Property seduction will sting China

As Chinese buyers ramp up their property presence across the globe, capital outflows from the country are a major challenge for Beijing, which is also battling the fallout from Europe.

Sydney’s real estate agents were celebrating yesterday after a Mosman waterfront property – which had been sitting on the market for three years – sold for what was the second highest price this salubrious North Shore suburb has seen so far this year.

According to the selling agent, two buyers – a Sydneysider and a buyer from China – ended up vying for the property, which helped push the price above the $11 million mark. And although in this case the local won out, Sydney agents are deeply aware that mainland Chinese buyers are providing a welcome boost for the languishing top end of the Sydney property market.

Sydney, of course, isn’t alone. Chinese buyers are helping to drive up the price of Hong Kong’s luxury apartments, and are emerging as key players in property markets as far afield as London, Singapore, San Francisco and Melbourne.

There are two reasons why Chinese buyers have become increasingly interested in acquiring offshore assets such as property. In the first place, there’s mounting concern about the Chinese economic outlook, particularly now that exports are clearly slumping. At the same time, Chinese buyers also see their offshore property purchases as a handy insurance policy, in case of rising political instability in their homeland.

The latest Chinese trade figures show that the European recession is hitting China hard, with exports growing at a miserable annual pace of 1 per cent in July, down from June’s 11.3 per cent rate. The slowing global economy is a major concern for mercantilist countries such as China – which rely on exporting their surplus savings to the rest of the world and importing excess demand. They reap huge benefits when the global economy is growing, but they pay a high price when global growth falters, and when demand for their exports withers.

But growing capital outflows represent a major economic challenge for Beijing. For the past decade, the Chinese central bank has been engaged in a massive money-printing exercise aimed at preventing the Chinese currency from rising. Huge quantities of yuan were printed so that Chinese banks could absorb the foreign currency flowing into the country, both from the Chinese trade surplus, and as hot money flowed into the country to take advantage of strong Chinese growth and rising asset prices.

Now this massive inflow of funds has stopped. According to figures released by China’s central bank this week, Chinese banks were net sellers of 3.8 billion yuan ($597 million) in foreign exchange last month, a clear sign that investors are pulling funds out of the country, and that some exporters are choosing not to convert their foreign exchange earnings into yuan.

Indeed, over the last 10 months, China’s banks have only purchased 145 billion yuan in foreign exchange, a tiny fraction of the 905 billion yuan that China has earned as a result of its trade surplus with the rest of the world.

As a result, Beijing is now struggling to support its currency, rather than fighting to stop it from rising. Since the beginning of the year, the yuan has dropped 0.7 per cent against the dollar, and the Chinese central bank has had to battle to stop it from falling even further.

But the pick-up in hot money outflows is also having an impact on Chinese asset prices. There’s little doubt that the huge capital inflows over the past decade played a major role in pushing Chinese real estate and equity markets higher. Now that they’ve changed course, Chinese asset prices are deflating. The Shanghai Composite Index is down 17 per cent compared with a year ago, while Chinese house prices remain under pressure.

Beijing will be deeply concerned that falling asset prices are savaging business confidence and causing investment to slide, crippling its attempts to revive the flagging Chinese economy.

This is my final column for Business Spectator, as the time has come for me to head back to the AFR.

Before I go, I’d like to thank Alan, Bob, Steve and James for being such great people to work with, and for initiating me into the brave new world of online journalism.

But most of all, I’d like to thank you, the readers, for your tremendous support over the past two and a half years.

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