Late on Wednesday night, the Chinese Football Association (CFA) released details of two new rules that the Chinese Super League (CSL) must follow. Both rules are significant and have immediate consequences, not just for Chinese football, but for the global transfer market. Let’s break down the what and the why of Chinese football’s latest brainwaves, before examining what consequences are likely. 

Chinese football is no stranger to controversy and those in charge don’t always handle things well – from handing out widely inconsistent bans for similar incidents to radically changing the league’s transfer policy in the middle of a transfer window, fans have come to expect the unexpected. Even so, the CFA‘s twin edicts – issued at 9:56pm and 10:01pm on Wednesday night – came from way, way out of left field.

In a nutshell, here’s what they said:

1. Starting from the summer transfer window (i.e. immediately), any club that is “in debt” – presumed to be all clubs in the league – must pay into a development fund a sum equivalent to the transfer fee paid for any new foreign signing. In other words, pay Chelsea $50m for Diego Costa and you must also pay an additional $50m into the fund.
2. Clubs in the top two divisions must, from the start of next season, play as many U23 Chinese players as foreigners in any one match. It’s presumed that you can play more U23s if you want, but few, if any, teams are likely to do this.

Why have these rules been made?

While the first rule is an entirely new concept for Chinese football, the driving force behind it is a continuation of the crackdown on too much money being spent on foreign stars at the expense of the rest of the Chinese football pyramid. Similar to the fact that spending large sums of money acquiring overseas football clubs is no longer seen as ok, authorities were known to have been unhappy with the headlines generated over some of the largest transfers earlier this year – Shanghai SIPG paid Chelsea around $75 million for Oscar, while rivals Shanghai Shenhua gave Carlos Tevez a contract worth $20 million a year (though headlines regularly quoted a figure of $40+ million) – and that is largely what prompted the move in January this year to cut the number of foreigners allowed in a game from four to three.

Authorities are now trying to ensure that Chinese football in general benefits, with the new transfer tax paid into a grassroots development fund, since money paid to overseas club to buy foreign stars is of no benefit to China and just contributes capital outflows (a current pet hate of Beijing’s bankers).

A few days later it dawned on me on that this rule has been modeled on the US-style luxury tax rules found in MLB and the NBA, especially when the phrase “奢侈税”, or ‘luxury tax’, was being repeated in Chinese-language media reports. But there are some big differences – namely, the amount and who gets the money.

Firstly, the CSL’s tax is 100%, as compared to a sliding scale of 17.5%-50% for MLB, while for the NBA, well, let’s just say that the NBA system is complicated. The point is, 100% is high. Secondly, MLB pays this money to a combination of player benefits (50%), the “Industry Growth Fund” (IGF) (25%) and defraying teams’ funding obligations from player benefits (25%), while the NBA redistributes 100% of the luxury tax money to all of the teams under the salary cap.

MLB’s IGF says it aims to “enhance fan interest in the game, increase baseball’s popularity and ensure industry growth into the 21st century”. As it’s operated jointly by players and clubs, there is a fair measure of transparency there. Meanwhile, any money paid into the Chinese Football Development Fund will be used on local youth players and the promotion of football in China, but don’t expect to see any published accounts at the end of each year. In other words, it’s a black hole with zero transparency or accountability.

With regards to the second new rule, it’s a continuation of a rule made earlier this year mandating that clubs have at least one Chinese U23 player in their starting XI and another on the bench. Given that many teams widely abused this rule by substituting the youngster early in the game, the powers that be clearly thought that more needed to be done on this front.

In essence, it’s not a bad thing at all to want to stop the obscene amounts of money being paid to foreign players or to promote the development of young Chinese players. However, the rules as they stand will do neither – and may actually harm these goals, as discussed below.

Who has made these rules?

Although these rules were issued by the CFA, it’s apparent that they were just the messengers and that these rules came from on high, likely some part of the State Council, or the working body for football reform which reports to the State Council. It’s also apparent that these people know very little, if anything, about how football works.

It is extremely unlikely the CSL clubs themselves would have voted for these rules, and while the CFA is the largest stakeholder in the CSL, it only has a 36% stake, so is not a controlling partner. That adds to the evidence that neither the CFA nor the CSL were behind the changes.

How will the clubs react?

Almost as soon as these rules started to circulate online, fans were predicting how the clubs would look to get around them. Here are some of the main ways that CSL clubs can – and will – counter these rules:

100% foreign player tax

• Sign players on free transfers
• Sign players on loan
• Sign players for reduced transfer fees, with selling clubs getting compensated in some other, unspecified way
• Extend contracts of current foreign players in order to avoid signing new ones
• Get “creative” with their accounting

U23 rules

• Sub up to three youngsters on towards the end of the game
• Play fewer foreigners and, therefore, fewer U23s

What are the implications for the global transfer market?

First of all, Diego Costa and his agent can forget about that big money move to Tianjin this summer. There is no way that teams will double the expected transfer fee, and no reason why the selling club – in this case Chelsea – would lower the transfer fee to help out. This shift in the market may help to reduce the premium that Chinese clubs have been paying on top stars, but not nearly enough to make it worthwhile paying a 100% levy for the big names.

Or, I should say, the big names still in their prime.

Those who haven’t been paying close attention have sometimes unfairly blamed the CSL for being a retirement home for aging superstars – a criticism that is much more apt for MLS. Players including Oscar, Alex Teixeira, John Obi Mikel,  Axel Witsel, Ramires, Jackson Martinez and Hulk were all signed by CSL clubs while still in their 20s. But what these new rules will mean is that future signings will be older, out-of-contract players, like John Terry (36) or Bacary Sagna (34), who would, if signed, still command very large wages. In other words, plenty of money still leaves China and nothing will be paid into the development fund.

