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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7.62x54r's picture

No, it won't get crushed. Prices will go up, and inflation will go into overdrive as all those dollars held abroad come home to roost.

SDRII's picture

Yuan appreciation. liberalize the capital account. New Treasury study being undertaken to assess the prospects of capital flight without accompanying inflows

 

bbq on whitehouse lawn's picture

Funny you mention Yuan. Thats the elite plan, to make the
Yuan the next gold.
Even funnier is that will never happen.
REN-MEN-BE will super-sede it and end all plans of global domination.

bbq on whitehouse lawn's picture

Did you ever read Sun TZU. He was the biggest asshole that
ever existed, or close.
He killed the emperor's favorate mistress. To prove a point.
Make killing mech's out of lovers not fighters.
Sun Tzu was stupid.
Politics is stronger then steal.

world_debt_slave's picture

yep, I read it, the military strategy is sound

Farqued Up's picture

Maybe an asshole but he was not stupid.

tuttisaluti's picture

With all the citizenship programs here in the caribbean, they will come to us. I hope

I can sell them our house too.

insanelysane's picture

Just like the Fed increasing the balance sheet, the Chinese buying real estate, at the end of the game you still need to find a buyer that can buy from you.

NOTaREALmerican's picture

Yes,  but it's also about getting rid of worthless currencies and buying something that is real.

I Write Code's picture

Median price of $500k?  That's a one-bedroom condo in most decent parts of Los Angeles.

Need some more drill-down on the data, by price and zipcodes.

astoriajoe's picture

edit: if it was sanctioned, then I'm sure they can just remove an reference to the offending story, and carry on as usual.

MrButtoMcFarty's picture

Chinese blowing up NYC RE big time.

I love it.

lakecity55's picture

Say, DiBlasio will be happy to welcome all his fellow "Communists."

riot-police's picture

Because the Yuan is worth less than the Dollar, you just need hyper speed nitro printers. That way you print as many as you need to buy what ever you like. Yes the US has a monopoly on the reserve currency, but all the printers are made in China.

GrinandBearit's picture

I can't wait until it all blows up in their faces.

Can a US citizen buy RE in China?...

Nope.

 

praps's picture

Presumably the fed knew all about this and it was one reason why they could afford to taper.  So untaper?

starman's picture

Well the Fed spent 2trillion on mortgages why can't Chinese oligarch s?

No?

Bunga Bunga's picture

Don't worry, BoJ will fill the gap.

general ripper's picture

Side door to USA Visa......citizenship. Just you wait and see. Schumer was bantering about something a couple of years ago

Jethro's picture

Wouldn't suprise me.  Anything to keep the social securiy ponzi scheme/boomer voting block promises as politcal capital.  The federal government importing all of these people from socialist/communist/ouwardly corrupt systems won't bat an eye at the political shenanigans here, and be grateful to drink water from the faucet.

First There Is A Mountain's picture

This is how it works in most of Latin America. Invest X dollars (usually between $100K-$200K) get citizenship - period. 

ebear's picture

"How did millions of Chinese "buyers" manage to get tens of billions of yuan or dollars out of the mainland"

Who says it was ever there?  You're missing the obvious.  China is an exporting nation.  You produce garments, electronics, hillarious rubber dog poo... whatever...  then ship that abroad for which you get paid abroad. Apart from what's needed to cover costs, the money never enters China.  It goes to an offshore bank from which you draw a cashiers check to pay for the house in L.A. or Vancouver which is listed as a company asset.

Likewise, importers need foreign exchange to purchase abroad.  Not subject to capital controls.  I'm sure you can figure out the rest.

Just as America has too many lawyers, China has way too many accountants for the amount of actual business conducted, and have you noticed.... nearly every Chinese family has a registered "business" of some sort - usually import/export.

Ban KKiller's picture

Hmmm...could be on to something. Son married into Chinese family in HK. Bride is an accountant in a family of accountants. I am more than ever sure that accountants do all the dirty work. But it pays...the bills. Man, this is not how to live. 

Would not surprise me if they all move here to the States. They'll bring FRNs by the bushel. 

ebear's picture

You know, I may have overstated when I said nearly every family has a business set-up, but many do, and for good reason.  There's nothing you could call "social security" in China. Families have to arrange that themselves, and so they pool resources across generations.   The best way to do that is to set up a business, let the smart family members run it while the rest go to work there at whatever they do best.  Everyone gets a cut, the business gets handed down, and the old folks draw a pension.  Not all that strange really. Something like that existed in America at one time.

As for the offshore stuff, well... they're just doing what any western corporation does, no?  Keep your profits abroad?  We see it as foreign investment (or tax evasion) whereas for them it's more like insurance - a safe place to land if things go south in China.

As for me, I'm still trying to puzzle out if a crash in China brings West Coast RE down, or drives it up (or maybe it's a wash?).  You could make a case either way I suppose.  Anything "investment class" could certainly face liquidation, but since those investments were basically meant as insurance packages to be sold on, I'm guessing some pretty stong buying might appear if China becomes dicey.  No way to really know I guess.  Just have to wait and see.

 

Zeta Reticuli's picture

You export machinery, clothing, etc from China to US. The bill is one billion dollars. You have an agreement with the company who is taking delivery. The price is padded by 1 million dollars. They wire $999 million to China for the goods and another $1 million to a US bank. Presto, i million has been exported to the US. Without a very detailed forensic accounting investigation, it is almost impossible to spot.

Son of Captain Nemo's picture

Ah the art of "pump and dump" done at a grand macro professional scale!  Lot's of Americans also involved in the same speculative game but at a much smaller scale... 

Now repeat after me: "Life is good"... When there are no rules!...

