How To Profit From The Wealthy Mainland Chinese

I’ve been “Chinesed” and I’m not sure how I feel about the situation. On the one hand, I benefit as an asset owner. On the other hand, the American Dream gets harder to achieve for those who aren’t prepared.

Being “Chinesed” is a term I’m introducing to describe a situation where a wealthy mainland Chinese person buys an asset (usually a house) for a ridiculous price and crowds out existing domestic buyers. The term is not derogatory, so stop your bad thoughts right there. I’ve always heard stories about rich mainland Chinese people buying up America, but I never experienced the situation until recently.

A home nearby had been languishing on the market for three months during the winter holidays, November – January. The agent priced the property at $2.1M, and I was absolutely positive it would go for closer to $1.9M. To my great surprise, the house ended up selling for $150,000 over asking! I was baffled, and wondered what type of donkey would bid up a stalefish listing.

It turns out, probably a very rich donkey because the selling agent told me the new owner is a 20-something year old English + Art student from China. She visited the place in between classes one day and told her parents this was the one. Her parents paid all cash. 

EVERYTHING WAS FINE UNTIL

I chalked the purchase up to another lucky neighbor who didn’t have to struggle and save to buy their own home. A massive generational wealth transfer is real, and I have yet to meet one neighbor who bought their own home with their own money. I’ve met eight neighbors so far.

All was good until a $120,000 Nissan GT-R started flying through our quiet neighborhood roads one day. The car has obnoxious after market exhaust pipes that trigger car alarms after it zooms by. The driver clearly doesn’t give a damn about tranquility or safety. Eventually, a pedestrian or child will be run over by this car if nothing is done.

As I was going for my weekly hike, I noticed the GT-R parked right outside of the $2.25M house. It was conveniently next to the 20-something year old owner’s turquoise Maserati Granturismo that costs about $150,000. I reached out to the listing agent to ask what was up, and he said the GT-R driver is her boyfriend, also a 20-something year old English + Art major from China.

I can now see why some people hate rich international people. It’s one thing to make living more expensive for folks already living here. It’s another thing to flaunt your wealth and disturb your neighbors, especially if you’ve done nothing to deserve it. Previous generations of Chinese immigrants had reputations of being frugal, hardworking, and respectful to others. It seems like attitudes have changed with China’s nouveau rich. Perhaps the wealth levels are so extreme now or perhaps it’s the typical spoiled rich kids syndrome that has infected this particular homebuyer.

Curiously, you can’t legally take out more than $50,000 a year from China. Therefore, it’s always a mystery how so many mainlanders can pay cash for multi-million dollar foreign assets. I’ll share their secret at the end of this post.

CHINA MONEY

Although China has a per capita GDP of only ~$7,000, the rich are obnoxiously wealthy with 213 of the world’s billionaires (#2 in the world) and thousands of unknown millionaires. Entrepreneurship, skilled emulation of Western businesses, and perhaps a little government help are the keys to such massive wealth creation so quickly.

I’ve been researching China since I first studied abroad in Beijing, Shanghai, and Chengdu in 1997 as a college student. Since then, I’ve gone back multiple times for work, and helped bring public some of the largest Chinese companies such as China Mobile and Baidu.

It’s clear to me the Chinese are to the world today as the Japanese were to the world in the 1980s. With the opening of their capital account system, the Chinese will go on a global spending spree for the next several decades. It’s no use fighting an inevitability. We all should be prepared to welcome them with open arms.

“To get rich is glorious!” (致富光荣) said Chinese leader, Deng Xiao Ping back in the 1980s as he transitioned China from a Communist Maoist regime into one of the world’s most capitalistic countries. How surprised Deng Xiao Ping would be if he were alive today.

PROFITING FROM CHINESE WEALTH

To profit from China’s nouveau rich, we must understand what Chinese people from mainland China are like. Please be aware there’s a big difference in Chinese people based on where they’ve grown up, just like how there are big difference with every other ethnicity that spreads the Earth.

Let me share several general points about the Chinese you should know.

1) Chinese are infatuated with real estate. To be rich is to have real assets. Owning as much real estate as possible is one of the key objectives for most Chinese people. They don’t even need their property to earn rental income.

There is an underlying fear among wealthy Chinese in China the government will one day confiscate their wealth or investigate them for shady business practices. As a result, wealthy Chinese are trying to get as much of their money out of the country as possible.

