Data released in the first week of January indicate that Chinese investments in global real estate continued to grow rapidly in 2016, hitting a record $33 billion. The United States is the most popular venue for Chinese investment, followed by Hong Kong, Malaysia, and Australia. As the Chinese upper class continues to expand, global real estate has gained prominence over other forms of investment because it is easily managed and even easier to understand. The majority of investment in foreign real estate comes through insurance companies, conglomerates, and property developers.
Klaus E. Meyer, of Forbes, identifies three major factors which may be motivating Chinese investment in foreign real estate. Firstly, investors may simply be seeking assets which are expected to yield a good return, as real estate in metropolises like London and New York typically do. Secondly, as Chinese companies begin to go global, they might look for new real estate development opportunities by building commercial and residential buildings across the globe. Lastly, investing in foreign markets provides an opportunity for Chinese businesses to diversify their assets, especially amid growing concerns about the slowdown of the domestic economy.
As we discussed in class, however, the Chinese government is growing concerned about the ever-increasing rate of capital outflows. A domestic economic slump has resulted in further concerns about the government’s ability to keep exchange rates stable, as Chinese foreign currency reserves fell to a six-year low of $3.052 trillion in November. On Jan. 2nd, 2017, the Chinese government announced that banks would have to submit reports on overseas cash transactions of more than 50,000 yuan (around $7,000), down from 200.000 yuan prior to new regulations. In addition, banks will have to report any overseas transfers by individuals of more than $10,000. Rueters reports that Chinese citizens were restricted from purchasing “overseas property, securities, life insurance or other investment-style insurance products.” While it is unclear to what effect new regulations will have on corporate overseas investments, they will certainly restrict the ability of individual investors to engage in foreign real estate markets. It may be that the glory days of Chinese investment in foreign real estate as we know them are be over.
Sources Consulted
https://www.ft.com/content/d8d80b6e-e381-11e6-8405-9e5580d6e5fb
http://www.reuters.com/article/us-china-yuan-idUSKBN14M032
http://fortune.com/2016/08/18/china-overseas-property-investment/
http://www.forbes.com/sites/ceibs/2016/05/05/whats-behind-chinas-worldwide-real-estate-shopping-spree/#d409cd1ce29d
It is interesting to consider the impact on real estate markets that the end of this “golden age” may have. Such heightened demand for real estate from Chinese buyers may have created mispricings in the market, which a drop in demand may correct. One wonders if the high prices many Chinese investors paid for real estate are an accurate representation of the asset’s value and if investors will experience losses on their investments.
It is interesting to see China taking on such a stance with regard to foreign exchange and capital flows. As others who may have taken International Finance will also be aware, there is an “impossible trinity” of sorts that China is delicately balancing here.
A country can only ever implement two of the following three policies at a given time: a fixed exchange rate, control of domestic monetary policy, and free capital flows.
Since China is dead set on fixing its exchange rate and also wants to be able to make macro-level adjustments using its monetary policy, it has to limit the inflows and outflows of capital domestically. It appears they have had limited success at this if these new regulations are any indication; it is fair to wonder how long the Chinese government will be able to keep a lid on capital flows before it is forced to concede either its domestic monetary policy or its fixed RMB.
In China’s case they have bought forex to try to “sterilize” (limit) the impact of capital flows, that $3 trillion mentioned above. That is, people are required to sell their dollars to the govt and/or the People’s Bank of China bought up foreign assets. Capital flows were indeed restricted.
As we discussed in class at the very start of the term, Chinese asset holders are under diversified, holding only domestic real estate, stocks and bonds. There’s thus a big incentive to seek foreign assets. But there’s also corrupt money sent overseas so that in the event there’s a crackdown, at least some of the ill-begotten gains are out of reach of the Chinese government.
But back to macro: how successful has China been at insulating itself from foreign shocks, such as the 1997 Asian Financial Crisis and the 2008 Lehman Shock? … a good blog post topic.
Some people in China consider the country’s real estate market to be the sole reason why the country has not entered into recession or a correction period despite all the slowing growth. There are numerous stories of Chinese properties exponentially growing in the last two decades. China’s land right usage is really unique, and the argument is made that a country’s long term success needs to be based on privatizing land (which China still has not!). I believe you technically have 70 years for the right to the “property” but not the land. And there are tons of stories out there of the Chinese buying foreign real estate assets (Vancouver and LA are main hubs).
