Did China Just Crush The US Housing Market?

Tyler Durden's picture

A few days ago we finally closed the door on any argument who the marginal buyer in the US luxury housing segment was - the answer: Chinese oligarchs, scrambling to launder their "hot" domestic money abroad (as we predicted first two years ago) and now that Switzerland is no longer a safe offshore venue where one can park cash, they picked US luxury housing as the best money laundering alternative.

This means that far from indicating a recovery, as the recent surge in the high end of the US housing segment had long been touted, all the relentless move higher in ultraluxury properties prices was simply a recycling of China's hot money, which unlike in the US, never made its way into the Chinese stock market (explaining why the Shanghai Composite has barely budged in years) and merely ended up in US real estate. If anything, this is simply another confirmation of the epic capital misallocation, and the complete lack of "trickle down" resulting from failed global central banking policies.

So now that the "who" has been answered, just one question remained: "how?"

How did millions of Chinese "buyers" manage to get tens of billions of yuan or dollars out of the mainland - a country which as is well-known has strict capital controls when it comes to individual and corporate offshore outflows? Under Chinese law, citizens are allowed take only the equivalent of US$50,000 out of the country each year: hardly enough to buy a storage closet in any of New York City's Central Park West duplexes.

Today we learn the answer and it has to do with officially sanctioned "money laundering" services by not one but two of China's largest banks: Bank of China and also Citic.

As Hong Kong's SCMP reports, A day after Bank of China (BOC) was accused by China's state broadcaster of breaking foreign exchange rules by helping people take money out of the country, it has emerged a second state bank has also been offering the service.

And the biggest irony is that Citic is ultimately controlled by none other than the "State Council" or China itself. In other words, while China was prohibiting the outflow of hot money with one hand, with the other it was providing the very services it had previously forbidden!.

Industry sources told the South China Morning Post yesterday that China Citic Bank - controlled by the Citic Group, which in turn is directly controlled by the State Council, China's cabinet - also facilitated the movement of currency overseas, including Hong Knog. "It is definitely not an illegal business," said one source.

 

"Both BOC and Citic Bank have been able to do this business only after they got approval from the Guangzhou branch of the People's Bank of China. So the PBOC definitely knows what the business is about," said the source, who declined to be named as he was not authorised to speak to the media.

 

"If there is any problem, it should not be a problem about whether this business is legal or illegal but more about how exactly the business is done, especially about internal risk controls and customer background checks at those banks."

 

On Wednesday, CCTV aired footage showing an employee of a BOC branch in Guangdong coaching an undercover journalist on how to channel large sums of money overseas.

 

 

CCTV accused the bank of "blatantly offering money laundering services" and fabricating information through its money transfer platform Youhuitong.

 

BOC said the Youhuitong service was part of a legal pilot scheme launched in 2011. It said the CCTV report "deviated from the facts" and had a "biased understanding" of Youhuitong.

What is disturbing is the implication that the PBOC not only was aware of these secretive and law-breaking deals, but was effectively encouraging them:

On the sidelines of the Sino-US Strategic and Economic Dialogue in Beijing yesterday, PBOC Governor Zhou Xiaochuan said the central bank would need more time to investigate the situation.

 

Analysts cast doubt on whether such a scheme that allowed for free currency exchange could exist. "The government is very concerned about hot money flows," said Teo Weechoon, a forex analyst at Nomura in Singapore. "If there was a pilot programme like this, I don't think the limit would be much higher than it already is."

 

Industry sources said BOC and Citic Bank were chosen by the Guangzhou branch of the central bank in late 2011 and late 2012 respectively to join the pioneer programme, which was part of Beijing's efforts to better manage its huge foreign exchange reserves - the world's largest at over US$4 trillion.

