Yves here. China is cracking down on flight capital, starting with Australian banks. As the most casual readers of the business press know, the international wealthy, particularly Russians and Chinese, have been using residential real estate in “world cities” as their favorite lockbox. As we’ve written, it’s stunning to see how much real estate has been hoarded in London. Mayfair was depopulated during the petrodollar recycling of the 1970s; now much of Belgravia, Chelsea near Sloan Square, and Kensington are visibly underpopulated. Vancouver has been bid to the sky by Chinese flight capital. New York is a big destination for Russian and Chinese investors, and Chinese money has been pouring into Australian real estate.
The Chinese move may be an admission of stress on the financial system. Victor Shih predicted the risk of Chinese capital flight in 2011, and also said it would take some time to manifest itself. From our post then:
We’ve written about Victor Shih’s work on Chinese banks and wealthy households. He argues that the Chinese financial system and economy are at risk if enough capital moves overseas. While the release of this video is coming at a juncture when the US and Europe seem to be engaged in a beauty contest between Cinderella’s stepsisters, Chinese business have been making aggressive investments in other economies as well, such as agricultural land in Africa, so it’s worth remembering that advanced economies are far from the only targets for offshore funds.
MacroBusiness reports today on the Chinese saber-rattling towards Australian banks. If the news media starts reporting about efforts to block flight capital directed at other nations’ banks, that would bear out Shih’s hypothesis, that the outflows are hitting a level that is starting to be unhealthy for the Chinese financial system, and the authorities are trying to stave off bad outcomes.
By David Llewellyn-Smith, founding publisher and former editor-in-chief of The Diplomat magazine, now the Asia Pacific’s leading geo-politics website. Originally posted at MacroBusiness
The first large crack just appeared the great Australian dream of laundering Chinese money through our property market. From the SCMP:
State broadcaster CCTV yesterday accused the Bank of China of offering a money laundering service to wealthy mainlanders and helping them to siphon cash out of the country.
The accusations against one of the country’s five biggest state-owned commercial banks led to speculation that the leadership may be preparing to shake up the financial and banking sectors.
…Under Chinese law, citizens are allowed take only the equivalent of US$50,000 out of the country each year.
CCTV accused the bank of “blatantly offering money laundering services” and fabricating information through its money transfer platform Youhuitong.
It said BOC teamed up with immigration agencies to disguise the origin of clients’ money and helped them send funds overseas for investment immigration.
…CCTV’s attack on BOC came as a surprise to analysts. Just last month, the State General Administration of Press, Publication, Radio, Film and Television issued a directive banning media outlets from making “critical reports” against major government institutions without approval.
BOC, like CCTV, is one of the so-called central enterprises directly supervised by the State Council. To release such detailed and serious accusations against the bank suggests CCTV acquired approval in advance.
Wei Wuhui, a Shanghai-based media researcher, said: “It’s rare to see CCTV going after a state-owned enterprise like the Bank of China.
“And it is not just targeting one branch, but the whole BOC. The accusation of money laundering is also a serious charge. This is so rare and so severe.”
Business Spectator is reporting that the inquiry focuses specifically upon Australia:
China’s state broadcaster CCTV has launched an extraordinary attack on one of the country’s most powerful government controlled financial institutions – the Bank of China, accusing it of money laundering in Australia, via the country’s Significant Investor Visa Program.
…Australia is a centrepiece of the investigation due to the country’s Significant Investor Visa program, which offers an accelerated pathway for wealthy investors to gain permanent residency by investing $5 million in Australian bonds, funds or a small business. Chinese nationals account for nine out of 10 applicants since the program was introduced under the former Labor government.
I can’t find that corroborated in the Chines media but I guess it’s legit. As Jim Chanos advised Australia’s property moguls recently, “hit the bid”, the flood won’t last.
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No kidding. China has notorious capital controls. I tried mailing a personal check to the IRS (yea, Uncle Sam) through FedEx, but the carrier would not accept it because it was not approved. Money coming into the country for business start-up is also under heavy control. My guess is launderers are also funneling money through Hong Kong to get around capital control rules.
This isn’t new, as it’s been going on almost since the beginning, as in before Christ. “Lords of the Rim”, by Sterling Seagrave wrote a very good book on the subject, for anyone who’s interested.
Friend from college, who was more interested in marring for money than love, ended up moving to Hong Kong with her banker husband in 2000. She just announced her family is moving back to US in 2014.
in addition to the oz banks shouldn’t the heirs of mao want to virtually tar and feather the real estate outfits that cater to their investment interests in places like london, nyc and frankofurto? attractive properties go in negative time here in the home of the ecb. if i were a real estate agent here i would have a list of my favorite investors: the ones who ask no questions, especially when it comes to the 5.7% commission.
Can we place blame where it belongs: The Fed. These houses are just Treasury bills…now that the original T-bills pay 0.001%
And they morphed the stock market into an ersatz bond market, with yield and buybacks
James Grant makes the obvious point that the regular definition of inflation, “too much money chasing too few goods and services” is too long. It should read “too much money”, period. Whether the inflation shows up this time around in stocks or houses or food or medical care…anyone telling you there’s no inflation is lying.
There are other factors re Australia. China is about to put the boot into us for our ‘all the way with LBJ’ (that was an actual saying by an Australian Prime minister during the Vietnam war) foreign policy.
We are 100% in the US camp and full of anti-China foreign policy rhetoric and are spending many billions joining in with the US containment ‘strategy’ (inc AMD systems). So they are going to put the screws on us real hard to make us jump ship, or at least become more neutral.
This was inevitable, not that anyone in our foreign policy ‘elites ‘ (idiots, dropkicks?) saw it coming. Given that 30% of our trade is with China they have a lot of levers to harm us and our economic relations (servitude?) with the US are a real drain on our economy.
We are about to re-learn that old lesson “he who pays the piper calls the tune”.
It’s amazing what the PM is doing, praising Japan “for their military prowess during WWII” I mean just how unbelievably stupid can you get
“I mean just how unbelievably stupid can you get”
I think you just answered your own question at the start.
Very astute comment ‘oldsceptic’. Tony’s Abbot’s appalling comments regarding Japan’s ‘honorable’ conduct in the Second World War could not have been made at a worse time. Australia can expect retaliation from China across a range of industries: metals, education, agriculture. Abbot is a moron with zero understanding that his comments hurt. The wounds of the war run deep in China. Chinese TV’s only safe topic is the heroic conduct of the Chinese people in the “War of Resistance”. Japan’s conduct in the war and occupation of large chunks of Chinese territory was brutal, bloody and uncivilized. The consequences of Abbot embedding Australia deeper into the US / Japan Axis will be swift, nasty and heavily impact Australian trade and investment with China.
A similar “invest to immigrate” scheme in New Zealand has recently been in the headlines because of all the political contributions made by one of its beneficiaries, currently the target of some domestic-violence charges. Very embarrassing to both major parties, as he gave to both and got favors like citizenship despite not satisfying either the letter or the spirit of the requirement for at least some minimal competence in the English language. This is the first I’ve heard of the $50k/a limit on cash exports from the Chinese end, which he (and many others) surely must have violated.
Meanwhile, the public gets bland reassurances that Auckland’s ballooning housing prices have nothing to do with overseas (much less Chinese, oh no!) money flowing in. But the soothing words are never accompanied by hard numbers, just by excuses about how difficult it is to know just who (and of what nationality) really owns a house, when the owner could be a trust, a corporation, or a local person acting for a foreigner. This official view is quite the opposite of the reports from locals attending property auctions, who find it no problem at all to identify the foreign buyers, their dominant wealth, and their apparent origin.