Take a look at this infographic below by PropGoLuxury. The report was generated from millions of online searches by Chinese investors in 2015.

One insight you could glean from this report is that you should be buying real estate in places like San Francisco, London, Tuscany, New York, and Paris. Although Seattle has most recently being rising in interest after Vancouver instituted a 10% foreign investment tax.

Chinese investors tend to invest where there is a concentration of Chinese. Hence, it’s not good enough to just buy property in one of the top 20 most viewed cities. You need to buy in areas where there is already a thriving Chinese population.

In San Francisco, that area is the Richmond and Sunset Districts. In New York, the Chinese are clustered in Queens, Brooklyn, and Chinatown Manhattan (lower). In Vancouver, they are everywhere, but especially on the west end.

2) Speak Mandarin and understand Chinese culture. Roughly 15% of the world’s population, or 1 billion people speak Mandarin compared with 500 million who speak English. Doing business successfully is all about positive connectivity. By speaking Mandarin, you’ll be able to better connect with wealthy mainland Chinese.

Not only should you speak Mandarin and English, you should also go to China, Taiwan, and Hong Kong and immerse yourself in the culture for as long as possible. You’ll be able to pick up important customs that will go a long way towards bridging the cultural gap between East and West.

For example, it’s important to take off your shoes before entering someone’s house. Only in America do we allow people to tramp around our home with dog shit, mud, and dirt stuck to their shoes. It’s also important to serve your elders tea and food at meals, and to be the last one to start eating.

For relationship-building purposes cultural idiosyncrasies are important. You don’t have to speak perfect Mandarin, but at least show that you’ve made an effort.

3) Understand luck, superstition, and feng shui. The Chinese are very superstitious. You’ll never see a Chinese person choose the number “4” for anything because four is pronounced “si,” which sounds like death. The best number to have is “8,” because it’s pronounced “ba,” which sounds like “fa,” or fortune in Mandarin.

Signs of prosperity include having a mobile phone number with as many 8s as possible, a home address with the number 8, or purchasing something with 8 items like a house with eight exterior windows. I know one Chinese buyer in San Francisco who went up and down a block of homes all starting with the number 8 and left a note in each one of the mailboxes asking whether he could buy the house.

Feng shui is a system of laws considered to govern spatial arrangement and orientation in relation to the flow of energy (qi), and whose favorable or unfavorable effects are taken into account when siting and designing buildings. Feng shui affects happiness, and what’s more important than being happy? Make sure your marketing material addresses feng shui. For example, this marvelous house faces West for maximum creativity during the afternoon, and an injection of health every morning!

4) Understand China’s difficult past. The Chinese have gone through tumultuous times with numerous invasions and heart-wrenching atrocities. To really build empathy with someone, we must understand their pains.

Here’s a dialogue I had with my Chinese taxi driver when I visited Chengdu several years ago.

“Yes, my income has grown by 30% a year, every year for the past five years. But, I am still a cab driver! Everybody around me is making just as much, if not much more,” he explained.

“What about living conditions? Surely, they are better now?” I asked.

“The government has decided to build these massive high rises for all of us. Yes, at least we have air conditioning during our hot summers, but the space is cramped. Furthermore, food prices have risen by 30-40% recently, especially pork prices. We’re all richer, but we’re all still the same!”

He went on to say, “During the Cultural Revolution, my parents went sent to the countryside. They didn’t believe in helping me further my education, so I didn’t go to college. Here I am, decades later driving a cab. This is all I know how to do, and this is all I will ever do until I die.”

Know about the Cultural Revolution under Mao Ze Dong in the 1960s, and the Nanjing Massacre by the Japanese from 1937 – 1938. These are the two historical events that matter most.

5) Understand loyalty and guanxi. It’s not what you know, it’s who you know. Nowhere is this more true than when doing business with the Chinese. In America, we may define guanxi as “connections.” Some might more harshly define guanxi as “nepotism.” But in China, it’s about taking care of the people who take care of you.

The importance of loyalty cannot be underestimated. For example, if you help a friend out during a difficult time, not only will your friend be forever indebted to try and pay you back, his children will also be instructed to give deep respect as well. Chinese culture is very centered around family. This is why you’ll tend to see more multiple-generations under one household compared to the United States, where becoming independent is more valued.

