In the six weeks or so since I last returned from Shanghai, another 2-3 would-be EB-5 Regional Center projects have assured me that they “have most if not all Chinese EB-5 investors in place and ready to fund.” Sometimes delivered with the charming innocence of youthful ignorance, other times conveyed with arrogance by misguided snake-oil salesman, the sheer historical inaccuracy of the notion that you can “pre-sell” EB-5 in China is the number one reason so many otherwise sophisticated U.S. developers are being separated from their money right here in America. But the underlying cause is more basic: a fundamental U.S. ignorance about China, its internal dynamics, and the impetus behind Chinese migration. The truth is that to close a prospective customer, you must understand their needs, and with but a handful of exceptions, the vast majority of self-proclaimed “dealmakers” promising U.S. EB-5 project developers big EB-5 bucks are 100% sans clue when it comes to China. Witness the recent Bo Xilai mess, the subject of most back door conversations in China these days.
The Bo WHAT mess, you ask? Well, as usual in Chinese politics, it’s complicated, but here’s the nutshell: Mr. Bo was chief of party in Chongquing, a huge city in China. Popular, brash, and possessing all the arrogance of the most megalomaniacal local politician – an April 17th Wall Street Journal editorial draws a rather apt comparison with the foul-mouthed, George-Stephanopoulos-coifed Rod Blagojevich, disgraced would-be auctioneer of Mr. Obama’s vacant Illinois seat – he seemed unstoppable. But between that arrogance, his efforts to rouse revolutionary sentiment via Maoist theme songs, and his innate ability to piss off (sorry, but that’s the only accurate way to say it) an increasingly secular and pragmatic central party authority, the unthinkable happened: the seemingly untouchable Mr. Bo got the boot.
There’s always more to it, of course. In Mr. Bo’s case, that “more” included a glamorous if petulant wife, a murder mystery, and dealings with powerful regional Chinese crime syndicates. As the late Congressman Tip O'Neill (whom I had the privilege of bantering with during my State Department days) famously stated, “all politics is local”; in China’s omnipotent one party state, all politics is not only local but also regional, national and international. And so the ousting of Mr. Bo, a party “princeling”(WSJ) and powerful heir to a de facto political throne, has been seen as a clear manifestation of the sheer power – and, more importantly, its willingness to use it -- of the national government at a time when the economy is slowing, the stifled real estate market continues to whimper, the wealth gap is widening…so increasing numbers of successful Chinese “vote” by choosing to emigrate.
Here’s the real story about getting EB-5 funding in China: finding EB-5 investors is hard…even in China. In fact, you might even say “especially” in China. After two decades of making hefty commissions – 3-4 or more times greater than what even the most generous EB-5 program offers them -- promoting government backed investor visa programs from Canada, many Chinese migration agents are at a loss as to how to present this “risk-required” ugly American cousin, the EB-5, to its vast market. (I should add: this further explains the maddening “how is my investment guaranteed” with which one is peppered after an EB-5 presentation in China; “risk” is a whole new concept in the China emigration sector.)
But with Canadian and Australian migration opportunities seasonal and ever more expensive, the EB-5 putters along in China. People DO sign up, and it is in the maneuvering of capital outflow from China where Chinese agents earn their commissions. (I can tell you from personal experience that the only “high fives” more exuberant than those resulting from USCIS approval of your first EB-5 Regional Center Filing are those erupting when that excruciating Chinese “Source of Funds” dance is complete and the first Chinese investor funds hit project escrow…exhilarating!)
With or without incidents like that of Mr. Bo, Chinese emigration will continue because, despite the formidable changes in that country - most recently documented in the GOC’s unprecedented discussions with the World Bank regarding how best to channel future domestic growth – China remains a country of whispers and back-glances. The underlying fear of the power of a barely noticeable yet omnipotent and seemingly unchallengeable national government permeates the collective conscience of China’s brightest and most successful. Add to that the Chinese prioritization of ensuring the best possible education and future for their child/children (and yes, they CAN and DO have more than one these days) – inculcated at a molecular, DNA-level, or so it would appear given its universality – there is apt room for EB-5 funding from China. Today’s conventional wisdom suggests that between the sheer number of EB-5 projects marketed in China and the amount of scamming going on, the China EB-5 market is facing a glut.
Horsefeathers. It shall be the topic for another day but I will tell you this much: barring the potentially disastrous failure of the USG to make the well-proven EB-5 program permanent prior to its sunset this coming fall, it is my firm belief that we have but scratched the surface of EB-5 investment from China. There’s a reason why Lake Point’s investors are coming from places like Nanjing instead of Shanghai. More on that soon. JEL