China’s FX Reserves See Largest Rise In Over 3 Years, Global Real Estate Spending Cools

Posted by Ricky Dhadwal on Thursday, August 10th, 2017 at 9:53am.

How many Chinese anti-money laundering experts does it take to cool a global real estate buying spree? Over 400,000 apparently. We knew the rise in foreign exchange reserves was going to be huge, since it followed The People’s Bank of China (PBoC) announcement that over 400,000 people have been trained to help stem the capital outflow. Although, no one expected it to be the largest increase in over 3 years. As we explained in January, this is going to have severe consequences for real estate markets around the world.

Capital Reserves Swell To 9 Month High

PBoC numbers show that foreign exchange reserves rose for another straight month. Total reserves now stand at US$3.08 trillion, a 0.8% increase from the month before. The increase is just north of US$25 billion, sending the value of the reserves to the highest level since October 2016. That increase may not seem all that large in contrast to the size of the reserves, but this is the largest increase since March 2014. So it’s kind of a big deal.

China's Foreign Exchange ReservesUSD (InTrillions)
MonthUSD (In Trillions)
Jul 2015 3.651
Aug 2015 3.557
Sep 2015 3.514
Oct 2015 3.526
Nov 2015 3.438
Dec 2015 3.33
Jan 2016 3.231
Feb 2016 3.202
Mar 2016 3.213
Apr 2016 3.22
May 2016 3.192
Jun 2016 3.205
Jul 2016 3.201
Aug 2016 3.185
Sep 2016 3.166
Oct 2016 3.121
Nov 2016 3.052
Dec 2016 3.011
Jan 2017 2.998
Feb 2017 3.005
Mar 2017 3.009
Apr 2017 3.03
May 2017 3.053
Jun 2017 3.056
Jul 2017 3.081
 

Source: People’s Bank of China.

New Capital Controls

This is the sixth month in a row that China’s foreign exchange reserves rose, after implementing new capital controls in January 2017. From 2014 to 2016, there was over a trillion dollars in capital that left the country, with an estimated 1 in 10 dollars hitting global real estate markets. Great for sending property values higher, but not so great for China’s currency.

The country responded by rolling out some of the tightest capital controls in decades, only allowing currency to leave for pre-approved uses. One use restricted in this round is real estate buying, which global markets felt almost immediately. The world’s largest real estate buyers, are quickly becoming the world’s largest real estate sellers.

China’s 400,000 Anti-Money Laundering Experts

Many speculated China would loosen the rules in a few months, instead they announced the deployment of 400,000 anti-money laundering experts to halt money from leaving the country. Jin Luo, Director General of the PBoC’s anti-money laundering bureau, said China’s new rules will have a “higher standard with stricter requirements than developed countries.” Oh yeah, did we mention that money laundering in China includes exchanging money you legitimately earned to buy foreign currency for an unapproved use?

If you’re a city that’s been chasing Mainland Chinese investment, at the expense of building local industry – now might be the time to review those plans. If you’re a city that still has Mainland Chinese money pouring in, you should probably be asking how this money is still arriving in your country. Last time we checked, the downpayment on a house in Toronto or Vancouver was largely in excess of the amount of money that can be exported from China.

Ricky Dhadwal
604.418.6600

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