices?

Never have seen a picture of one here. We might have to stop saying Communist China.

[skibum]

Sweetie just read my post and said I should add that the commission rates will be much higher for Chinese citizens. Taxes, who knows. Sounds like they are a lot better off putting their money in savings.

[audelair]

skibum,

 

Thanks for the response. I do not know anything about the investment opportunities there, but I do know that my parents have complained about high fees/commissions and poor regulation in the financial markets in Taiwan. For that reason, I also believe that they are better off putting their money in savings over there.

 

I definitely agree that people will most comfortable working with the financial system that is close to home, and familiar. I'm biased, because I'm from the US. I do think that, if properly educated, the option of moving money to the US, opening a discount brokerage account, and accessing broad global market indices (through extremely low-cost ETF's) should be very attractive to Chinese citizens who have money to invest. I'd imagine it's much lower cost, and more tools to build a properly diversified longterm portfolio. The feasibility seems to be there, but that doesn't mean that they are willing to go through with it.

[skibum]

Be aware that most countries have their own exchanges. I am sure there is a good reason.

You may have your tax forms near you now. Take a look and see if there are exceptions for foriegn investors. As you know, taxes will be paid!!

[audelair]

Be aware that most countries have their own exchanges. I am sure there is a good reason.

You may have your tax forms near you now. Take a look and see if there are exceptions for foriegn investors. As you know, taxes will be paid!!

 

Yea, taxes will always be paid, but it should only be paid once. (whether it is paid to the foreign country or paid in your home country)

 

Well, the way I see it is this. I have foreign investments, and dividends have tax withheld by foreign countries (probably on average, about 30%). Since I pay taxes on those dividends in the US as well, I can claim a foreign tax credit (box 6 on 1099-DIV), so that i'm not double-taxed.

 

For Chinese citizens, their dividends will also have 30% tax withheld (in this case, the foreign government is the US). Rather than paying taxes again in China and taking a credit, I'd imagine most citizens will not even bother with it. So the difference is that they pay taxes once in the foreign country (the US) and none at home (in China). (in contrast to me paying once in my home country and taking a credit for taxes I paid to the other country).

 

Unfortunately, they get tax withheld at 30%, whereas we get a qualified dividend rate of 15%. But since dividends are only a portion of the total return, and the difference in tax rates is only 15 basis points, I do think the tax implications are not unattractive at all. Also, the US ONLY taxes dividends (and does not tax capital gains). Unless the Chinese citizen pays cap gains taxes in China (which I doubt they would do), this ends up being a favorable tax treatment (compared to domestic investors in the US).

 

I'm still trying to wrap my head around the whole thing, though.

Edited February 12, 2007 by audelair (see edit history)

[SirLancelot]

Interesting concept. The US uses ADRs (American Depository Receipts) for a lot of foreign stocks and trading is all in US funds. I wonder if the Chinese market has something similar?

 

I also wonder about getting funds out of China to fund a US broker account. Seems to me that would be the biggest hangup.

 

I know that in Taiwan, the available mutual funds have very high fees and commissions, and I would imagine many countries suffer from that, including China. I know it's even popular for Europeans to send money to US brokerages due to the low cost and efficient system that we have here.

 

I'm also curious about getting funds to China. My wife seemed to have no problem wiring a substantial sum of money out of China, and many of her friends have done the same thing (due to study abroad). Are there occasional problems involved with wiring out of China?

 

What Don said. I think the most difficult part is getting the Chinese RMB out of China and into the US.

 

For study abroad and going to US for a visit, the government allows a certain amount to be taken out of China but if you're just sitting at home in Henan province and have never been out of China or have no immediate relatives abroad, I doubt you'll be able to send a penny out of China. The RMB is not a freely traded currency. The outflow of the RMB is heavily regulated and restricted by the Chinese government. I suspect what you're describing is NOT possible at all for most Chinese citizens.

 

I would be EXTREMELY interested in knowing the details surrounding how your wife was able to wire out a substantial amount of money out of China. Was the funds being wired out ALREADY in USD? Or was she wiring out RMB?

Edited February 12, 2007 by SirLancelot (see edit history)

[audelair]

[quote name='SirLancelot' date='Feb 12 2007, 02:17 PM'

I would be EXTREMELY interested in knowing the details surrounding how your wife was able to wire out a substantial amount of money out of China. Was the funds being wired out ALREADY in USD? Or was she wiring out RMB?

 

She wired money in RMB. I don't know all the details, but she and her classmates all did it with no problem. I will ask again to see if there is anything I am missing.

[audelair]

You also mentioned Taiwan. There is a world of difference between Taiwan and the mainland.

 

Yea, my wife was wiring money from the mainland... although i still need to find some details on that! I mentioned Taiwan just as an example of a situation where my parents much preferred dealing with US financial institutes.

 

Not to nitpik, but a basis point = .001% and normally used in referring to bond yields. 100 basis points = 1%.

 

oops! I was thinking about expense ratios, and then started talking about tax rates.

[skibum]

Personally, I don't see what the point is for Chinese to invest here. There is money to be made there and you would not have to worry about the changes in the exchange rate and such.

 

My mother in law has made some good trades lately on the Chinese market. She is probably doing better than I am here.

[notrevorich]

Interesting concept. The US uses ADRs (American Depository Receipts) for a lot of foreign stocks and trading is all in US funds. I wonder if the Chinese market has something similar?

 

I also wonder about getting funds out of China to fund a US broker account. Seems to me that would be the biggest hangup.

 

I know that in Taiwan, the available mutual funds have very high fees and commissions, and I would imagine many countries suffer from that, including China. I know it's even popular for Europeans to send money to US brokerages due to the low cost and efficient system that we have here.

 

I'm also curious about getting funds to China. My wife seemed to have no problem wiring a substantial sum of money out of China, and many of her friends have done the same thing (due to study abroad). Are there occasional problems involved with wiring out of China?

 

My wife has legally taken money out of China in the form of a credit card , she has her relatives put some of her money into the card as RMB and then it is changed to US dollars .

This works for her since she then buys what she wants with the credit card -But it hardly is a perfect system and she needs to cordinate things with her family every time she gets money also she does not get the bill .it stays in China