You can’t understand Chinese buying in Australia without understanding the tense risks facing the Chinese government. Is there a chance we could end up as collateral damage in a new cold war between the US and China?
According to a recent NAB survey, foreign buyers account for 1 in 6 new home sales. In Melbourne, it’s 1 in 4!
No doubt about it. This is huge. And it largely seems to be driven by off-shore developers selling to off-shore buyers.
But the thing no-one’s talking about is the role the Chinese government is playing in all this.
Take the Eq Tower in Melbourne. This 63-level, 633-unit high rise is being built by the state-owned Sino Ocean Land.
Yep, that’s right. ‘State-Owned’.
It’s a bit like Vic-Roads going and buying a freeway in Guangdong province.
Ok, capitalism works differently in China, and state owned enterprises are a common feature of the economic landscape, so it’s not quite the same.
But one thing we know for sure is that this kind of development has the Chinese government’s blessing.
And the Chinese government has made no secret of the fact it wants to help the flow of outward bound investment. Earlier this month, the Chinese Commerce Ministry relaxed the requirements for off-shore investments that need its approval.
So all this development has happened when restrictions were ‘tight’? Cripes! What’s going to happen when conditions are loose?
The puzzle though is why the Chinese developers (and others) are not too fazed about market conditions. In Melbourne, they’re bringing massive supply on line into a market that already seems over-supplied – that’s already being battered by vacancies, falling rents and teetering prices.
We could maybe point to incompetence. China is quickly becoming famous for its ghost-cities – cities with massive high-rise developments laying empty.
WA’s Under-Treasurer Michael Barnes just came back from a fact-finding mission to China:
“As far as the eye can see there are rows and rows and rows – not just in this city (Hohhot) but every city I went to – of 20, 30-storey empty apartment buildings.
“It’s extraordinary. The official estimate in China is there are 50 million surplus apartments, yet they’re still building them.”
That’s the sound of a government minister realising that his key market is oversupplied and his budget could be blown to bits.
So could the developers be bringing that same level of incompetence – that amazing inability to read the market – here?
I doubt it. I don’t think you’ll get far underestimating Chinese intelligence.
My thoughts? I think they just don’t care.
And I think to understand why, you need to place the Chinese spending spree in the context of a currency war that’s been raging since the end of World War II.
Part of the price the US demanded for playing their part in WWII was that the US dollar would become the world’s reserve currency. Key commodities, including and especially oil, would be traded in US dollars.
Reserve currency status has quite a few perks, and everyone was more or less happy with the arrangement for a while. But then in the 70s, Nixon divorced the dollar from the gold standard (which meant that each dollar was worth a certain amount of gold) and from that point on, the US dollar was worth whatever the government said it was worth.
Fast forward to the end of the GFC and the advent of the ‘Quantitative Easing’ era, and the US government is printing the buggers like crazy.
And China, which has pegged the Yuan to the dollar, has had to keep buying up dollars to stop the currency appreciating.
So think about it from their perspective. They’re sitting on a mountain of US dollars, which are worth whatever and only whatever the US government says they’re worth.
That’s a pretty risky position right?
Now, they can’t sell dollars because they need a cheap Yuan to support their exports. So what’s the solution?
Go on a spending spree.
Take this money that’s only as good as the US government’s word, and buy real tangible assets in the developed world – resources, energy companies, and of course…
It’s like a massive money laundering operation.
And at the end of the day, the developers make a tidy profit, and Chinese mums and dads own foreign real estate.
(Remember the Chinese government has a scheme to encourage citizens to buy gold – another hedge against a US dollar collapse.)
To some extent this is a conspiracy theory – ‘theory’ in the sense that there are a lot of black holes in our understanding of this, so to get a sense of the full picture, a degree of guess work is required. And the truth is probably a complex interaction of factors.
But I wouldn’t be surprised if this money laundering operation (of American dirty money, not theirs) is a key part of it.
But the upshot for Australian property is the same.
And that is, we’re possibly looking at massive over-supply in market segments aimed at mum and dad Chinese investors.
For the moment, we’re really only talking about the inner-city new apartment markets in Melbourne and Sydney.
But it’s not so easy to predict how this will play out.
Normally a housing glut could crash a market. Think Ireland after the GFC. Buyers hit the skids, and developers trying to sell into a flooded market hit the wall. The banks, who had leant to buyers AND developers were hit with a double whammy. The government nearly broke the bank bailing them all out.
But in Australia, we’ve got a highly concentrated glut (with most of the rest of the market in shortage). And developers are using off-shore funding to sell to foreign buyers.
Strangely enough, the Australian economy could actually be relatively insulated from its effects. And if it is being driven by a currency war, it could go on for years – long after the market has turned against it.
These are strange times. I’m going to have to think a bit more about the broader implications, but for the time being, I’m flying a ‘No Go Zone’ flag over off-the-plan apartments in inner-Melbourne and Sydney.
Or at least be very, very careful.
You don’t want to end up as collateral damage.