And as angry as it should make any American?... Look in the mirror and ask yourself how we allowed Washington D.C. to let them get access to it along with our technical manufacturing base -in both cases just rewriting the rules to simply give it away!

Hope we can all sit back and learn to enjoy the self-inflicted "gun shot wound" to the lower extremities we've given ourselves!

22winmag's picture

When the big reset comes, let's ride this foreign scum out on a rail.

 

After all, they bought all this property with ill-gotten, illegal, invalid FED funny money.

Son of Captain Nemo's picture

When the big reset comes, let's ride this foreign scum out on a rail.

Ah 22s that's where the U.S. military comes in with the gun ever so firmly fixed at the temple of the Chinaman to "buy" more in the "Land of the Free Home of the Brave" till he drops...

But I digress... I think you've missed the more important point.

Never shit in your own pool and blame it on the "house guest" when you initiated the rules for doing so!...

Farqued Up's picture

He'll no, I wanna sell 'em something.

RMolineaux's picture

An excellent piece of work.  But one question remains:  Have the Chinese oligarchs thought about how they will re-patriate those assets when they need them?  Or are they all planning to emigrate?

Hari_Seldon's picture

My house in the SW suburbs of Chicago is being sold to the Chinese.  For Cash.

This is not a big $$$ sale so I gues it's not just upscale properties as far as I can tell.

I'm guessing they'll get burned when things take a dump.

Couldn't happen to a nicer bunch of asshats.

emersonreturn's picture

mom in law decided on a whim to sell her townhouse in a retirement/golf course development, it's nice but the community is generally mid eighties.  yesterday she popped by the realtor just to see what she might have to do, paint, change the carpets etc. prior to putting it on the market---the realtor sold it for cash sight unseen!  we have to have her packed and out by EOM!! talk about a hairball.

pelican's picture

Americans are the bitches in the prison ass fuck gang rape.

pelican's picture

Americans are the bitches in the prison ass fuck gang rape.

RaceToTheBottom's picture

.1% love the Chinese money coming back to the states.  Inflates their houses without inflation reaching the serf work rates

DrDinkus's picture

THIS is why i will always love you, zh

Nader_Nazemi's picture

Why won't the Chinese simply legally allow the outflow of money ?! 

Why are there restrictions on cach outflow ? 

This can easily be fixed. 

 

bunnyswanson's picture

Chinese of the older generation are savers and encouraging them to spend their money is not easy (They remember the last famine, The Great Leap Forward).  Same in Japan.  They refuse to spend so economy suffers.  There was a time a huge down payment was required, and entire mtg had to be paid within a short period of time in China, 10 years?  40% down? 

Salsipuedes's picture

U.S. NUNBA WON!: In debt, incarcerations, wealth disparity, drug consumption, rapes (if you include the 200,00 a year in the military), and going hard to triple it's already record breaking number of crooks and dirty dealers. (Feel free to add to this list). USA! USA!

walküre's picture

Not surprising. There has never been more worthless paper in circulation. The 0.01% have a real problem on their hands. The billions can become completely devalued with the stroke of a few pens overnight, say for example on 07/20 to 07/21 2014.

Forget conspiracy for a moment. Economics is nothing but common sense. There isn't enough collateral in the world to back up all the public, private and corporate debts. Just not possible.

Collateral that IS proven and actually accounted for will get revalued to save the balance sheets and restart the game.

Top 0.01% know this, have seen this coming along time already and their purchases are testament to what I'm describing. Money is worthless, it is FAKE. Money has no basis anylonger, no accountant can verify where this money is coming from and just exactly what this money is really worth.

Lagarde's speech should give everyone pause. Even if the conclusion that the reset is coming in 10 days is incorrect, the point is that Lagarde made a pretty weird speech at the beginning of the year, that the global economy is in shambles and confidence is tapered over with propaganda and lies.

See for yourselves

https://www.youtube.com/watch?v=QYmViPTndxw

Senseless Urinal Cake's picture

If you're thinking of selling then put a bunch of "8"s in your asking price; they go nuts over it.

Jack Burton's picture

Chinese have been all over LA and New York thowing huge mountains of cash at high end housing.  London picked up some of this as well. I heard Australia was the target off large scale Chinese buying, both high and middle end. I think those Chinese were working on getting Aus passports as well. In Asia, an Australian passport is worth it's weight in gold X 1,000,000.

pcrs's picture

Like petrol dollar recycling. It needs to go back to us treasuries which is funding their enemy or to the private sector.

Magooo's picture

Why?

 

Because China prefers that the US housing market not collapse - because we are all living in this giant house of cards - and if one card falls they all do

walküre's picture

Have you seen your coin and bullion dealer today? How about yesterday? How about any day this week? Try for next week?

tick, tock, tick, tock

honestann's picture

Humans sure aren't very creative!  Duh!  Chinese can easily buy gold bullion and other precious metals with Chinese currency.  They have retail gold bullion stores all over the place (in the cities).  Once they have gold bullion in Hong Kong they can ship it anywhere for peanuts (about 1% for insurance).  Then convert that to whatever currency they wish and buy, buy, buy.

Most Chinese who get $50,000 per year of USD or foreign currency are just students of rich Chinese... and they need USD or foreign currency for college fees, books, rent and everything else.  While $50,000 is a tad high... not so much for "rich folks".

Most Chinese who buy expensive stuff in the USSA appear with suitcases full of cash... probably cash they received from western customers for their products.

And finally... to spend your own money on whatever you want is NOT money laundering.  Geez!  What is cash for if not to buy what you want?  Good grief!  Furthermore, there is no real money on this planet any more.  A debt instrument like a "note" (a "federal reserve note") is not money.  It may be currency, but it is certainly not money.  Money has value in an of itself, which is why only precious metal coins are (or can be) money.