China's Money Exodus

http://www.bloomberg.com/news/features/2015-11-02/china-s-money-exodus

by cdnsteve • 11 years ago

65 68 11 years ago

bloomberg.com

Steko• 11 years ago

Apparently it's 'money flooding out of country x' week at Bloomberg:

https://news.ycombinator.com/item?id=10498040

toomuchtodo3• 11 years ago

I believe that's what they call "economic contagion". Capital is trying to find safe returns somewhere, anywhere.

landryraccoon• 11 years ago

It's a shame property taxes aren't higher. It would be a free ride from the perspective of domestic tax payers.

If one wanted to be protectionist, the increased taxes could be set to only apply to non owner-occupied residences.

seanmcdirmid21• 11 years ago

Chongqing and Shanghai have tried this (applied property taxes to 2nd houses for luxury properties). But that is easily gained by simply throwing in a Smurf or two (put the house in a family member's name).

Any system with rules that can be gamed is not going to work in China. The only solution is a tax on all property.

PakG1• 11 years ago

Any system with rules that can be gamed is not going to work in China.

Case in point: http://world.time.com/2013/04/29/why-chinese-couples-are-div...

nugget• 11 years ago

Some states in the US do have high property taxes. Texas, for example, hovers around 3%, and it's generally a much healthier fiscal environment for residents than states with lower property taxes (and higher income taxes), such as California.

seanmcdirmid21• 11 years ago

Property taxes encourage good behavior in making people use their property productively. With property taxes, you just can't sit on property as a form of speculation, which would take it out of use to the detriment of the local economy. In china, even in first tier cities, you have a huge number of apartments that are unoccupied because they are bought for speculation reasons alone.

China has a huge problem, however, in that property was bought already with upfront taxes and the assumption of no property taxes. Introducing a property tax now is going to make those people mad, understandably.

ageofwant3• 11 years ago

Here in Sydney and Melbourne, 1/4 of all apartments are sold to Chinese, even Chinese government owned corporations.

http://www.abc.net.au/news/2015-10-12/selling-the-australian...

contingencies• 11 years ago

To be fair, recent mainland Chinese immigration has enlivened a lot of otherwise dead areas of Sydney, and I'd wager Melbourne. Places that were ghostly failed malls are now thrumming 24 hour apartment-ringed nexus for food and entertainment. (Eg. Chatswood.) A similar transformation has permanently improved central Auckland. Smiles from China, where I now choose to live ... a Sydney native.

shostack3• 11 years ago

Out of curiosity, where are all the jobs supporting the people now living there?

Are they commuting to more urban areas?

ageofwant3• 11 years ago

Oh not saying its bad at all. Investment is good. Just a comment on what seems to be a global trend.

ori_b• 11 years ago

I don't think that people here are complaining about immigration, so much as absentee landlords.

ajtaylor• 11 years ago

I worked in Chatswood for 4 years and the amount of development that went up (or finished) was incredible! Right around the Chatswood station there are 3 or 4 new high rise apartment buildings. All the new shops that opened up were a boon for lunch time offerings :)

narrator5• 11 years ago

This is the "Great Blowing Sound". Ross Perot's "great sucking sound" in reverse. All that money we sent out the trade deficit is flooding back in to real assets in the U.S and elsewhere in the western world.

roel_v• 11 years ago

It's illegal in Australia for foreigners to buy existing homes though, so what they buy are off-the-plan units, and (from what I can tell) significantly (double-digit percentages) overpriced compared to existing stock, or even smaller developments that don't cater to foreigners as explicitly. Many of them seem to be bought to rent out, with the idea of living in them 'occasionally' or 'sometime'. I wonder how many of these investments make financial sense. (then again, just for portfolio diversification it's worth even paying for, maybe that's where the price excess comes from).