6) Work for Chinese companies. With an understanding of Chinese culture, history, and language, you are primed to work for a Chinese company. After Uber, Xiaomi, a Chinese maker of smartphones, is the world’s second most valuable startup with a valuation over $40B. They have global expansion plans and need people with all sorts of backgrounds. Then there are publicly traded giants like Alibaba, and Baidu always looking for foreign talent.

Also consider multi-national companies like Proctor & Gamble and GE looking to gain market share in China. The NBA is clearly trying to grow its popularity in China. How cool would it be to be the NBA’s liaison in China? Of course, being a real estate agent who helps Chinese buyers buy in your market could be quite lucrative as well. The opportunities are endless!

7) Recognize that new wealth is gaudy wealth. All mainland China wealth is considered “new wealth” given the economy only really started opening up in the late 1990s. What do all people who suddenly receive lots of money do? They tend to spend it aggressively on the most expensive mainstream fashion items to the extreme.

Gaudy wealth is in your face wealth. Unfortunately, gaudy wealth is often not accompanied by good taste or humility because there hasn’t been much time to cultivate any. China’s National Tourism Administration even released a 64-page handbook called “Guidelines on Civilized Travel Abroad” because there have been so many complaints from around the world about poor Chinese tourist behavior.

The turquoise Maserati GranTurismo the owner of the $2.25M house drives is a perfect example of gaudy wealth. The two massive exhaust pipes and a racing wing on the Nissan GT-R is another example of gaudy wealth. It doesn’t matter if the person looks ridiculous wearing a $700 Gucci shirt that’s two sizes too tight, the Chinese love name brand items to the maximum. They are anti-Stealth Wealth.

What do we know about people who love to show off their wealth? We realize they are crying for attention and feel insecure about their stature. As a result, you must learn how to ingratiate yourself with those who are ostentatious by fawning over their belongings. Compliment them profusely while also stating how you could never afford such nice things. Once you’ve gained their appreciation, you can start developing a profitable relationship.

8) Marry a wealthy immigrant. Foreigners can receive immigrant visas to the US (officially known as EB-5 visa) if they invest $500,000 to $ 1 million in a business that creates 10 or more new jobs. The UK will grant five years right of abode if a foreigner invests 1 million pounds ($1.55 million). In Spain, purchasing 500,000 euros ($557,000) worth of property gains foreigners residency for as long as the property is retained. Money buys a lot of access around the world.

If the immigrant has this much money to invest in just a visa, then s/he will automatically catapult the suitor into upper middle class to rich status because surely there’s more behind. Marrying into wealth is really one of the best shortcuts if you can’t create your own. Let me go bake some cookies for my rich neighbor now and deliver them when her Nissan GT-R driving boyfriend is not around.

CHINA’S TIDAL WAVE OF WEALTH

Like it or not, the Chinese are coming to buy up our land, bid up our properties, compete for college admissions, take our jobs, and own our businesses. Globalization is an inevitability. Instead of doing nothing, we must figure out how to compete. We know our country better than anybody else. Therefore, we should have a competitive advantage.

With Chinese limited by rules that allow them to convert/take out only $50,000 per person a year, how are they moving some $300+ billion out of the country a year? The answer lies in China’s underground banks, private bankers, offshore trading companies, direct business investments, marrying a foreigner, carrying cash, and pooling the quotas of family and friends — a practice known as “smurfing.”

Let’s say you have 10 family members in China. If you are the wealthy one, you gift each one of them at least $50,000 a year so they can collectively remit $500,000. After five years of remittances, you can buy a $2.5M property, no problem. Of course you’re going to give them something on the side for their hassle. There’s a massive network of financial institutions that will take care of hot foreign money for a fee.

When China’s capital account finally starts to really loosen, we are going to see a flood of money looking to buy real assets around the world. Given tremendous volatility and constant government interference, no mainland Chinese person I know really believes in the long term sustainability of China’s stock markets. Wealthy Chinese seek secure assets just like us. In their eyes, the US and Canada offer the security they desire.

Recommendations

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Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.

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Updated for 2019 and beyond. The Chinese homebuyers have left the house vacant for over a year since purchase. It looks like they’ve just used the house to park $2.25M of their wealth. It was a great move since the US dollar has appreciated to a 13 year high and the house is now valued at closer to $2.65M.