Chinese Capital Flows

Over the weekend, both the NY Times and the WSJ reported on capital flows into and out of China.  The NY times reports on the Shenzen Connect, which is a system that makes it much easier for global investors to invest in the Chinese equivalent of the NASDAQ.  Meanwhile, the WSJ reported on new capital controls that makes it harder for money to leave. “Targeted for particular scrutiny by the pending measure are “extra-large” foreign acquisitions valued at $10 billion or more per deal, property investments by state-owned firms above $1 billion and investments of $1 billion or more by any Chinese company in an overseas entity unrelated to the investor’s core business,” according to the WSJ Report. 

This is a pretty easy jigsaw puzzle to piece together.  China is encouraging money to come into the country and discouraging money to leave the country.  China is trying to solve for the fact that the country is living in a bubble of magnanimous proportions.  Onshore equity markets carry nose bleed valuations.  Real Estate markets continue to visit new highs, reversing a cooling off period in 2015.  With banks in the region offering low returns on deposits, there are few places in China for rational money to park.  Plus, with the corruption crackdown and threats to punish non-conforming citizens, any respectable multi-millionaire would feel safer with his money in a country such as the US with good rule of law. 

As the below figure shows, Chinese foreign buyers are increasingly the largest group purchasing homes in the US.  Over the weekend, I had a conversation with a well-connected Chinese American who says Chinese buyers are desperate for high end real estate in the US, which they see as both a store of value and potentially as a crash pad should they need to leave the country.  Hostile rhetoric from President-Elect Trump will not help this situation. China is trying to stop the flow of money out of the country and increase the flow into the country.  It’s unlikely that international investors will take the bait.  The Shenzen Composite index trades at a 45 P/E ratio and offers a measly .68% dividend yield, compared to a 31 P/E and 1.24% dividend for the NASDAQ.  Throw in better safeguards for intellectual property, rule of law, and 200 plus years of democracy, and its easy to see why the US looks more appealing to the Chinese investors than their own market. 

 

Figure 1: From the WSJ