Passengers board a ferry after clearing customs at Lianyungang International Passenger Station in Lianyungang, China, on October 21, 2024.
Cost Photo | Null Photo | Getty Images
China’s new border controls are aimed at preventing two of its most valuable assets from leaving the country: money and talent.
The rules, issued by the State Council and set to take effect on Tuesday, give authorities clear legal powers to prevent people from leaving the country, turning a patchwork of temporary travel bans into a permanent measure to stem the flow of capital and talent.
Authorities can ban Chinese nationals from leaving the country for export control violations or technology transfer violations deemed to threaten national security. The new rules also increase pressure on the wealthy, who already face a widening tax web, and on the private bankers, trust companies and immigration authorities that help them move their money and families overseas.
“The objective is to limit the outflow of people overseas and keep the capital and talent that could go out home,” said Neo Wang, China strategist at Evercore ISI. Both resources are critical to China’s drive for innovation, productivity, and new growth engines as it competes head-on with the United States.
For years, the Chinese government has increased scrutiny of overseas travel by party officials and employees of state-owned enterprises, but it has also increasingly expanded its scrutiny of the private sector. Dan Wang, China director at political consultancy Eurasia Group, said the new rules would make the system “more permanent and give authorities more confidence to intervene.”
He expects stronger document checks and stricter enforcement at the local level as authorities seek to avoid liability for lax enforcement. “Export control concerns could lead to formal exit bans, rather than just compliance friction,” he added.
technology flow
Technology professionals face some of the most powerful limitations. China already restricts exports of key technologies and components such as rare earths, electric vehicle batteries and solar panels, and the new rules give authorities a legal basis to enforce these export control and countersanction regimes directly at the border, said Guo Xiang, a partner at Hutong Research who specializes in China.
Authorities could prevent Chinese nationals from leaving the country if it violates export control rules that could threaten the security of the nation’s industry or technology.
“By directly tying export controls to exit rights, this regulation gives the Chinese government even more leverage over foreign governments and foreign companies,” Eurasia’s Wang said.
flow of wealth
The rules are already changing behavior among private bankers who help wealthy Chinese clients move money overseas. An offshore asset management company serving clients in mainland China said some people were questioned at Chinese border crossings about the purpose of their visit and asked to submit pre-applications before arriving.
Bankers have become increasingly wary of inviting mainland clients to events in Singapore, sometimes rebranding them as jewelery exhibitions rather than foreign investment seminars to avoid scrutiny, said a Singapore-based fund manager who advises wealthy Chinese clients on overseas stock holdings, who asked not to be named due to the sensitivity of the issue.
Another Singapore-based banker, Ms Fan, who asked to remain anonymous only by her last name due to the sensitivity of the matter, said some of her colleagues were now traveling to China without documents containing sensitive information. They are sent separately by courier to avoid spot checks at customs that could give authorities access to customers’ financial data.
Various measures have created a perception that the law can change without notice and have retroactive effect, leading to tightening from all sides.
Clifford Ng
Partner of Zhong Lun Law Firm
Provisions of the new regulations prohibit foreign companies from providing immigration services within mainland China and require registration authorities to report civil servants and military personnel who illegally apply for foreign nationality or overseas permanent residence.
The rules will raise costs for brokers based in Hong Kong and Singapore, who handle immigration, education and real estate applications for mainland clients, and will push more agents to open land-based entities, Eurasia’s Wang said.
The new framework also gives local governments a stronger legal basis to restrict the departure of people deemed liable to pay taxes on offshore wealth. The practice predates the regulations, but is now gaining new teeth. “Immigration and overseas property purchases have already slowed down due to compliance uncertainty,” Wang said.
In July, China imposed a 20% income tax on assets moved into offshore trusts starting in 2023, closing a loophole long used by the wealthy for asset protection and succession planning. Local authorities have also reportedly begun taxing insurance policy income and salaries earned by Chinese nationals overseas.
Earlier this month, regulators set the tax that foreigners must pay on dividends earned from foreign-invested companies at 20%, abolishing a preferential treatment that previously required Chinese entrepreneurs to obtain foreign citizenship to take advantage of preferential tax treatment.
Clifford Ng, a partner at Zhong Lun law firm, said: “The various measures have created the awareness that the law can be changed retroactively without notice, and tightening is coming from all sides.” Customers with no family or assets left in China are now more likely to leave permanently, while those who still have ties to China are choosing to follow.
