Chinese Private Wealth Flooding Into Other Countries

Adam Taggart
By Adam Taggart on Tue, Nov 26, 2013 - 12:15pm

CNBC reports on how private wealth is leaving China for foreign shores at a historic rate:

It's one of the largest and most rapid wealth migrations of our time: hundreds of billions of dollars, and waves of millionaires flowing out of China to overseas destinations.

According to WealthInsight, the Chinese wealthy now have about $658 billion stashed in offshore assets. Boston Consulting Group puts the number lower, at around $450 billion, but says offshore investments are expected to double in the next three years.

In the San Francisco Bay Area, where I live, you can see this flood of Asian wealth pretty clearly. Recently, a realtor I know stated that any new house going on the market in Silicon Valley will immediately have two all-cash offers, "one from a Chinese national and one from an Indian". It's a dynamic that's now simply taken for granted. The final price of the house will be determined by the bidding war that takes place on top of those.

Here's another interesting point from the CNBC story:

And it's not just the money that's exiting the country. The wealthy are increasingly following their money overseas.

A study by Hurun and Bank of China found that more than half of China's millionaires are considering emigrating or have already taken steps to move overseas.

A sign that these Asian millionaires sense that the money river they're plugged into won't last much longer, and are getting out while the getting is good?

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Adam Taggart's picture
Adam Taggart
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In related news

From Reuters today:

Special Report: How China took control of an OPEC country's oil

China's aggressive quest for foreign oil has reached a new milestone, according to records reviewed by Reuters: near monopoly control of crude exports from an OPEC nation, Ecuador.

Last November, Marco Calvopiña, the general manager of Ecuador's state oil company PetroEcuador, was dispatched to China to help secure $2 billion in financing for his government. Negotiations, which included committing to sell millions of barrels of Ecuador's oil to Chinese state-run firms through 2020...

..."This is a huge and dramatic shift," said Rene Ortiz, a former Ecuadorean energy minister and secretary general of the Organization of the Petroleum Exporting Countries. "Never before has Ecuador committed its oil to a lender."

A small OPEC exporter, Ecuador pumps around 520,000 barrels per day (bpd), or 5 percent as much oil as kingpin Saudi Arabia. But China's role in the Andean country shows how the Asian giant's oil firms are becoming powerhouse traders in energy markets far from home. The oil that Ecuador sells to Chinese firms can be traded anywhere. Yet less than 15,000 bpd is being shipped to China this year, down nearly 40 percent from 2012. Most is sent to the United States...

..Beijing's growing thirst for natural resources has led Chinese oil firms to offer at least $100 billion in oil-related financing around the world. They already control growing volumes of oil from Venezuela, where China has negotiated at least $43 billion in loans; from Russia, where the tab may exceed $55 billion; and Brazil, with at least $10 billion. In Angola, the deals total around $13 billion.

While this is money from China's public coffers, it's another example of Asian wealth purchasing vast amounts of foreign hard assets.

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Better Homes and Gardens

Just recently talked with a friend who just moved back to the US from Beijing. He pointed out that many wealthy Chinese have been sending their kids to school here in the US for the past couple of decades. The idea was that eventually they would stop because once they had an educated populace they would begin educating their own people. What they didn't foresee was the rapid increase in the devastating air pollution amidst their enormous economic growth. These same wealthy Chinese came to visit their kids while in school here and realized... hey you can actually breathe in most of our cities and began buying up homes and figuring out ways to move here. Just ask someone who works in Beijing if they want to live there and see what their reply is.

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Adam Taggart
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Charles Weighs In

Interesting day for this topic. I see that Charles Hugh Smith just posted on this today, as well:

Take the Money and Run: China's Ill-Gotten Wealth Flees Overseas

A friend who once worked for the Chinese government recently returned home after several years absence, and found that all her bosses had moved to the West:Australia, Canada, etc. These were typical officials: their base salary was low but they managed to buy multiple homes, support mistresses, have upscale autos, and so on.

In a word, ill-gotten wealth. There are tens of thousands of these beneficiaries of China's boom in credit and corruption, and they have all either fled (with their ill-gotten wealth) to the West or "safe-haven" East (Singapore, for example). Those who haven't fled yet have passports to a safe haven, and cash and homes overseas awaiting their arrival.

It is common knowledge that the offspring of top officials all have passports and homes awaiting them in the West.

That every one of your political bosses has left China is an astounding revelation into the mindset of those who have benefited most from China's boom: they obviously fear that some upheaval could strip away their ill-gotten wealth, otherwise, why not simply move to some wealthy enclave in China?

Read full article here

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capital flows can cause price inflation

So this may explain why people are seeing price inflation in some specific sectors.  500 billion in chinese dollars are being dumped in specific sectors in the more developed countries.  While this is not monetary inflation (i.e. its not an overall increase in money & credit in circulation) prices sure do go up when a bunch of new money starts buying stuff in a particular sector.

