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Are Capital Controls Behind China’s Move Into the Domain Market?

January 5, 2016

It is an undisputed fact to anyone involved in the domain name aftermarket that a significant upswing in overall pricing trends of certain categories of domain, namely short 2 and 3 character .com as well as strong one-word .com, have been realized over the past year due to a strong influx of Chinese buyers into the market.

Writer and financial strategist Simon Black of SovereignMan.com today speculated in a blog post that a driving factor behind this influx is the Chinese Government’s increasingly tightened capital control policies amidst a flagging economic outlook and flailing stock market.  I say ‘speculate’ as I don’t know that there is any consensus as to the overall motivations of individual Chinese buyers.

However the supposition – that Chinese buyers are buying expensive domains as a way to get their savings offshore –  does not seem completely unfounded.   Mr Black explains:

Chinese citizens now have strict limitations on the amount of money they can withdraw while traveling abroad, plus restrictions on how much money they can transfer overseas.

But for any Chinese citizen with savings right now, it’s pretty obvious what’s happening. And they want to get their money out of the country.

But it raises a difficult question– how do you get money out of the country when the government has imposed strict capital controls?

With a little creativity, there’s always a way.

Bitcoin has been a popular alternative in China because people can easily cross borders with vast sums of money encrypted inside their mobile phones.

But there’s a new tactic that Chinese are using now: domains.

Yes, those domains. As in Internet “.com” domains.

I believe though that Mr. Black falls short on a few key points within this claim.  He continues:

But… Chinese aren’t looking to make money. They’re not buying domains as investments– they’re using domains to TRANSPORT money.

Think about it– if you have $50,000 that you really need to get out of China, you can buy an expensive domain today.

Naturally there are no restrictions (for now) on buying a .com domain. So the sale goes through without any problems.

But domains are international. Almost anyone in the world can buy or sell a .com domain.

So later, you travel overseas, open a foreign bank account, then sell your domain to someone else.

The proceeds of that sale get paid to your new bank account abroad. And, presto! You’ve just moved a lot of money overseas, completely circumventing capital controls.

Naturally there are some costs involved, including some brokerage fees for buying/selling the domain.

But for Chinese citizens whose alternative is to let their savings remain trapped within a failing system, they’ll gladly pay a few percent to move their money abroad.

You can read the full article here.

First, nearly anyone with an active involvement in the domain aftermarket can tell you that there is no such thing as “presto!” when it comes to buying and selling domains, unless you are able to make a killing on the buy side, meaning, that you purchase a domain at a price that is well undervalued.

Otherwise, domain names are not a very liquid asset.  That being said, premium domain names, and short, 2 and 3 character domains of which the Chinese are very active buyers, certainly have much more liquidity than the average domain.  However, more is a relative term, and we must bare in mind that these buyers are now buying at the top of the market.  The price of 2 and 3 (and even 4) character domains have never been so high.

If Mr. Black were more acquainted with the domain market, he would know that buyers today are paying in some cases nearly triple the value for some domains than they would have sold for a year or so ago.

Therefore, while flight from capital controls seams like a very plausible motivation for the upsurge in activity from China, it would demonstrably not be such a simple matter of using domain names to transport wealth as is being claimed, in as far as since the Chinese are the ones driving up the prices it remains to be seen how they would easily unlock an equal value of their investments by reselling to overseas buyers who are not subject to the same forces.

A second point to note is that typical brokerage fees in the domain industry are not on the order of “a few percentage points” but rather will range easily from 10% – 20%, thus also negating the idea that it will be easy to unlock anywhere near full value, as in addition to buying in at peak pricing (although, who really knows if this is the top of the top), it presents the added difficulty of having to sell a domain name yourself if you want to avoid having 10% – 20% skimmed off of your investment by brokerage fees.  Brokers add liquidity, thus doing without them can also decrease the liquidity of the asset.

This analysis is not meant to trash Simon Black, as I am in fact someone in agreement with much of what he writes on and I would encourage anyone to research his blog further for alternative viewpoints to financial planning and economic freedom.  However I feel that in this particular case Mr. Black, while presenting a reasonably sound hypothesis, is not familiar enough with certain nuances of the domain aftermarket to really say for sure whether flight from capital controls is a valid motivating factor for Chinese buyers of domain names.  It may well be one among many motivating factors, but I am inclined to say there must be others, and that it may not even be the strongest factor.

What do you think?

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