I know, your neighbour/real estate agent/waiter told you foreign buyers are buying up real estate markets like Toronto, Vancouver, and Seattle. If they are, they haven’t been buying these houses with actual money people would accept. According to the State Administration of Foreign Exchange (SAFE), China’s capital outflows have been inflows for two months now.
China’s Foreign Exchange Reserves Rise
SAFE and the People’s Bank of China saw foreign currency reserves rise for the past two months. The total reserves now stand at US$3.009 trillion, a 0.36% increase from the month prior. US$220 billion left the country in 2016, so this is a sharp turn in contrast. If foreign currency reserves haven’t moved, there’s little reason to believe money is leaving the country.
China’s Foreign Exchange Reserves
Source: People’s Bank of China, State Administration of Foreign Exchange. Since US$3 trillion is an important number for reserves to be held, analysts believe money won’t be leaving the country in significant numbers for some time. Yes, that means even to pay mortgages, and buy real estate.
Why Track Foreign Exchange Reserves?
China is the world’s most powerful country that does not have a reserve currency. For those that don’t know, a non-reserve currency is one that does not have liquidity in the global market. This means foreign central banks do not stock it in large quantities, and it only has value in the local country.
In order for a Chinese citizen to use their hard earned yuan outside of China, they need to exchange it locally. At the current time, yuan is a little more useful than Monopoly money outside of China. This might change in 2019-2020, but that’s not the case today. Since it has to be exchanged, it doesn’t matter if you evade capital controls – it will show up in the reserves.
Why Did Chinese Buyers Stop Exchanging Capital?
This is where China’s capital controls come in. Each Chinese citizen can only convert US$50,000 per year, not quite enough for a down payment. So people needed to borrow an allowance from friends, family, or smurfs for hire. This changed in January when the Chinese government rolled out new controls. These controls prohibit borrowing allowances, and now require proof/reason why you’re exchanging capital.
Only approved uses are now allowed, and paying a mortgage or buying a house is not an acceptable reason. Violate the rule or try to circumvent it, and you get an investigation for money laundering. Keep in mind you’re guilty of money laundering in China for converting more money than allowed. So even mom and pop that earned their money, and payed their taxes can be guilty for converting a little extra for safe keeping.
There’s no doubt that Chinese money left the country at a rapid pace last year, and a lot of it landed in Vancouver, and Toronto real estate. However, the amount of money leaving the country has been throttled since December. Since January, the new capital controls have been effective, even more so than Vancouver’s foreign buyer tax.
You might still be hearing that foreign buyers are running the market. However, today’s buyers are more likely providing liquidity for foreign sellers. If they’re sellers from China, they likely can’t even secure local currency to pay a mortgage. Soaring real estate prices are now a domestic issue, not a foreign buyer issue.
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