Looks like China’s capital controls are legit working this time. In January, one of our writers claimed that China’s new capital controls would cause a capital shortage for Mainland Chinese buyers. Shortly after he observed a capital flow reversal at the State Administration of Foreign Exchange (SAFE), and claimed inventory would flood certain markets. I had my doubts, but five months later it looks like he’s right. China’s capital controls have led to substantially less money leaving the country, and the markets Mainland Chinese buyers flooded have no idea how much their homes are worth anymore.
China’s FX Reserves Hit A 7 Month High
China’s foreign exchange reserves rose for another straight month. According to SAFE, total reserves hit US$3.052 trillion at the end of May, a US$23 billion increase from the month prior. This is a 0.77% increase, and a 7 month high. SAFE claimed last month that the reserve exchange will be balanced going forward, and the market appears to have followed through. This means a lot of things, but most important it means money isn’t leaving the country in the significant quantities it was last year.
Source: SAFE, PBOC.
Why This Is Important
SAFE’s reserves are an important measure of capital outflows due to the lack of convertibility of the Chinese yuan. In order for Chinese yuan to be used outside of China, it must be converted by the Chinese government into a foreign currency. Last year over a US$1 trillion more currency left the country than entered. That’s an impressive amount when you consider how much money actually enters the country on a daily basis. You know, since virtually everyone buys things made in China.
In January 2017, China rolled out stronger capital controls. Now they always had capital controls limiting the exchange of more than US$50,000, but there were no rules on borrowing someone else’s exchange allowance. The new rules prevent borrowing someone else’s allowance, and it can only be exchanged for an approved use – this does not include real estate. Further rules to tighten the money supply will be rolled out over the next few weeks as well.
Impact On Global Real Estate Markets
Real estate markets that saw locals scramble to cash in on foreign buyers are now noticeably cooler. Toronto is seeing new listings hit an all-time high, coupled with a massive dip in sales. New Zealanders that were complaining about a “flood” of Mainland Chinese buyers, are now complaining about the market cooling faster than expected. Australia’s leading property analyst is now telling people to prepare for a 10% drop in prices soon. The one place that’s bucking the trend is Vancouver, where locals are still convinced that Mainland buyers are somehow buying – but not showing up in any significant statistics. Good luck with that Vancouver!
Mainland Chinese buyers were buying a lot of international real estate, but over excited locals bought into the narrative way too much. Countries that are nice, but not global leaders got way too excited that they were the next “New York.” Canadians after all, have been heavy real estate speculators without Chinese influence. Now that mainland Chinese buyers aren’t buying in any significant quantity, buyers are finding themselves in an existential real estate crisis. Is a 30% rise in a single year a justifiable increase in property prices? We’ll find out.
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