US economy: Citizenship for sale

Miami is the latest city to embrace a scheme that grants visas to wealthy investors

by: Kara Scannell
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From the 36th floor of a downtown Miami office tower, Ronald Fieldstone has a 360-degree view of the construction boom that he has had a hand in fostering.

There is the high-speed rail line that will connect the city to Orlando, home of Disney World. To the west is the newly renovated Langford Hotel and to the north is the building site of the Paramount Miami Worldcenter, a 60-storey condominium and retail complex, where construction crews are digging the foundations.

All of those projects are funded, in part, via an investor visa programme known as EB-5 that gives investors a path to US citizenship. For a $500,000 investment in a project that creates at least 10 jobs in a high-unemployment area, a foreign national can eventually receive a green card that allows him or her to live and work permanently in the US.
Miami, already a magnet for wealthy families from Venezuela, Brazil and Argentina, is using the EB-5 programme as a tool to attract cash from China. Officials hope to transform Miami into an international banking centre with close ties to China, which they hope to cement by persuading Chinese airlines to begin nonstop flights from the mainland.

Miami’s embrace of the EB-5 is not without controversy. Critics say it is rife with fraud and used to launder money. Canada ditched a similar programme while Australia tightened its requirements after finding there was little economic benefit.

Some US lawmakers say it sends a bad signal — trading visas for cash from the wealthy while much of the money has gone to well-off areas, not the distressed regions the programme was designed to help.

Congress will vote later this month on whether to renew the programme. Even supporters like Mr Fieldstone say it needs more regulatory oversight to limit fraud and protect the national security interests of the US.

Advocates of the programme say it has pumped hundreds of millions of dollars into mega-projects in New York and California, including the 12.7m sq ft Hudson Yards office complex in Manhattan. Now Florida wants a bigger piece of the action. 

    Lawyer Ronald Fieldstone spends 50% of his time dealing with EB-5 cases


For decades, Mr Fieldstone’s legal practice dealt primarily with corporate securities work, but today he spends 50 per cent of his time working on EB-5. “The success rate is really high for EB-5 funded projects,” he said. “South Florida is a special place. You can’t duplicate it — the climate, transportation and beach. I think the Chinese look at it as a gateway city.”

The EB-5 programme was created in 1990 as part of the Immigration Act to spur the US economy and promote job growth. Since then it has brought in $15.5bn in investments and created 84,400 jobs, according to the US Citizenship and Immigration Services, a unit of the Department of Homeland Security, which oversees the programme. Applicants need to loan $1m to a job-creating business or $500,000 if the project is in an economically depressed area.

After roughly five years the investor receives a green card and, if they are lucky, their money back with a profit.

Other countries have investor immigration programmes of varying levels. France requires a €10m investment in a project that creates 50 jobs. Malta’s programme, which issues an EU passport for €650,000, has drawn the ire of the European Commission. The UK raised its requirement to a £2m investment in government bonds.

10,000Annual limit for EB-5 visas, which was reached for the first time in 2014
 
The US programme sputtered along largely unused until the 2008 global financial crisis made it harder for real estate developers to obtain financing. Canada’s 2014 decision to close its programme, which had been extremely popular with wealthy Chinese, also gave the US version a boost.

The US scheme is capped at 10,000 visas annually, which it hit for the first time in 2014.

Chinese investors are by far the biggest users, accounting for 86 per cent of the visas issued last year. That has created a backlog for Chinese applicants entering the programme, which is now up to 18 months. Some fear they will choose other countries given the delays.

Shutdown threat

The programme’s fast growth has exposed vulnerabilities in the system. There have been criminal cases alleging investor money was stolen. A Chicago man was charged with stealing $160m from investors that he purported to use to build a convention centre. He pleaded guilty earlier this year.

Two government watchdogs have found deficiencies in oversight. An accountability audit found USCIS failed to consistently enter information, such as names or dates of birth, in its system to track individuals for potential fraud. USCIS says it has consolidated its examination staff in Washington and has started random visits to regional centres. It is also expected to propose regulatory changes later this year to strengthen the programme, including raising the minimum investment.

