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China’s FX Reserves See Largest Rise In Over 3 Years, Global Real Estate Spending Cools

China’s FX Reserves See Largest Rise In Over 3 Years, Global Real Estate Spending Cools

How many Chinese anti-money laundering experts does it take to cool a global real estate buying spree? Over 400,000 apparently. We knew the rise in foreign exchange reserves was going to be huge, since it followed The People’s Bank of China (PBoC) announcement that over 400,000 people have been trained to help stem the capital outflow. Although, no one expected it to be the largest increase in over 3 years. As we explained in January, this is going to have severe consequences for real estate markets around the world.

Capital Reserves Swell To 9 Month High

PBoC numbers show that foreign exchange reserves rose for another straight month. Total reserves now stand at US$3.08 trillion, a 0.8% increase from the month before. The increase is just north of US$25 billion, sending the value of the reserves to the highest level since October 2016. That increase may not seem all that large in contrast to the size of the reserves, but this is the largest increase since March 2014. So it’s kind of a big deal.

Source: People’s Bank of China.

New Capital Controls

This is the sixth month in a row that China’s foreign exchange reserves rose, after implementing new capital controls in January 2017. From 2014 to 2016, there was over a trillion dollars in capital that left the country, with an estimated 1 in 10 dollars hitting global real estate markets. Great for sending property values higher, but not so great for China’s currency.

The country responded by rolling out some of the tightest capital controls in decades, only allowing currency to leave for pre-approved uses. One use restricted in this round is real estate buying, which global markets felt almost immediately. The world’s largest real estate buyers, are quickly becoming the world’s largest real estate sellers.

China’s 400,000 Anti-Money Laundering Experts

Many speculated China would loosen the rules in a few months, instead they announced the deployment of 400,000 anti-money laundering experts to halt money from leaving the country. Jin Luo, Director General of the PBoC’s anti-money laundering bureau, said China’s new rules will have a “higher standard with stricter requirements than developed countries.” Oh yeah, did we mention that money laundering in China includes exchanging money you legitimately earned to buy foreign currency for an unapproved use?

If you’re a city that’s been chasing Mainland Chinese investment, at the expense of building local industry – now might be the time to review those plans. If you’re a city that still has Mainland Chinese money pouring in, you should probably be asking how this money is still arriving in your country. Last time we checked, the downpayment on a house in Toronto or Vancouver was largely in excess of the amount of money that can be exported from China.

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6 Comments

  • Reply
    Anne Hamilton 1 week ago

    A trillion plus left the country, and if I were an money laund… investor, I wouldn’t bring it back into the country.

    My guess: prices in YVR and YYZ will probably not drop quickly, lest a catastrophic externality occurs, e.g., new meaningful property rules against non-residents, North Korean war, etc..

  • Reply
    Maha 1 week ago

    Even half of the laundered money returned to the country, it is considered a lot, because it is all from the 100% profit.

  • Reply
    Justin Thyme 1 week ago

    Not one yuan has left China.

    The wealth in China stays in China.

    Our American-centric ideas have ingrained the notion of money and monetary wealth leaving the country.

    In America, you CAN take greenbacks out of the country. In fact, over half of all greenbacks are held outside of America. This is TRUE monetary wealth leaving the country. Greenbacks can be used as currency almost everywhere, so if you have greenbacks that were earned in America, you can take them out of the country and buy something with them.

    You can not take renminbi out of the country, and if you do, you can’t do anything with them except frame them. They are useless anywhere but China. So any wealth earned in China STAYS in China.

    All of China’s ‘reserves’ are money earned outside of China. Sure, the average Chinese citizen can ‘buy’ some of these reserves (exchange money), but the renminbi that he uses to buy these foreign currencies stays in China. His ‘earned wealth’ stays in China.

    But, again, we are so used to the American-Western concept that when we take money out of the country, it can be in genuine currency of the country (greenbacks). Thus, home-grown wealth leaves the country.

    China realizes this completely, and recognizes that it is the main reason why America is in decline – so much wealth has left the country. Thus, China will not allow it’s currency to become ‘convertible’. Once they do, wealth can actually leave the country.

    it is a fallacy perpetuated by capitalistic thinking that currency needs to be convertible in order for the country’s economy to be ‘stable’. In fact, it is exactly the opposite. A ‘convertible currency’ leaves the country open to exploitation by Capitalism.

  • Reply
    Justin Thyme 1 week ago

    China guarantees full employment. They guarantee that there is a job for everyone, even if it is handing out toilette paper in a public washroom (Cuba, for instance).

    China is also finally doing something about polluting out-dated and inefficient zombie industries.

    See the conundrum? How do you replace these jobs from dirty industries?

    Well, how about coming up with a new job of ‘currency control’ and hiring 400,000 people to ‘monitor’ the situation? Talk about a make-work project. At least it is clean and non-polluting. And ‘plausibly’ useful and purposeful for the employee.

    But don’t think for one instant that it has anything to do with stemming ‘money laundering’.

  • Reply
    Justin Thyme 1 week ago

    ‘If you’re a city that’s been chasing Mainland Chinese investment, at the expense of building local industry – now might be the time to review those plans.’

    Think about this IN REVERSE.

    If you’re a city in China that’s been seeing investors seek out FOREIGN investment, at the expense of building local industry, now might be the time to prepare for more investment.

    China does NOT make policies to make the REST of the world either richer or poorer, but for the benefit of the average Chinese citizen.

    THIS is the ‘correct’ message to send – do NOT depend on Chinese policies and Chinese wealth to make Westerners rich. Sorry, Capitalists, but you are now on your own.

    China intends to make CHINA great again, NOT America.

  • Reply
    Justin Thyme 1 week ago

    These ‘reserves’ can only be spent OUTSIDE of China. Exactly WHAT does China have in mind for these reserves?

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