Similarly, as overseas clubs adjust to the fact that the CSL can’t – or won’t – continue to pay over the odds for players, loan signings, while not as popular with the selling clubs who previously would have pocketed a nice lump sum, would still be a way to get unwanted players off their books.

One possibility of note here concerns overseas clubs with Chinese owners. It’s not inconceivable, for example, that Inter Milan buys Diego Costa for a large fee, and then loans him to Jiangsu Suning for no fee, given that Suning owns both clubs. A similar scenario could emerge with Beijing Renhe, who are candidates for promotion to the CSL and whose owners just bought Reading FC.

It’s also worth bearing in mind that at the start of the last transfer window in January, clubs were allowed five foreigners in the squad, and four of them could play in any one match, but that was promptly cut to five in the squad and three in the match, after some teams had already filled all five slots. For next season, it’s assumed that the maximum number of foreigners on the pitch will remain at three – making two foreign players essentially redundant – so we should see a reduction in the overall number of foreigners in squads as teams adapt to both rule changes, making new transfers even less likely.

That, of course, means it’s now more likely that the current crop of foreigners will stay on in China, either fulfilling their existing contracts (which is often not the case) or extending their contracts beyond the current term. In both scenarios, clubs will likely have to offer increased financial incentives for players to stay, meaning that even more money will be leaving China, paid straight into the bank accounts of the foreign stars and their agents. Again, there is little benefit for Chinese football here.

The rise of creative accounting?

The most worrying aspect of this is that it essentially gives clubs a huge incentive to declare that they are not in debt, in which case the transfer tax will not apply. CSL clubs do not typically declare their financials, but it doesn’t take a genius to realize that they are all running at a loss to some degree: with largely non-existent merchandise streams due to the prevalence of counterfeit goods, plus broadcast revenues, ticket prices and prize money that are far lower than their counterparts in the English Premier League receive, for example, the ‘plus’ side of the ledger isn’t too rosy. With foreign player salaries that sometimes surpass what some of the top EPL clubs are paying, plus inflated wages and transfer fees for domestic players given the league’s quota system, there’s a lot of weight stacking up on the ‘minus’ side. It’s possible that some of the smaller clubs don’t pay out much in salaries, but they are not likely to be in the market for top foreign stars anyway.

Additionally, income from TV revenues – a huge part of EPL clubs’ finances – could collapse in China in the not-so-distant future. Part of the recent bubble was created when CSL broadcast revenues went up 20-fold in late 2015, when Tiao Dongli (aka China Sports Media or CSM) paid 8 billion yuan to the CSL for a five-year deal (1 billion for each of the first two years and 2 billion for each of the subsequent three years). They then appeared to have turned a profit on the first part of the contract, by reselling the rights for the first two years to LeSports for 2.7 billion. But, with PPTV picking up the rights for that second year for 1.35 billion due to LeSports’ inability to pay, certain questions remain:

• Was LeSports able to pay its full share of the 1.35 billion for the first year of the contract?
• If it came up short, was CSM still able to honor its commitment to the CSL? And, if not, does the CSL pass that on to the clubs?

While those questions are purely speculative, it certainly prudent to question CSM’s ability to recoup 2 billion yuan from the market – whether PPTV or elsewhere – for each of the next three years, especially if these rules do indeed restrict the number of big name stars coming to China. It’s no surprise that CSM was reported to be furious at the announcement from the CFA, with suggestions that they were demanding a reduction in their agreement, given the expected slowdown in star names and what that will mean to viewing figures.

So, while everything points to clubs running at a loss – and continuing to do so –  this being China, it wouldn’t be surprising in the least if clubs still find a way to declare themselves profitable.

“Oh, we’ve just signed a new trillion-dollar sponsorship agreement, so we’re able to pay for some foreign stars now.” [Unnamed CSL club, summer 2017]

Politically, though, clubs realize that Those In Charge don’t want them to keep throwing money at the foreign players at the expense of developing Chinese football. Tianjin Quanjian, one of the clubs presumed to be in the running for Costa and the like, had already issued a statement the day before the CFA announcement saying they would “put a stop to any excessive pricing” (suggesting they knew the rules were coming), while the boss of Guangzhou Evergrande, winners of the last six CSL titles, spoke in February of a desire to see his club reduce the number of foreigners and field an all-Chinese line-up by 2020 (suggesting, perhaps, that he had a hand in this latest decision).

The rise of creative substitutions?

There’s less to say on the U23 rule, except to say that clubs abused the previous rule from the start – with Andre Villas-Boas a particular offender – so why wouldn’t they continue to do so?

With more U23 players mandated to play, the overall quality of games will continue to drop, while the transfer bubble for young Chinese players will continue to swell. Alternatively, clubs will play fewer foreigners and fewer U23s. Either way, the rule will not help achieve the goal of developing young Chinese players.

A final caveat

This is how I see it as things stands. It’s possible that the rules will be further tweaked, with some reports saying that more details will be released, but given that the existing U23 rule was mocked and not a thing was done to stop it, that is far from certain. However, the fact that the number of foreigners allowed on the field was altered in the middle of the previous transfer window shows that authorities can still change things as they see fit at any time. It’s possible these rules carry through to the start of next season after two more transfer windows; it’s equally possible that we see yet more rules layered on top, or some of the existing rules abolished.

No one knows what’s likely to happen in the future – least of all the CFA – so if players/agents/teams on either the Chinese or foreign side see an area that they can exploit, the time to act is now. There are windows of opportunity in China – but they always close sooner or later.

Further listening:

• Moving the Goalposts – to China (BBC World Service)
• Are foreign footballers stopping China developing young players? (BBC World Service)

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