Congress is divided over whether to improve the programme or simply end it, as Canada did. One lawmaker, Senator Dianne Feinstein, a Democrat from California who is the vice-chair of the Select Committee on Intelligence, says it should be shut down.

“I believe the programme is deeply unfair, sends the wrong message about this country’s values and is prone to fraud and abuse,” Ms Feinstein wrote in an op-ed last year. “It says that American citizenship is for sale, and that’s not what our country stands for.”

“It’s cash for a green card,” adds David North, a frequent critic of the EB-5 programme, who is a fellow at the Center for Immigration Studies, a conservative think-tank. “I don’t think we should be selling visas to anybody.”

$15.5bnValue of investments through the EB-5 scheme, which has created 84,400 Jobs
 
One of his concerns, which are shared by some lawmakers and law enforcement agencies, is ensuring that cash is not being laundered or that the individual receiving the visa is not a threat to national security. “It’s very hard to trace money through particularly obscure Middle Eastern or Chinese financial systems,” Mr North says.

Hotting up

In Miami, the view is that the influx of capital will raise the city’s profile internationally and attract more business. Developers have been on the ground in China promoting the city as the best place to park their cash.

Real estate developers began their effort to recruit Chinese buyers five years ago, but now those efforts are interwoven with EB-5 financing.

Marketers for the Paramount Miami Worldcenter began pitching the residences in China last year. Paramount’s builders hired a feng shui expert who advised them on introducing the right earth, wood, metal, water and fire elements in the development. They were advised to position the chairs in the lobby to face the door and green potted plants were added to the seating area.

A fireplace was also added.

        A condominium development in Florida © Getty


For the first time the developers of Paramount decided to use EB-5 to finance a project. In March, following the Chinese new year, they deployed a team to the southern city of Guangzhou to pitch to potential EB-5 investors. “There seemed to be a much greater interest by the Chinese for investment opportunities in the US,” says John Montani, a business consultant to the developer.

For many of the overseas investors there are other appeals, from access to the US education system for their children and a safeguard against political difficulties in their home country.

The Miami Chamber of Commerce 18 months ago launched an Asia task force. “We have very few people here who speak Mandarin and who really are familiar with Asian and Chinese culture and customers. We have to build up our troops,” says Seth Gordon, chair of the task force.

He says the city also needs to hedge its bets against cycles of instability in Latin America, where countries such as Venezuela and Brazil have been hit by the commodities bust. “When China began to pay attention to us [it’s like] when somebody is passing an approving look at you across the bar and you smile,” Mr Gordon says. “You begin to think, ‘Maybe we should have a relationship.’”


One hurdle is changing the image of Florida that many associate with Mickey Mouse or drug trafficking. The Chamber of Commerce arranged a visit of a group of Chinese journalists to help promote the images of sandy beaches, clean air and ocean breezes.

In February, members of the chamber, the mayor of Miami and others met the Chinese consulate’s Houston office to discuss opening a branch in Miami, according to three attendees. A representative for the Chinese consulate did not have an immediate comment.

Two months later, a delegation including the Miami-Dade County Commissioner flew to China and made presentations to China Eastern Airlines, China Southern Airlines and Hainan Airlines to discuss offering a nonstop service, according to a written memorandum summarising the mission, and viewed by the Financial Times. China Eastern put Miami on its “shortlist” for introducing the new service within one to two years, according to the memo.

Eyes on Cuba

Angie Ki was among those in the Miami delegation. Ms Ki had grown up in Malaysia and lived in North Carolina for 25 years with her husband and children, working in real estate.

86%

Proportion of applicants for EB-5 visas that were Chinese investors
 
During a family visit in 2014 to Hong Kong, she was struck by the televised broadcasts of US President Obama’s visit to China when he spoke of the US lifting sanctions on Cuba and the expansion of the Panama Canal. Seeing parallels between Cuba and the lost opportunity for many to capitalise on the growth of China’s economy, Ms Ki had an idea. “I had to be in Asia to discover Miami,” she says.

After some persuasion, her husband agreed to relocate to downtown Miami in May 2015 and Ms Ki has been recruiting Chinese to Florida.