This is a really interesting issue which I did not consider. I wonder how demand for real estate in China, from both domestic and foreign investors, will change if land privatization reforms move forward.
Inside China there’s a (mistaken) belief that buying property is a sure thing. That was true in Japan as well, until real estate markets collapsed in 1991 (I was in Tokyo at the time). Many investors carried that mindset overseas; there was a wave of Japanese investments in the late 1980s, including Rockefeller Center and the Pebble Beach golf course. Rockefeller Center ended up in bankruptcy, the Japanese investors lost everything, and Pebble Beach was sold at a $300 million loss.
It seems certain that with the increasing bond default rates (analysts have estimated that as much as a fifth of bank loans are bad https://www.wsj.com/articles/in-china-insurers-sell-risky-products-to-fund-risky-investments-freaking-out-regulators-1484130601) one of their current “impossible trinity” choices is going to have to give. It would be wise for the Chinese government to examine what aspects of the foreign real estate investment make it so desirable, to try and replicate similar attractive situations domestically.
This is a really interesting post and holds very interesting implications for the major metropolitan cities in the United States. It will be interesting to see what happens to high end building values in cities such as San Francisco and New York if the Chinese stop buying up property. One trend which has been observed over the past year is that Chinese investors are beginning to invest in residential funds in the US such as single family homes for rent. These SFR properties are available by the hundred or thousand, provide an attractive cap-rate and as well as appreciation potential.
Chinese investment in American real estate seems as though it could be a double edged sword. On one hand, it’s an influx of capital and has the ability to transform cities when American local governments fall flat. For example, if Chinese investors decided to buy up land in Detroit and build multimillion dollar developments that could have a profound impact in reinvigorating economically depressed areas. On the other hand, it’s not so hard to imagine a Chinese company owning the office or facilities of an American company that competes with Chinese interests. A malicious Chinese landlord could hike the price on its tenants to curb growth. While this seems far fetched and could happen with other foreign investors, certainly, the sheer amount of Chinese investment in our infrastructure is enough to give any local government some pause.
Most of the investment is passive, not active: buying existing properties. So the Chinese may drive up prices in a few neighborhoods in a few cities, but not much more.
Note too the amount: $30 billion is 1% of the PBOC’s foreign reserves, not a big amount. Likewise spread across several countries and many cities $30 billion isn’t much when it comes to real estate.
An article from The New Yorker highlights what March mentioned in his comment: the ‘fuerdai’ in Vancouver. Fuerdai are rich Millennials who flaunt their money whenever they can, and many seek schooling outside of China. In Vancouver, one fuerdai, Weymi, mentions that “a three-thousand-dollar outfit is like a carton of milk.” Such culture has been brought to the forefront of Chinese TV shows, who depict the fuerdai as uber-rich kids with loads of popularity. Their is backlash from some of the Chinese populous, however. One of the most notable web quotes of the fuerdai is that “their grotesque displays are a poison to the work ethic of Chinese society.” It makes sense that new regulations are being imposed to keep money in the domestic market. Perhaps the fuerdai are in for a rude awakening, but Reuters said that they were “unable to immediately confirm if all banks in China were using the new application form.”
http://www.newyorker.com/magazine/2016/02/22/chinas-rich-kids-head-west
This is a really interesting article. I wonder to what degree these reforms are created out of policy, and to what degree they arise out of growing concern about China’s cultural shift towards a more individualistic, materialistic society.
Conservatives in China hearken back to some mythical world in which people were altruistic members of a collectivist society. I’m not sure there’s much evidence such a world ever existed. Yes, people were forced into collectives. From the outside you don’t look materialistic when you’re extremely poor, not baubles to flaunt. But that doesn’t mean that people were individualistic and materialistic.
I don’t have much faith that these new regulations will do much to stop the big-time Chinese investors from getting what they want. This will hurt individuals, but as we all know if you have enough money in China you can get around pretty much anything you want. China’s billionaire class probably isn’t sweating about the future of their foreign investments.
I agree, it might be important to consider the role that relationships with government officials can play in getting major investors and businesses what the want in China. These regulations might actually serve mainly to keep gov’t officials posted about who’s investing where, perhaps for their own benefit.
If you have enough money, the same is true in the US. The very wealthy can, if they wish, avoid paying taxes – certainly that appears to have been the case with our President, and with Mitt Romney as neither made public their tax returns. Legal? – maybe, but the IRS can’t afford to prosecute the truly wealthy, they don’t have the budget, so we don’t really know.