‘Chinese buyer pips local bidders’ran the headline in the Australian Financial Review last Wednesday. Talk about an understatement — the buyer just paid some of the highest land rates in Southbank, Melbourne,‘significantly ahead of recent comparable sales in the surrounding precinct’. This trend is going to run for a long time to come. And it’s not hard to see why.
Here’s the clue: ‘The buyer owns tyre manufacturing and cardboard businesses and is looking to secure more properties in Australia over the next few years. The businessman, who has two children at universities in Melbourne, plans eventually to have the majority of his assets and capital in Australia rather than China.’
Chinese money is treating real estate in Australia, the United States, Canada and the UK like a safety deposit box. Maybe a passport will go along with it. Over in America, an obscure visa program called EB-5 offers a ‘green card’ to foreign families who invest US$500,000 in the US to create at least 10 jobs.
The Wall Street Journal reports that the number issued in 2006 was 486. For the last fiscal year in the US, which ends in September, that number was 10,928. The dollar investment amount could top US$4 billion. Chinese nationals make up 85% of the visas, and ‘investors are primarily seeking green cards, not a profit, and generally are willing to accept low returns.’
The article also mentions that this money is a handy and cheap source of capital since US banks reeled in their lending after 2008. With credit hard to come by, cashed up Chinese are on everyone’s wish list.
Over in the UK, Bloombergreports, ‘From luxury retailers to law firms to banks, Londoners are jockeying to take advantage of a wave of Chinese investment and tourism.’ The tanking oil price is causing rich Russians to rein in their spending, not to mention the national call from Moscow to bring the money home. That’s bad for posh businesses like Bentley dealerships, which are now catering to Chinese tastes. Presumably sales of premium vodka are suffering accordingly.
Matthew Cranston, writing in the Australian Financial Review this week, cites 90% of Australia’s Significant Investment Visas are Chinese, equating to $2.4 billion coming in ‘that is tied up in numerous investments, such as bonds and cash, there is also plenty in special vehicles that buy both established as well as new homes.’
He also writes that in the 2013 financial year, China became the largest foreign source for Australian real estate at $5.9 billion, a record that should be ‘well and truly exceeded’by June 30. Some analysts already estimate the amount of money coming in will double that figure.
Before you get the impression Australia is becoming the Great Southern State of China, the figures are not that big in the context of Australia’s $4 trillion real estate market. In fact, in comparable figures, sales are not that much more than from American and British investors.
In the last issue of Cycles, Trends and Forecasts, we had real estate expert Catherine Cashmore explain the situation. Chinese investors are not spreading their dollars evenly across the land. They’re funnelling cash into two specific regions, and that’s driving property values in those spots ever skyward. If you want to know where they are, start here. The rest of the country probably wonders what all the fuss is about.
This could run for years. The only thing stopping prices running even higher is the restrictions the Chinese have about sending their money out of the country. It’s been dubbed the ‘Great Wall’, holding back billions and billions in Chinese money. It’s pretty leaky already, but it won’t be that long before it’s abolished altogether.
Here’s why. China wants to circumvent the grip the United States has over the international financial system. But the only way it can truly do that is to liberalise money flows in and out of the country and promote its currency, the renminbi, as an international one. That’s happening. The Financial Times reported this week that 22% of China’s trade is now settled in its own currency, up from nothing five years ago. Not only that, the renminbi is now the seventh most used currency for payments in the world. Some wags in the media have now dubbed the renminbi as the ‘redback’, as opposed to the US ‘greenback’.
Here’s some real meat on the bones too: In May of this year, China and Russia announced that Russia’s Gazprom will supply 30 years of gas in a deal valued at $400 billion. It’s due to begin in 2018, and the payment will be in renminbi, not US dollars. That’s the first energy deal to break out of the US dollar hegemony.
Contributing Editor, Money Morning