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19-09-2015, 08:09 AM
Chinese crackdown could threaten Australian property market
Andrew Main
[Image: andrew_main.png]
Senior Business Reporter
Sydney
[Image: 920972-61413902-5dce-11e5-896e-4e71406d3561.jpg]
Hamish Douglass, CEO of Magellan, says up to $US500bn of mainly private capital has left China in the past 12 months. Picture: James Croucher Source: News Corp Australia
[b]One of the biggest risks to the Australian property market is a potential crackdown by the Chinese central bank on its citizens exporting capital to invest in other countries, says Hamish Douglass.[/b]
Mr Douglass, the chief executive and chief investment officer of the Magellan group, said this week that between $US450 billion and $US500bn of mainly private capital had left China in the past 12 months thanks to “very leaky’’ export controls, and the People’s Bank of China now wants to see capital flowing back to where it came from.
“Of this capital that’s been leaving, tens of billions of dollars has been finding its way into the Australian property market and for us that’s acted as a form of stimulus as our commodity markets slowed down. It’s breathtaking and it simply wouldn’t have happened without this capital that’s been flying out of China.
“It’s not only Australia — there have been other countries — but ultimately the more of our property capital stock that gets into the hands of a foreign constituency, the more correlation our property market ultimately experiences to either the policy implications which make up the country, or the investment desires or whims of that class of investor.
“From a policy point of view, capital leaving China is actually sucking dollars out of their economy and their economy’s slowing down, so you could see, legitimately, that the People’s Bank of China may want to slow the rate of capital outflow because it’s draining financial resources.”
He said that there was a legal limit of $US50,000 ($69,000) a year per person leaving China, “which makes it interesting to work out how they finance a $20 million purchase in Point Piper”, and “if the PBoC really clamped down on that, property investment would stop immediately and the price of apartments, many of which are specifically designed for the Chinese market, could drop by as much as 50 per cent’’.
Mr Douglass served a five-year term on the Foreign Investment Review Board between 2009 and 2014. He explained that “as soon as the buyer signs a contract to buy an apartment it becomes existing housing stock, whose only legal buyer has to be an Australian resident”.
“At that point the Chinese can’t sell to themselves; they’ll have to sell to Australians. And do Australians really want to buy residential property in CBDs on this scale? Under our foreign investment rules they’re the only ones who can buy it from the Chinese. And in that circumstance the price might be going down and the buyer will want a bargain.
“We’re talking Sydney, Melbourne, Brisbane, Parramatta ... you only have to look around the skylines. Many of the buyers may be viewing it as an alternative to a bank deposit but if that investor suddenly feels that there’s risk involved and it’s not a bank deposit, they want to sell and they see prices moving, the herd changes direction and that can compound the problem.’’
He admitted that much of the Chinese property investment in Australia was financed offshore or indeed paid for in full by the buyer, and that Australian banks had “very significantly” cut back on lending to finance new apartments in CBDs.
“But I can guarantee to you that if we get a 50 per cent drop in the prices of apartments, there will be a drop in the value of bank shares. Even though Australians prefer houses to apartments, any drop in one sector of the market is going to spill over into the other sectors because of relative valuations.’’
He said not all capital was going into housing. “There’s some capital leaving for development needs and corporate M&A, but largely it’s private capital leaving China.’’
On the $US50,000-a-year limit, “all you need to do is have 100 relatives and actually pay them renminbi in China and take the money out yourself’’, he said.
“Or you go to a third party intermediary who puts in a fake invoice for purchases offshore for import reasons.
“This is where corruption comes in. And lo and behold, the banks are processing a lot of legitimate capital needs which are actually illegitimate.’’
He said that the PBoC’s slight devaluation of the yuan on August 11, “and it was only slight”, was a “brilliant” move because it made capital exports more difficult at a time when those suddenly more valuable overseas currencies were easier to tempt back into China.
He made it clear he doesn’t expect any looming bust in China, despite the slowdown and more than 22 million apartments lying empty, “because the Chinese government is in the strongest financial position of any country in the world and the government still owns 40 per cent of the economy.
“Post August 11 the PBoC has brought back into China more money than ever before, at a better rate,’’ he said.
“One way for our government to reduce the risk of a bust in the apartment market would be to allow overseas buyers to purchase housing stock owned by overseas buyers, but that would be a politically charged decision given the sensitivities around foreign ownership of housing.”
“We’ve been in a perfect positive cycle and the problem is that when you start moving you get into a vicious cycle going in the other direction.’
“We’ve now been 21 years without a recession and a recession is caused by a drop in the property market.
“The global financial crisis could have caused it to happen in 2008 and 2009 but China saved us through their investment expansion, which led to a continued boom in our commodity markets.’’