Chinese investors “look at Cuba as almost 20 years behind China. They’re more excited about Cuba than Florida to be honest. But Miami is a stepping stone to go to Cuba,” Ms Ki says.

When a group of Hong Kong businessmen came to visit, Ms Ki took them on a boat ride around the city.

“They look at the buildings from the boat and say, ‘Oh my god, there is so much room to build high-rises. You’ve got so much room to spend’,” she recalls.

Ms Ki helps parents seeking EB-5 visas for their children, who will then go to university in the US and, with a green card, be in a better position to compete for jobs after graduation.

“Miami is just waking up to the Asian market. If I was here three years ago I couldn’t get a job. Now, I can speak Chinese and have connections in Asia. It’s hot,” she says.

“You’re going to see a lot of them coming,” Ms Ki predicts.

Regulation: Offshore marketing raises concerns on oversight



Mamma Mia! Italy's Upcoming Referendum Has The Potential To Tear Apart The Euro And Investors Need To Hedge With Gold

by: Hebba Investments


- The upcoming Italian referendum has been flying a bit under the radar but with a 'No' vote it could send the Euro into crisis.

- Very similarly to 'Brexit' the polls are showing an almost a dead-even split with the 'No' side slightly ahead 51% to 49%.

- This is another potentially game-changing event for the political and financial system coming in the next few months and the best hedge here is gold.

 
As gold investors we have to keep our antennae highly tuned to all sorts of financial and geopolitical events that could threaten the stability of markets. Of course one of these upcoming events are the US elections, which we think is already a game-changer for the current deflationary-biased narrative, but another one which is getting far less press is the upcoming Italian referendum. We already know the significance that the British referendum had on the gold markets - that was the last time gold was under $1300 per ounce. 
 
In our opinion, the Italian referendum has the potential to be much more disruptive for the geopolitical environment and have more consequences than "Brexit". But very few people seem to be covering it or care - not dissimilar to what happened with Brexit.
 
We will get into our thoughts on it but let us first give a brief overview on the referendum.
 
Italy's Upcoming Referéndum
 
Nick Andrews and Stefano Capacci do an excellent job giving a detailed summary of what's at stake here (which we highly encourage investors to read) but in a quick summary this upcoming referendum is an attempt by Italian Prime Minister Matteo Renzi to restructure Italy's legislative process to help streamline much needed reform. As they state in their aforementioned piece:
 
Now, in a bid to secure a popular mandate for his restructuring program, Renzi has bet his premiership on a referendum over badly-needed constitutional reforms. It is a high stakes gamble. If Renzi wins the vote, which is due in either October or November, his proposed measures will streamline Italy's legislative process, breaking the parliamentary gridlock which has crippled successive governments, and opening the way to far-reaching economic reforms. If he loses, Renzi has promised to step down - a pledge that has turned the referendum into a popular vote of confidence in the unelected prime minister, his Europhile policies, and by extension Italy's membership of the eurozone itself. As a result, a "No" vote in October will not just precipitate the fall of Renzi's government; it could throw Italy's long term membership of the eurozone into doubt, plunging the single currency area once again into crisis
Essentially this referendum is about Renzi being able to actually implement significant changes to the Italian system to help turnaround Italy's economy which has been weak and moribund for years.
 
However, powerful forces are arrayed against Renzi, and a "Yes" vote is far from assured. The proposed reforms have attracted opposition not only from establishment voices who benefit from the current arrangements, but also constitutional lawyers and the growing anti-EU "5-Star Movement", which argue that it is too low of a threshold for the largest changes to Italy since the foundation of the current republic in 1946.
 
Current polls are showing 'Yes' and 'No' running neck and neck - very similar to what we saw with "Brexit".
 
 
 
Referendum Consequences
 
Much like the uncertainty on who will win this vote, there's much uncertainty on what the consequences of a 'No' vote would be - and that primarily depends on what Renzi will do after the vote.
 
Previously Renzi had stated that if the referendum ended in a 'No' vote, he would step down as PM in a move that would mimic British PM David Cameron's resignation following the EU referendum in June. However, in recent weeks Renzi has started to climb down on his promise a little. Last week, for example, he told Italian media that irrespective of the referendum outcome there will be no early elections in 2017. No early election suggests that Renzi's government may try and stay in power even if it loses the referendum, likely taking the sting out of the referendum result somewhat.
 