It's an interesting economic dynamic, in-explainable with orthodox theory, it's really about the circumstances. Which makes it difficult to analyze and model, too.

lifeisstillgood• 11 years ago

Where would you like your money - in a country with tight capital controls, an unstable political hierarchy, unclear or unreliable economic data and lack of "institutions" or ... China

:-)

sharetea2• 11 years ago

Some relevant links:

"(Chinese bank's) nonperforming loans may be at 20 percent to 21 percent, or even higher." http://www.bloomberg.com/news/articles/2015-10-29/risky-math...

"by 2018 all of China's excess reserves — cash that it has on hand to use immediately — could be gone." http://www.businessinsider.com/chinas-record-capital-outflow...

"China’s 42.2 trillion yuan (US$6.7 trillion) bond market is flashing the same danger signs that triggered a tumble in stocks four months ago" http://www.thestar.com.my/Business/Business-News/2015/10/10/...

narrator5• 11 years ago

How long has this "China is about to crash" story been in the news? It's been around for at least 10 years. There's an article almost every month. I should write a big FAQ about why the Chinese financial system doesn't follow western financial system rules and link to it whenever these articles come up.

seanmcdirmid21• 11 years ago

The economy can remain insane longer than you can remain solvent.

You can claim that the Chinese financial system is immune to economic cycles and that the law of gravity doesn't apply. But we've heard that before about American real estate, where people were saying "how long has this real estate is about to crash story been in the news?" in 2007...

If everyone around you is talking about how to get money out of China, then something might be up.

Jerry2• 11 years ago

Money's also flooding out of Canada:

Money Flooding Out of Canada at Fastest Pace in Developed World

http://www.bloomberg.com/news/articles/2015-11-02/money-floo...

beachstartup• 11 years ago

might be related. a lot of money has flooded into canada because of the chinese. see: real estate.

toomuchtodo3• 11 years ago

While at the same time, money is flowing out of Canada due to the collapse in oil prices.

adventured• 11 years ago

This is due to the dollar.

It's not a coincidence it's all happening simultaneously globally. For the same reason, every GDP on earth simultaneously skyrocketed (priced in dollars) as the dollar lost value in 2002/03, as the US Government began running large budget deficits under Bush.

It's causing the mess in China to get worse, by pulling capital out of China more rapidly. It crashed Brazil (check out when their unemployment began to soar, exactly when the dollar run began [1]). It crashed Canada and also hit Australia hard. It caused Russia to lose 1/3 of its economy, and is bleeding off their reserves and emergency fund; and the worst isn't over yet. The strong dollar ended the USSR by tanking the price of oil, and caused their crisis in 1998 as well.

The same thing happened in Asia in the late 1990s, when the strong dollar crashed numerous economies there. This time is worse in terms of sheer damage, as those Asian economies are far larger today (as are Canada, Australia, Russia and Brazil).

Every day the dollar remains strong, things will get better for the US and worse for almost everyone else. It has already pulled trillions in capital back to the US, and has boosted real US annual purchasing power by at least $2 trillion in just 18 months. The US has gone from #9 or #10 in the world in GDP per capita in 2014, to #5 on the IMF's projections for 2015, due to the dollar.

[1] http://i.imgur.com/MCsEaOb.png

shostack3• 11 years ago

It seems like the media has been trying to will a crash in global markets to happen with the amount they've been going on about this.

How biased are their opinions and what do more neutral experts say about the direction the global economy is heading? Honest question as I am not an expert.

seanmcdirmid21• 11 years ago

They are reporting facts, really it is as simple as that. People are moving money out of China (I'm one of them), confidence in the economy is not good even if the government says everything is completely spiffy. Bloomberg doesn't have to make anything up to talk about how people are moving money out of China, they just need to follow the money. And if the money is flowing one way, it is completely reasonable to speculate on "why" that is so, and I think it is obvious (confidence is low, better investment opportunities exist abroad then what can be done with the money at home).

shostack3• 11 years ago

Thanks for the clear and logical explanation. I find it hard to trust the news in this day and age so always interested in other opinions on the biases of the publisher itself.

gscott• 11 years ago

Good thing China has all of those Treasury Bonds to sell.

markdown• 11 years ago

Fijian here. As of a year ago, foreigners are no longer permitted to buy residential properties within town boundaries.