And sure enough, where two of the largest Chinese banks were involved, many other were sure to follow: "a report by the official Shanghai Securities News yesterday said China Construction Bank offered similar services." We expect to learn soon that virtually every domestic bank was breaking regulations, with the PBOC's blessing of course, and allowing residents to quietly transfer their funds from China to the US, London, Zurich and any other venue where Chinese oligarchs wanted to park their cash.

Finally, "why"?

Well, from the individual's standpoint taking money away from China's corrupt system and "investing" it in the US housing market certainly seems like far more safe proposition.

But why would the PBOC agree to quietly bless this activity which it has, at least openly, blasted vocally in the past?

Simple - to keep inflation in check.

Recall that China is a country which creates nearly $4 trillion in bank deposits every year. Also recall that back in 2011 China nearly chocked when inflation briefly soared out of control, leading to sporadic "Arab Spring" type riots in various cities. And since China simply can not reduce the pace of its loan creation at the macro level without crushing the economy, what it needs is to find outlets - legal or otherwise - that permit the outflow of funds.

Which is why it is not at all surprising that as SCMP reports, the scheme was launched in 2011, just as China's scary encounter with soaring inflation was unfolding and Beijing needed a fast way to solve the overabundance of domestic liquidity. Basically at that point the central bank agreed to keep its eyes shut as wealthy oligarchs transferred funds to developed world nations, something the US government and NAR were delighted by as it kept real estate prices (if only at the very top) soaring, dragging the entire housing market higher with them. Furthermore recall: the one thing the Fed has wanted more than anything for the past several years is inflation. And since the US economy is nowhere near strong enough to create the kind of inflation needed, with the bulk of the Fed's reserves ending up in the capital markets and the latest and greatest credit bubble, the Fed would be more than happy to import some of China's inflation from it, even if that means a housing market which at the upper end is no longer accessible to anyone but the 0.0001%.

Indeed, this summary explains everyone's intentions to keep the scheme afloat for as long as possible, at least until CCTV busted it and laid it out for all 1+ billion Chinese, most of whom are not oligarchs and can't take advantage of the PBOC-sanctioned loophole.

So what happens next? Assuming there is the anticipated resulting backlash and crackdown on Chinese banks, which will finally enforce the $50K/year outflow limitation, this could well be the worst possible news not only for Chinese inflation, which suddenly - no longer having a convenient outlet for the unprecedented liquidity formed in the country every month - is set to soar, but also for the ultra-luxury housing in the US.

Because without the Chinese bid in a market in which the Chinese are the biggest marginal buyer scooping up real estate across the land, sight unseen, and paid for in laundered cash (which the NAR blissfully does not need to know about due to its AML exemptions), watch as suddenly the 4th dead cat bounce in US housing since the Lehman failure rediscovers just how painful gravity really is.

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LawsofPhysics's picture

Where is this "market" you speak of?  For the high-end (0.1%) buyer, maybe...

 

I don't think this author understands how mark to fantasy works.

/s

 

knukles's picture

Near where I live is a very upscale golf course.  And being built upon a lot along one of the holes is a humongoliod house.  One of the ugliest abortions of a house ever designed and built.  Yes, architect designed.  One of my local buds said that it's owned by a China-man.  A high ranking China-man. 
"Communism been belly belly good to heeem"

macholatte's picture

 

 

What is disturbing is the implication that the PBOC not only was aware of these secretive and law-breaking deals, but was effectively encouraging them:

Premise: There are no accidents -->

China=Predator

 

I MISS KUDLOW's picture

so is the endgame the .01 own everything in housing, no more fannie and freddie and everyone rents from Blackstone?

Say What Again's picture

I'm not surprised that china is buying our property.  Who wants to live in the smog hell of china?

Liberal's picture

There wouldn't be any smog if we took global warming more seriously and outlawed cars, oil, gas, shuttered factories, farms, cattle and so on and so on.

 

What we need to do is to confiscate everyone's belongings and trust Michelle Obama to feed us carrots and spinach. 

Say What Again's picture

Will she also provide us with entertainment?