In the case of a 'No' vote and if Mr. Renzi doesn't step down, there may be little in the way of immediate consequences - which is the view of Citi:
Nothing would change in Italy's institutional setting, and the constitutional reform would be scrapped. The ensuing complication of a Senate regulated by a proportional representation electoral system and a Lower House regulated by an empowered majority system would inevitably have to be addressed to avoid high risks of hung parliaments before 2018. This makes the chances of early elections in 2017 pretty low, in our view, even in the case the current government falls.

While the logic is there we think that consequences may be a bit more significant. Not only would it energize the opposition as they would have popular validation of their lack of confidence in the current government, it may also hit Italian bonds and banks hard as it would mean that there would be no realistic path to reform. That's not good for a financial system that has already been showing signs of stress.
 
With an energized opposition that is primarily anti-Euro and a lack of any meaningful way to reform Italy's stagnant economy, we think it would only be a matter of time before we see a serious financial crisis in Italy and possibly a true break from the Euro. If that happens, then the Euro as we know it is doomed - and that is obviously something that would be good for gold.
 
Thus we take the opposite view of Citi analysts as a 'No' vote would be the start of the end for Italy's Euro membership. Renzi choosing to stay (rather than resign) would simply draw out the process but it wouldn't reverse the trend. Make no mistake - this is a big deal if the population votes 'No'.
 
In fact, we think this would be a much bigger deal than Brexit (especially if it leads to an immediate resignation of Renzi) as Brexit, despite its significance, was ultimately a country that the EU could do without and that didn't even use the Euro as its national currency. Italy is much more significant for the EU and the Euro than the UK ever could be - there would be major questions about the viability of the Euro if Italy leaves as the precedent of leaving would be established and a certainly messy conversion back to the Lira would ensue.

Conclusion for Investors
 
The Italian referendum to be held in late November or early December has the potential to have much bigger consequences than the 'Brexit' vote by the UK - which, to put it mildly, had widespread consequences. A 'Yes' vote would take quite a bit of risk off the table, but a 'No' vote could potentially spiral markets out of control as it would create some very uncomfortable questions about the EU and the Euro.
 
Investors need to pay extremely close attention to the polls as we move closer to the actual referendum, and based on the latest poll published by the newspaper La Stampa on Sept. 4 credited the 'No' vote with 51 percent, against 49 percent in favor. That should be quite a bit unnerving for investors seeking stable markets as it seems the 'No' side is gaining momentum.
 
Of course risks that involve disruptions to the wider financial system are bad for most markets - except of course precious metals. In this case, questions about the viability of the Euro and an exit of a cornerstone of the EU Project would certainly send at least some money into gold.
 
Throw in US elections, the surge in anti-Euro party strength, and potential policy mistakes by the Federal Reserve as they try to raise interest rates into a weakening global economy and you have all the makings for a very volatile end-of-year for financial markets. This is simply another MAJOR risk causing us to change our short-term view on gold as we get closer to all of these potentially derailing events.
 
Thus we feel that despite the large speculative long positions in gold its certainly the time to re-establish a few of our previously sold speculative gold positions in the ETFs such as the SPDR Gold Trust ETF (NYSEARCA:GLD), ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL), iShares Silver Trust (NYSEARCA:SLV). We aren't going to buy all of the positions yet because we expect a further drop as we get closer to the Fed's September meeting, but we certainly see many good reasons why gold has some significant potential short-term to be a high-quality performing asset as volatility returns to markets.

Italy's referendum is one that is a bit under the radar right now but it will certainly start taking center stage if the 'No' vote continues to grow and for an issue that has much more severe consequences than 'Brexit', it's simply not getting the attention it deserves.

After Brexit Vote, EU Leaders Struggle to Paper Over Divisions

EU leaders are likely to focus on the few issues where they can agree at upcoming Bratislava Summit

By Valentina Pop and Drew Hinshaw

A European Union flag in front of Elizabeth Tower in Westminster, London. The Brexit vote in June has raised fundamental questions of the EU’s future. Photo: Zuma Press


STRASBOURG—When European leaders gather in Slovakia, this Friday, to reflect on the future of the European Union after the U.K. leaves it, they are expected to stick to modest proposals in an effort to paper over deep divisions on the way ahead.