Outside of town boundaries, they can buy residential property but must build on it within 2 years, spending at least USD$125k on the home. Failure to do so attracts a penalty of 20%(off the top of my head) of the value of the property annually.

The chinese were just buying up too much property and locals couldn't compete.

mahyarm• 11 years ago

That money exodus has been happening for a decade from Vancouver's perspective. Maybe it's just accelerating now.

elchief• 11 years ago

And our neighborhoods are emptying out...

fspeech6• 11 years ago

Why is it called an exodus? Other than the central bank selling dollars, for every yuan that is sold there is a buyer on the other side.

Let me try a different narrative that could be equally valid: as the oil price has halved the Chinese are getting a subsidy of 150 billion dollars a year. Coupled with other commodity windfalls, the regular trade surplus, and a domestic slow down that reduces the potential return on domestic investments, they have cash busrting their wallets and must seek alternatives. Overseas investment (a.k.a. the money exodus) is the only way to keep the accounting identity true.

seanmcdirmid21• 11 years ago

The money is leaving the Chinese economy to be invested in other economies, hence an exodus. One could say that the money could always come back when the Chinese economy provides more opportunities. Or those rich people could just emigrate completely, leaving China behind.

fspeech6• 11 years ago

There are only a few currencies (USD and maybe Euro) that circulate outside of the issuing country on a significant scale, but even for the USD the amount of cash outside of the country is puny compared to the worldwide dollar holdings. So strictly speaking money never leaves. It is easier to get the concept right to instead say that you now prefer to use the USD as the accounting unit for your assets.

EDIT: To clarify: "cash" refers to paper currency and coins; "dollar holdings" refers to dollar denominated assets.

fspeech6• 11 years ago

Let me add that the accounting identity I am referring to is that the trade surplus must be balanced the capital outflow. Since it is an identity it must be true in the past as well. It is just that in the past the private sector (on a net basis) was not very interested so it was the central bank that controlled all outbound investments. And as a result the PBoC has a very large and visible holding of foreign reserves. Now the time has come that the private sector and individual Chinese want to invest the surplus themselves and maybe then some so we see the central bank's reserve holdings falling. At this stage the central bank may be happy to just get rid of some of their excess holdings (also if they don't intervene and let the exchange rate fall they will get even more squawking and name calling overseas). But if it persists to the degree that the central bank runs out of reserves it will be forced to stop intervening in the forex market and then the exchange rate can fall as much as the market wants to, which by the way will make the trade surplus even larger.

seanmcdirmid21• 11 years ago

The private sector wasn't "not very interested", they were required to sell their dollars to the central bank for RMB. They just were not allowed to hold dollars inside the country. That money was then taken out of circulation by buying US treasuries (what else could China do with it?).

There was a time when China wanted to get rid of some of their USD holdings, so they encouraged companies to take RMB, buy dollars, and invest abroad. But taken to an extreme, eventually China runs out of reserves, has to buy dollars on the open market to satisfy demand, and that leads the RMB to de-valuing as they print more to buy dollars.

China still has to buy most imported commodities using dollars...like oil. A de-valued RMB will most certainly lead to inflation at home, causing prices to rise. And then Chinese will start hoarding dollars if they lose confidence in the RMB, leading to a sort of death spiral.

At this time, China wants to keep money in China, and so is cracking down on banks exchanging to USD too easily. Capital controls are a real thing.

colordrops• 11 years ago

Of note is that the recent rise in price of Bitcoin is in a large part due to this outflow of money from China. This article totally left that channel out.

China's Money Exodus

Related Stories