Likely too this explains some amount of Chinese gold buying.  Certainly in modest quantities, there is nothing better than a bunch of gold bars - internationally accepted, untraceable, portable, and a concentrated store of wealth - for taking with you when you flee the jurisdiction.

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Memories of Chairman Mao.

Sell you child daughter for a bag of rice? Bargain!

Memories. Hard won memories.

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westcoastjan
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no surprise here

One of the reasons the Vancouver real estate market is so over-priced has been the large influx of Chinese money for the past few decades. 

http://ca.news.yahoo.com/blogs/dailybrew/nearly-quarter-vancouver-condos...

Chinese investment is so prevalent in some of the metro areas that Richmond BC, where the Vancouver international airport is located, has been nicknamed by locals "Hongcouver". Indeed, a drive around Richmond will find extensive signage in the Chinese language. While our two "official languages" are English and French, you would be hard pressed to find any French signage in Vancouver. Chinese (mandarin?) is by far the second language, and in some areas, the first.

It is truly sad when locals are priced out of the market due to the inflow of foreign money. This is one more thing that needs a "reset", from my perspective. Especially when one considers that a good deal of the wealth being brought here was not earned by legitimate means, but gained via cronyism and corruption in an economic system that cannot be trusted.

Same ol', same ol', all encouraged by the corrupt federal government whose morals, when it comes to foreign investment and environmental protections, are all but non-existent. It would seem that the modus operandi is take the money first, ask questions later...

Jan

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More on the craziness in California

The Atlantic recently did a piece on the flood of Chinese money into Palo Alto:

Over the past two years, Chinese buyers have been snapping up property in the city, driving up prices and possibly contributing to an emerging bubble. Chinese nationals have tripled their share of home purchases in Palo Alto since 2011, now accounting for around 15 percent of transactions in the city according to Ken Deleon, founder of Deleon Realty, a local firm that has invested heavily in catering to Chinese buyers.

“If we have seven offers for a home here, three of them will be Mainland Chinese buyers with all cash,” Kim Heng, the Chinese-born head of Asian outreach at Deleon Realty, guessed. “We’ve never seen so much money in all the years we’ve been in the real estate business.”

Having lived for years in or near Palo Alto until recently, this last sentence is staggering. Remember, this was the epicenter of the dot-com bubble. Over decades, it has seen mind-boggling wealth generate armies of millionaires (Yahoo!, eBay, Oracle, Google, Facebook, etc...) who quickly and collectively threw their IPO proceeds into real estate.

And yet this influx of hot China money is even more extreme:

According to real estate tracker trulia.com, median home prices in Palo Alto have gone up 16.8 percent in the last 12 months, with the price per square foot jumping 23.4 percent in that time to $1,107. Local realtors have attributed that rise partly to the impact of Chinese buyers who are using cash to buy houses a continent away, often sight unseen...

...Lan Liu Bowling, a Taiwanese-born broker in Palo Alto, has used her fluency in Mandarin to act as a conduit for these Chinese purchasers.

“I just sold a house yesterday where there were four people from China interested, and none of them had seen the house,” Bowling said. “There has been an impact on market values because they’re all coming with cash and they know that in order to beat the other four, you need to bid it up.”

Many Chinese buyers looking for homes in Palo Alto come from the elite of Chinese society, often serving in the leadership of the country’s largest corporations. Capital controls normally restrict the movement of large sums of RMB, China’s currency, out of the country, so prospective buyers use Hong Kong branches of their companies to transfer funds from the mainland to the territory and then into American accounts. Among those with access to these channels of wealth and power, the cost of the home is often the least of their concerns when buying into Palo Alto, where average prices approach $2 million.

“I am so shocked at the amount of money these people have,” Bowling remarked. “To me $3 million is a lot of money, but to them it’s almost like pocket change. It just doesn’t put any kind of financial burden on them.”

Silicon Valley is a pretty constrained real estate market. There's no more space available for new home development. At some point, these foreign buyers will target other areas. There's likely new fortunes to be made by scrappy speculators who correctly forecast where. That is, until the trend stops.

I've long ranted that real estate prices in Silicon Valley are cuckoo. (See my account here of how SV's high home prices served as the spark that eventually led me to Chris) Those without access to sovereign wealth or massive stock option grants stretch themselves ridiculously (super-high leverage) in order to get into the market.

Yes, there's a sour grapes factor here for me. I consciously sat out the housing bubble that I saw emerging in 2003, and again starting in 2010. And those who recklessly (IMO) closed their eyes and played the game have made huge windfalls on their properties. In many cases, I've seen folks make retirement-sized gains simply on their home's appreciation over a single decade.

But it won't last forever. These are depreciating boxes. Many of the homes going for the average sale price of $2 million haven't been renovated since their original construction in the 1970s. If you buy one of these houses, there's no guarantee of finding an income to afford it.

