Chinese Money on the Run
Chinese Investors Rush for the Exits

Has China’s economy stabilized? According to some official statistics and analyses, maybe. Electricity usage rose in May, and industrial output increased by six percent as the government continued to pour stimulus into ailing factories. But private investment growth is more sluggish than ever according to Bloomberg:

The slowdown in fixed-asset investment in May was mostly due to declining coal and ferrous metals investment by privately owned enterprises, said Iris Pang, senior economist for Greater China at Natixis SA in Hong Kong.

“This is a reflection of high excess capacity in those sectors,” she said. “POEs are staying away from investments. However, the overall FAI shows SOEs are supporting the overall economy,” she said, using abbreviations for private- and state-owned enterprises.

That dependence leaves the official growth target for at least a 6.5 percent expansion in 2016 still hinging upon government spending on signature projects like shanty-town development and improving the drainage systems of its cities. It’s an unwelcome reliance for China’s leaders, who have recently signaled a desire to rein in debt-fueled stimulus.

Beijing can only keep propping up the economy for so long. Eventually, private money will have to return. But right now, money is fleeing the country. It’s a phenomenon that’s having all sorts of distorting effects, from record-high Bitcoin prices (many Chinese use the cryptocurrency to evade capital controls) to a record number of M&A deals involving Chinese companies.

But the most concrete effect of capital flight has long been in the real estate markets of safe haven cities. From Vancouver to New York, wealthy Chinese have been buying apartments and inflating the market. And few places have seen as many Chinese buyers as the Australian state of New South Wales, which includes Sydney and where median home values have nearly doubled since 2008. Now, the state government is trying to take advantage of all the new buyers by levying higher property taxes. Bloomberg:

Australia’s most populous state plans to introduce a 4 percent stamp duty surcharge from June 21 and from next year a 0.75 percent land tax surcharge on foreign purchasers, New South Wales Treasurer Gladys Berejiklian said in an e-mailed statement Tuesday. The measure, which comes on top of stamp duty that applies to all buyers, is expected to raise more than A$1 billion ($738 million) over four years.

Purchases by foreigners, many with a connection to China, have helped Sydney’s median dwelling value to almost double since the end of 2008, according to CoreLogic Inc., triggering community concerns that locals are being priced out of the market. The increase also follows a clampdown on home loans to foreigners by the largest banks amid concerns overseas buyers may be inflating a bubble in the property market.

Tax rates in some other “safe haven” real estate markets can be in the double digits, so Sydney has room to run before buyers start looking elsewhere. But the fact that it’s possible to raise taxes underscores how strong demand for luxury property around the world remains. Such an appetite for fancy apartments is good evidence that while China’s government and official news outlets keep saying the economy is improving, private Chinese citizens aren’t so confident.
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