- THE AUSTRALIAN
- SEPTEMBER 19, 2015 12:00AM
Andrew Main
[Image: andrew_main.png]
Senior Business Reporter
Sydney
[Image: 920972-61413902-5dce-11e5-896e-4e71406d3561.jpg]
Hamish Douglass, CEO of Magellan, says up to $US500bn of mainly private capital has left China in the past 12 months. Picture: James Croucher Source: News Corp Australia
[b]One of the biggest risks to the Australian property market is a potential crackdown by the Chinese central bank on its citizens exporting capital to invest in other countries, says Hamish Douglass.[/b]
Mr Douglass, the chief executive and chief investment officer of the Magellan group, said this week that between $US450 billion and $US500bn of mainly private capital had left China in the past 12 months thanks to “very leaky’’ export controls, and the People’s Bank of China now wants to see capital flowing back to where it came from.
“Of this capital that’s been leaving, tens of billions of dollars has been finding its way into the Australian property market and for us that’s acted as a form of stimulus as our commodity markets slowed down. It’s breathtaking and it simply wouldn’t have happened without this capital that’s been flying out of China.
“It’s not only Australia — there have been other countries — but ultimately the more of our property capital stock that gets into the hands of a foreign constituency, the more correlation our property market ultimately experiences to either the policy implications which make up the country, or the investment desires or whims of that class of investor.
“From a policy point of view, capital leaving China is actually sucking dollars out of their economy and their economy’s slowing down, so you could see, legitimately, that the People’s Bank of China may want to slow the rate of capital outflow because it’s draining financial resources.”
He said that there was a legal limit of $US50,000 ($69,000) a year per person leaving China, “which makes it interesting to work out how they finance a $20 million purchase in Point Piper”, and “if the PBoC really clamped down on that, property investment would stop immediately and the price of apartments, many of which are specifically designed for the Chinese market, could drop by as much as 50 per cent’’.
Mr Douglass served a five-year term on the Foreign Investment Review Board between 2009 and 2014. He explained that “as soon as the buyer signs a contract to buy an apartment it becomes existing housing stock, whose only legal buyer has to be an Australian resident”.
“At that point the Chinese can’t sell to themselves; they’ll have to sell to Australians. And do Australians really want to buy residential property in CBDs on this scale? Under our foreign investment rules they’re the only ones who can buy it from the Chinese. And in that circumstance the price might be going down and the buyer will want a bargain.
“We’re talking Sydney, Melbourne, Brisbane, Parramatta ... you only have to look around the skylines. Many of the buyers may be viewing it as an alternative to a bank deposit but if that investor suddenly feels that there’s risk involved and it’s not a bank deposit, they want to sell and they see prices moving, the herd changes direction and that can compound the problem.’’
He admitted that much of the Chinese property investment in Australia was financed offshore or indeed paid for in full by the buyer, and that Australian banks had “very significantly” cut back on lending to finance new apartments in CBDs.
“But I can guarantee to you that if we get a 50 per cent drop in the prices of apartments, there will be a drop in the value of bank shares. Even though Australians prefer houses to apartments, any drop in one sector of the market is going to spill over into the other sectors because of relative valuations.’’
He said not all capital was going into housing. “There’s some capital leaving for development needs and corporate M&A, but largely it’s private capital leaving China.’’
On the $US50,000-a-year limit, “all you need to do is have 100 relatives and actually pay them renminbi in China and take the money out yourself’’, he said.
“Or you go to a third party intermediary who puts in a fake invoice for purchases offshore for import reasons.
“This is where corruption comes in. And lo and behold, the banks are processing a lot of legitimate capital needs which are actually illegitimate.’’
He said that the PBoC’s slight devaluation of the yuan on August 11, “and it was only slight”, was a “brilliant” move because it made capital exports more difficult at a time when those suddenly more valuable overseas currencies were easier to tempt back into China.
He made it clear he doesn’t expect any looming bust in China, despite the slowdown and more than 22 million apartments lying empty, “because the Chinese government is in the strongest financial position of any country in the world and the government still owns 40 per cent of the economy.
“Post August 11 the PBoC has brought back into China more money than ever before, at a better rate,’’ he said.
“One way for our government to reduce the risk of a bust in the apartment market would be to allow overseas buyers to purchase housing stock owned by overseas buyers, but that would be a politically charged decision given the sensitivities around foreign ownership of housing.”
“We’ve been in a perfect positive cycle and the problem is that when you start moving you get into a vicious cycle going in the other direction.’
“We’ve now been 21 years without a recession and a recession is caused by a drop in the property market.
“The global financial crisis could have caused it to happen in 2008 and 2009 but China saved us through their investment expansion, which led to a continued boom in our commodity markets.’’