I look at the Bay Area's vulnerability to another 2008-like crunch, where stock prices crater and the IPO window slams shut. Where other nations stumble harder than we and the capital inflows dry up.

I also think of what these sky-high prices will do if -- when -- interest rates begin to rise back up. If rates revert back to the historical average (which statistics proves is pretty much inevitable at some point), houses will lose 50% of their sticker price.

It's the ticking of that time bomb that still has me sitting on the sidelines, real estate-wise. Someday (hopefully), the market will clear in a healthy (though likely painful for many) way, and it will be safe to make long-term real estate investments again.

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Re: More on the craziness in California

Adam,

Don’t you think it can last a long time before this bubble pops? The Chinese shipping back their $ to buy assets in the USA, it seems to me that we are just at the beginning of this trend. That’s what happens when we live on credit for too long…

Fred

 

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Adam Taggart
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'When?' Is Indeed the Key Factor

Fred -

Yes, this new RE bubble can last longer. In general, it's already lasted much longer than I thought it would. And it could have more years to go.

But I'm skeptical for a number of reasons. Perhaps "gun shy" is better term, because I'm mostly waiting for conditions in which I'd feel comfortable being a buyer. And those levels are waaay down from here.

For starters, the average home price in Palo Alto is $2 million. Menlo Park, Los Altos, Mountain View and the other surrounding towns aren't far from that number. How many families can come up with that amount of cash for a down payment, or have great stable incomes that can service the mortgage?

Average rent for a starter home in the same area is around $5,000/month now. That's $60K per year. What percentage of working families can afford to pay that? How many families would rather take $60k and make a down payment on a nice house in another, more affordable, part of the country?

Silicon Valley has already priced out the service workers (firemen, retail employees, police, etc). And it's now pricing out everyone not already holding a winning lottery ticket. At some point, marginal demand from new workers will drop to at least slow the party down. Or else foreigners will buy every new house and the heart of Silicon Valley becomes another of China's "ghost cities".

I think the most likely scenario, which I alluded to earlier, will be a bubble puncture created by another 2008-style (or likely worse) downdraft. One that dries up credit both in the US and elsewhere. The excess money sloshing amongst the global 1% will stop moving quickly. That combined with falling stock prices, higher unemployment and higher interest rates will start bringing the stratospherically-valued SV real estate prices down -- possibly quite fast.

During panic times like this, Chinese investors may be looking for more safety. The kind of safety that T-bills and precious metals offer. I think the former is a false promise of security, but I anticipate capital to move there nonetheless initially.

But When will this bursting happen? I don't know. I'll admit to being very nervous these days, as the market mania has continued for longer than I, Chris, or most of the other minds I respect have anticipated. Which makes us worry that the eventual downdraft will be bigger and more damaging than even the bears expect.

There were smart folks who sold tech stocks in 1998 because things looked exceptionally frothy. Then the party continued for another 2+ years. I saw similar examples with the housing market in 2004/5. 

The question Chris and I revisit often is: Are we in 1998? Or early 2000?

We don't know for sure. But we look at some of the hard constraints (% of American households on food stamps, % of workers out of the workforce, stagnant wage inflation, etc) and have a hard time expecting another 2 uninterrupted years of partying on.

Which is why we're very comfortable advocating defense at this time. Better to leave some on the table than lose it all when the inevitable 'snakeyes' is rolled.

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Nervous Nelly
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Old Drive in Theater bought by Chinese Holding in Laval ,Quebec

http://tvanouvelles.ca/lcn/infos/regional/montreal/archives/2013/11/20131127-104539.html

If you can't read French here's a quick summary, This came out today in the local newspaper.

Min Ying Holdings  bought a huge parcel of land just north of Montreal to create a reduced version of the Yiwu International Commercial Center based in south Shanghai ( a consumers paradise) surrounded by a housing project of over 100 luxury houses for 1000 Chinese rich families.

There will be 62,000 kiosques and over 400,000 products from 1000 Chinese Companies selling directly thus eliminating intermediaries. They'll be hiring about 1000 people (mainly retail low paying jobs).

I wonder how the other businesses that were importing their goods will feel about this. 

I am not happy it will drive the prices of the houses up again and bring the wages down. How are our kids ever going to get a place.

NN

 

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kevinoman0221
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some interesting articles of late

In the past week I have seen some interesting articles via Zero Hedge. Particularly this one, which to me, indicates this rush of investors into real estate may be soon coming to an end (and maybe the wealthy foreigners will slow down their purchasing at the same time, if US investors stop seeing it as a hot place to invest?):

RealtyTrac: "Institutional Investor Housing Purchases Plummet Nationwide"

More signs of a potential Real Estate slow down:

Pending Home Sales Collapse At Fastest Pace Since April 2011, Drop To December 2012 Levels

 

“Wave Of Disaster” Threatens U.S. Mortgage Market

 

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