The U.K.’s June referendum, in which 52% of voters chose to quit the bloc, raised fundamental questions over the future of the EU, which has never before seen a member leave.

But instead of addressing those deep questions—over whether more political integration or a looser union is the answer—leaders are likely to focus on the few issues where they can agree: more cooperation in the fight against terrorism, border security, and a more generous investment policy.

“Never before have I seen such little common ground between our member states. So few areas where they agree to work together,” said European Commission President Jean-Claude Juncker, a veteran of EU politics.

In the his annual State of the Union address delivered here to the European Parliament, Mr. Juncker painted a gloomy picture of the tensions and divisions within the bloc, but said the EU would withstand the pressures created by the U.K.’s Brexit vote.

“We respect and regret the U.K. decision, but the EU as such is not at risk,” Mr. Juncker said.

As a cure for the bloc’s ailments, Mr. Juncker put forward a series of initiatives across several policy areas, including building a greater common defense and foreign policy, doubling an EU investment fund and pushing new initiatives on a digital single market.

They are rare areas of agreement, in a sharply split bloc.

In Central and Eastern Europe, a growing club of smaller nations like Hungary are demanding tighter borders and more national autonomy, especially on migration policies coordinated from Brussels.

“Let’s return to the concept of Europe with nations,” said Hungarian Prime Minister Viktor Orban in a speech Monday, pushing for a looser, more autonomous EU. “We don’t want to exit, but to mend what we have.”

That has prompted backlash from more refugee-friendly governments.

Tensions flared Tuesday when, in an interview published in Germany’s Die Welt newspaper, Luxembourg foreign minister Jean Asselborn called for Hungary to be expelled from the EU due to its bad treatment of migrants. His Hungarian counterpart, Peter Szijjarto retorted that the Luxembourg politician can’t be taken seriously and called him “patronizing, arrogant and frustrated”.

In Western Europe, governments in Germany, France, and the Netherlands—all three facing national elections in 2017—are watching the rise of far-right parties that want to quit core parts of the EU, such as the euro and the border-free Schengen area.

In the run-up to the Bratislava summit, which includes all leaders except the U.K.’s Theresa May, EU top officials sought to play down expectations. “If they have a good day together, that will already be something,” said one senior EU official.

Mr. Juncker said that he asked each leader coming to Bratislava to think about “three reasons why we need the European Union.”

An internal diagram based on Mr. Juncker’s consultations with all 27 leaders and seen by The Wall Street Journal depicts 29 different areas of interest. But only three—the bloc’s single market, coordination in the fight against terrorism and policies in the digital sector—were backed by more than half the bloc’s nations, the diagram shows.

There was little appetite for, among other things, changing rules for workers’ mobility, on reform to the asylum system or on changing EU budget priorities.

European Council chief Donald Tusk, who represents all EU governments, including the U.K., said that the Bratislava meeting will be a moment to “make an honest assessment” of the EU’s shortcomings.

“Today many people, not only in the U.K., think that being part of the European Union stands in the way of stability and security,” he said in an invitation letter to all leaders.

Mr. Tusk blamed “last year’s chaos on our borders” for the dwindling trust in the EU. “Rebuilding this trust has become an urgent necessity, which Brexit has demonstrated very clearly,” he wrote.


 


Emerging markets on track to set sovereign debt record

Low rates tempt governments from Argentina to Saudi Arabia to issue bonds

by: Elaine Moore

Developing economies are on course to raise a record sum on global debt markets this year, as ultra-low rates in the developed world cheapen borrowing costs for countries from Asia to South America.

After a slow start, governments in countries including Mexico, Qatar and Argentina have issued bonds worth $90bn in 2016. By the end of the year, credit strategists at JPMorgan expect sales of debt by emerging markets in “hard” currencies such as dollars and euros to reach more than $125bn — boosted by Saudi Arabia’s first appearance on global bond markets.

