Success In Curbing Chinese Capital Outflows Spells Disaster For High End NY/SF Real Estate

Bloomberg today called attention to waning Chinese demand for U.S. real estate, a topic that we've discussed thoroughly over the past month, pointing to a recent report from the National Association of Realtors which indicated a YoY decline in total sales to Chinese buyers for the first time since 2011 (see our previous post on this topic here: "The Party Is Over: Foreign Interest In US Real Estate Tumbles To 3 Year Lows").  As we previously discussed, Chinese businessmen concerned with a fragile economy and Yuan depreciation are funneling billions of dollars into high-end real estate of countries considered to be "safe-havens" like the U.S., Canada and Australia.  In our view, these illegal capital flows are creating massive bubbles in high-end international real estate markets like New York, San Francisco, Vancouver and Sydney (something we discussed at length here: "Foreign Buyers Continue to Inflate Global Residential Real Estate Bubbles - This Will End Badly").  We've argued that when/if these illegal capital flows were curbed, these markets could be in for a rude awakening. 

As pointed out in the NAR report, 71% of Chinese buyers in the U.S. real estate market pay completely with cash which just confirms the point that any success by China in curbing capital outflows will have a big impact on high-end properties in the U.S.  A point which was confirmed by New York real estate broker David Wong:

"Many Chinese buyers are paying all cash in the U.S. because they neither have a credit history nor income proof here, making it impossible for them to obtain mortgages from banks."

 

“The residential-property market here, especially for those priced between $2.5 million to $3 million, has been affected by China’s measures to control capital flight.  You need to cut the price, or it may take a real long time.”

China

As Bloomberg noted, below are some of the capital controls China enacted back in December to curb capital outflows:

  • Increased scrutiny of transfers overseas -- Some Shanghai banks have recently asked their outlets to closely check whether individuals sent money abroad by breaking up foreign-currency purchases into smaller transactions and to take punitive action if violations were discovered, according to people familiar with the matter. Each person can send $50,000 abroad annually and so large sums can be transferred by utilizing the bank accounts and quotas of a range of individuals, a tactic known as smurfing.
  • Curbing the offshore supply of yuan to make shorting costlier -- The PBOC told some onshore lenders to stop offering cross-border financing to offshore counterparts late last year, and on Jan. 11 advised some Chinese banks’ units in Hong Kong to suspend offshore yuan lending unless necessary. It’s also widened the scope of reserve requirements to include some yuan holdings of overseas financial institutions.
  • Restricting companies’ foreign-exchange purchases -- Companies can only buy overseas currencies a maximum five days before they make actual payments for goods, having previously been free to make their own decisions on timing.
  • Suspension of foreign banks -- DBS Group Holdings Ltd. and Standard Chartered Plc were among overseas banks suspended from conducting some foreign-exchange business in China until the end of March. The bans included the settlement of offshore clients’ yuan transactions in the onshore market and was introduced as a widening gap between the currency’s exchange rates in Shanghai and Hong Kong encouraged arbitrage trades.
  • Outbound investment quotas frozen -- China has suspended new applications under the Renminbi Qualified Domestic Institutional Investor program, which allows yuan from the mainland to be used to buy offshore securities denominated in the currency. It has also refrained from granting new quotas for residents to invest in overseas markets via its Qualified Domestic Institutional Investor program since March.
  • Delaying the Shenzhen stocks link -- China originally planned to start a link between the Shenzhen market and the Hong Kong bourse last year, but the plan was delayed amid a mainland equities rout.
  • UnionPay debit-card clampdown -- New measures were introduced in December to crack down on illegal China UnionPay Co. card machines, which were suspected of being used to channel funds offshore via fake transactions, most notably in Macau casinos.
  • Underground banking clampdown -- China busted the nation’s biggest "underground bank," which handled 410 billion yuan ($62 billion) of illegal foreign-exchange transactions, the official People’s Daily reported in November. The Shanghai branch of the SAFE said last week that it will crack down on illegal currency transactions, including underground banking.

Turns out it might be working... which we're sad to report is bad news for all the 20-something I-bankers and techies reading this post from the comfort of their $2mm, 800 square foot apartments in New York and San Fran. 

China Capital Outflows