SWRichmond's picture

Well, from the individual's standpoint taking money away from China's corrupt system and "investing" it in the US housing market certainly seems like far more safe proposition.

Implying that the US honors "rule of law" better than other nations?  A terrifying thought.

old naughty's picture

Chinese troops are allowed to drill here...

so they may guard their acquisitions?

Terrifying thoughts, no?

Oracle of Kypseli's picture

I bet that when bitcoin was in the upswing, Chinese used that window to bypass capital controls. Some even made money in the process, but most lost as the honeymoon ended abruptly.

These mansions and high end apartments will eventually dry rot as there will be fewer and fewer suckers to sell to. Between taxation, maintenance costs and many of them with no rental income they are doomed.

These Chinese could have been stacking and transferring gold bullion to HK banks with anonimity and very minimal storage costs.

Again: The game nowadays for people with money should not be to seek appreciation. Just wealth preservation is sufficient. Would you life change if you are worth 110m v. 100m?    

Doña K's picture

You did not consider the human trait of flaunting, where saying "I own a mansion in London and a Park Ave. penthouse" does give you the "I have arrived" recognition.

Saying; "I have several thousand oz's of gold in the vaults" only gets you a "yea right"

Simmilarly: "I had fish eggs for lunch" gives you an "ou! yackie!" response.

Instead: "I had caviar for lunch" gives you an "oh! savvy!" response  

Perception and image to many especially Asians is important, as every little secretary in Tokyo owns at least 4 different Louis Vuitton bags

Oracle of Kypseli's picture

Granted!

But you can still get some recognition when you check in at the Hotel de Paris presidential suite in Monte Carlo and get picked up in a Maybach on your way to Jimmy'Z's to rub elbows with  the jetsetters.

You can also ask for Beluga fish eggs and "oeuf de neige." without checking the price in the menu. On Sunday mornings they may even have Dim Sum for the Chinese. 

HumanResourceProblem's picture

Uhhh, have you seen the potatoes who fly on jets these days?
By jetsetters you may mean Gulfstreamers. But the new "setters" fly free on chartered 777s provided for marketing purposes; privacy is priceless and anonymity the most chic but the new nouveaux don't get it.

samcontrol's picture

Fuck 10%. buys me a couple hectares in Uruguay,, it could change my life.

Oracle of Kypseli's picture

10% of what?

I bet you're thinking about your own weed garden don't you? Punta del Este drug consumption capital of the world.

Liberal's picture

Of course!  Never before relased, STAR WARS: WOOKIEE'S FINAL VOYAGE will be available for viewing as long as you can prove that you've turned all your belongings in to the gov't for the greater good.

Handful of Dust's picture

As long as Hong Tu Lo and Tu Phat Tu Phuk buy my $400,000 Cali house for $2.4 million with their ill-gotten money, realtors won’t rock the boat.

Liberal's picture

Why would Obama and Oprah buy your home?

Son of Loki's picture

Homeowners: A new class of fools

 

When Kimberly walked up to the front door of a beautiful, 7,500 square foot colonial, anchored in a terrific cul-de-sac in northern Baltimore County, she said to herself: "All my life I thought this was what I wanted. But as beautiful as this property is, I see nothing but a money pit and a trap." Owning a home isn't just for suckers, as I stated in my CNBC column in November of last year; it's creating a class of fools for those who do buy, because so many Americans continue to think home ownership is the passport to the so-called American dream.

 

https://homes.yahoo.com/news/homeowners-class-fools-162600967.html

 

Looks like some peeples are finally waking up.

TBT or not TBT's picture

So much better to raise one's kids in multifamily housing in a densely packed city.  

nightshiftsucks's picture

And then thy're going to remake "Return of the Sasquatch"

Moustache Rides's picture

It would be awesome to see Lee Majors rip Michelle Obama's arm off.

jimmytorpedo's picture

I wish I could give moustache rides a thousand more green arrows.