A punishingly low yield environment for money managers has sparked a jump in demand for emerging market fixed debt in the past few months, as lack of inflation keeps interest rates in big economies on hold and prompts additional monetary easing from the European Central Bank, the Bank of Japan and the Bank of England.
In the US, weak jobs data published on Friday have also pushed back expectations of the Federal Reserve raising interest rates this month, potentially removing a threat to the buoyancy of emerging market assets.

Record inflows of funds have in turn pushed up emerging market bond prices, reducing borrowing costs down and spurring an increase in debt sales.

Inflows into EM fixed income have surpassed other risky assets in the past two months, with investors pouring over $16bn into emerging market bond funds since the UK voted for Brexit.

While inflows have headed primarily to dollar-denominated bonds, local currency bonds — which expose investors to both credit risk and currency moves — have also seen an uplift in demand.

Zsolt Papp, head of emerging markets debt at JPMorgan Asset Management, said there remained scope for continued investment in emerging markets in the coming months, noting that countries including India and Turkey had lowered interest rates recently and that more might follow.

However, analysts at Bank of America Merril Lynch pointed out that the risks of a pullback in bond prices remained high. Not only are emerging markets an unbalanced and highly diverse group, but falling oil prices and a shift in risk appetite could quickly result in a sell-off.

 


Paradise Lost: Why the Good Times Are Over for Global Bonds

Government bond investors have had everything going right for them. That could never last forever.

By Richard Barley

The Bank of Japan has been inventive in monetary policy. Photo: Agence France-Presse/Getty Images


The global bond market has slipped its central-bank anchor. The days of bond nirvana, where seemingly every month brought lower yields—and higher prices—are over for now.

Until September, fixed-income investors had everything going their way. Global inflation has been quiescent, and global growth fragile. Central banks, particularly the Bank of Japan 8301 12.79 % and European Central Bank, have been ever-more inventive in monetary policy. And then June’s Brexit vote hammered yields lower as markets feared turmoil and expected more central-bank responses.

Ten-year bond yields turned negative in Japan and Germany. Even with the U.S. Federal Reserve looking to raise rates, U.S. Treasury yields fell sharply in the first eight months of the year. Long-dated bonds produced spectacular returns: By Aug. 12, U.K. gilts maturing in more than 25 years had returned nearly 39%, according to Bank of America Merrill Lynch indexes.

But the rally pushed bond valuations to extraordinarily stretched levels. And now the tide has turned: Long-dated bond yields have shot higher. Thirty-year U.S. Treasury yields have risen 0.23 percentage point in a week.

The move has its roots in Japan, as disappointment with BOJ inaction at the end of July caused a selloff in Japanese government bonds. Then markets were disappointed again by the European Central Bank last week. Now both the ECB and BOJ are working on potential changes to their policy mix: In both cases, investors fear they will be less supportive of long-dated bonds. That has global consequences: The rally in U.S. Treasurys was part of a global move; the backup is just the same. If it were fears around the Fed driving the market, it would be short- and intermediate-maturity bonds that would be suffering more.

Other supportive factors have faded. Brexit, while it may yet have profound long-term consequences, hasn't caused a new crisis. And headline inflation should rebound in coming months if oil prices remain in their current range. In economies where banks are the dominant suppliers of credit, steeper yield curves may be no bad thing and encourage lending, perhaps brightening the growth outlook. U.S. income data released Tuesday suggests consumers are well placed to spend.

There are still some powerful constraints on bond yields. Global growth remains uninspiring.

Regulation will continue to push banks and insurers into assets deemed to be safe. Central banks are unlikely to turn tail; the mix of policy may change, but it will remain loose, keeping short-dated bond yields low.

Fears about fiscal stimulus may be overdone: It will be a bold politician who challenges orthodoxy and ramps up borrowing in style. Geopolitical risk is high and the Brexit vote shows markets can get political outcomes badly wrong. A selloff in risky assets like equities, corporate bonds and emerging markets, themselves propelled higher by low bond yields, may generate demand for government bonds.


But at the margin, the environment for bonds is less friendly. Steeper yield curves are the result.

Bond yields can stay low by historical standards—just not as low as they have been.