China, 60 Billion Might Only Be the Beginning

Stockbrokers, property spruikers and fund managers rejoice! The money coming out of China might be about to turn from a flood into something like a tidal wave. Some people are going to get seriously rich from this.

Did you see the news? The Wall Street Journal reported this week that,

China’s campaign to turn the tightly controlled yuan into a global currency is crossing a new threshold, as the government plans to make it easier for individuals and companies to invest overseas.

Plans are afoot to liberalise China’s capital account. An official go ahead is due in a couple of weeks. Should the change go through, China’s companies, banks and citizens will be free to move renminbi  in or out of the country at their discretion. Right now they’re heavily restricted (legally anyway).

The idea is not new, but we’re beginning to see some genuine movement. Having said that, the plan does have a softly, softly approach. The proposal would begin only within certain free trade zones, but will be scaled up over time.

That’s because the Chinese government doesn’t want to risk money pouring out of the country in one hit. But the sheer scale of this could be enormous over the next ten years. The Bank of England did a study of this a while ago and modelled some likely figures.

China’s external assets and liabilities were 5% of world GDP in 2012. That could rise to 33% by 2025. That’s just ten years from now. Colleague Rob Marstrand puts the dollar figure on that at US$20 trillion sloshing around the world looking for a home.

The question for us is whether it will go into Australian stocks and real estate…and on what scale. Here’s why: you only have to look at the performance of Chinese stocks recently to see the impact Chinese buyers can have.

Let’s backtrack slightly to show you what I mean. The average Chinese saver hasn’t had much choice with what to do with his money in general. Imagine earning an average wage in Beijing.

You can put your money in the bank knowing that the interest you’re earning is less than inflation so you’re going to lose money in real terms. You can try and put a deposit together and buy a property. Or you could buy gold. That was the basic choice for years.

Chinese gold buying has been a major factor in the physical gold market for a long time now. Then the government decided to make investing in stocks easier, for both locals and foreigners. And the Chinese stock market has been on a tear ever since.

According to the Financial Times last month, the Chinese opened more than 4.8 million new stock trading accounts in March and a million more in the first two days of April.

By the end of the first quarter, the figure was up 433% from the previous year. Most of them are believed to be first time investors. Margin lending — borrowing money to buy shares — has doubled in six months.

Gold jewellery demand has fallen 10%, according to the World Gold Council. The FT says,

Middle-aged women, the so-called Dama, or “aunties”, who were among the most prolific buyers of gold in 2013, rushed to open stock accounts instead, said the industry body. “This shift has eaten into demand for gold, which has lacked clear price direction in recent quarters,” it added.

The boom is on. If you had bought, just for example, the Deutsche X-trackers Harvest China A-Shares Fund [NYSE: ASHR] in October 2014, you would now be up 90% in six months.

That’s the kind of money, and — arguably — speculative mentality, that could come into Australia. Real estate wise, Chinese buyers in Sydney and Melbourne already account for 23% and 20% of new housing supply, according to a Credit Suisse report released earlier this month.

They think the Chinese could pump $60 billion into Australian housing over the next six years. That’s double the previous six.

The potential capital gains are lucrative enough to offset the extra charges on foreign buyers. The Australian Financial Review reported on Friday that since May 2012, Sydney house prices have risen 38%. For Melbourne over the last three years, the figure is 23%.

Believe it or not, CoreLogic says those rises are modest compared to the boom period between 2001-2004. Indeed, the rest of Australia is hardly worth getting excited about. The implication appears to be there’s plenty of fuel left in the tank.

In the end, one can only speculate on how this will all play out. But for my best guess, start here.


By Callum Newman+,
Contributing Editor, Markets and Money


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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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