6 000 000$ dollar man vs. wookie.

I would watch that.

Alvin Fernald's picture

You could watch this instead:
https://www.youtube.com/watch?v=6SZMn_711s4
"Bionic Bigfoot Fight Scene - Featuring Andre The Giant - Six Million Dollar Man"

Zero Point's picture

I thought that was Reggies job?

overexposed's picture

This has to be the most hilarious tounge-in-cheek account I've seen here yet.  You're giving Harry Wanger a run for his money (wherever he is now).

JackT's picture

Busted..in more ways than one

China looking into Bank of China money laundering allegations
http://mobile.reuters.com/article/idUSKBN0FG00P20140711

old naughty's picture

accused by State Broadcaster, you say?

Are we being soften up or what?

barre-de-rire's picture

why outlaw oil gas & so long... you just have to kill banksters...

WeNeedaRealGovt's picture

You sound constipated, eat kale.

ninja247's picture

@ Liberal

Getting my sarc Lulz on  

snodgrass's picture

You forgot cupcakes also have to go by the wayside.

DerdyBulls's picture

Yes, and couldn't we use the money too... 

Say What Again's picture

Well we do need to house all those refugees from South America somewhere.

Hari_Seldon's picture

They're exporting their empty cities here to the US?

As Dirty Harry would say: "Marvelous"

knukles's picture

And you get a free selfie of yourself giving yourself a hand job to go with it.

Perfect promotion for the narcissistic

Say What Again's picture

Lets tax the life out of foreign real-estate transactions!

CheapBastard's picture

i been saying that for years. many countries impose a one time 20 to 40 percent tax on foreigners buying their RE. toobad our politicians are in the nar pocket.

Deathrips's picture

Fook Mi!!!

They print too.....alot.

 

RIPS

NoDebt's picture

China = Corrupt.  Just like everyone else.  "Everyone else" meaning, of course, everyone else who has "most favored nation" status with the US.

barre-de-rire's picture

difference  between china &  occident :

 

to a EU/US/RUS man : oh, corrupt ? hey, whatever - from "i'm part of it, proud of it, fuck you" to " what ? corruption ? LAME ! "

 

to a chinese man: cooo...?corrru, oh !, me not know, lea'me, me no problem.

they are so scared & educated to not speak about  some affairs they can literaly lick their own ass hole while they're walking. astonishing.

those same mother fuckers that self bid on their own auction on ebay to be sure you gonna buy what they sell the price they want.

just lol

Bro of the Sorrowful Figure's picture

i work in an industry that relies heavily upon capital flight from china, and im based in china. ive talked to a couple people at bank of china and they have all said this is temporary. just for show for the sheeple. will be back online within a couple weeks.

Tall Tom's picture

Of course. They must be able to export their inflation...like we do in America.

 

They have learned from the best...USA...USA...USA.

 

So...A MORAL POINT...Why are you complicit in FRAUD???

 

The guillotines await for you and your ilk when it all comes crashing down. It maters not where you are located.

 

There are many more Chinese than Americans. And they are more vicious over there.

 

Are you that myopic to be used as a tool and then advertise that here?

Bro of the Sorrowful Figure's picture

haha nice post. very logical. how about you go fuck yourself. im not complicit in any fraud. i help chinese people legally immigrate to and buy houses in the US.

 

 

Tall Tom's picture

You can justify your fraud any way that you want.

 

I am not too worried about it as I plan for the upcoming destruction.

 

You fraud the Chinese public while working for the oligarchy.

 

As I sharpen the blade of my guillotine...

 

Enjoy. That place is going to go up like a dry tinder box. You deserve everything headed your way. May you live in interesting times...

Bro of the Sorrowful Figure's picture

you have yet to identify the fraud that i am committing. where is it? specifically who am i defrauding? bunch of nonsense and tough internet talk. god people like you are the worst. bunch of vague preachy bullshit.