China’s overseas investment surge has slowed, amid tightening controls at home and abroad. But the so-called “great wall of money” driving asset prices higher may have already found a new destination, according to analysts.
With China accounting for an estimated one quarter of the world’s gross national savings in 2017, up from just 9 percent in 2005, the savings glut has sparked a surge in overseas investments by the world’s second-largest economy. In 2017, China’s gross national savings were estimated at $5.4 trillion, up fivefold since 2005.
The result has been an overseas investment splurge, with Chinese companies spending an estimated $1.8 trillion during the last 12 years on everything from property to businesses along with “trophy assets” like European football clubs.
Yet following a 2017 directive from Beijing restricting overseas investment in real estate, hotels, entertainment, and sport, last year saw a near 30 percent decline in outward direct investment to $120 billion, below the 2015 level.
According to ANZ Research, such investment is now seen rising to below $200 billion by 2020, around double the amount compared to previous projections. For offshore investment is still being encouraged in more strategic areas such as agriculture, new energy, resources and technology.
The impact of the changed investment approach is being felt around the world. While China’s holdings of U.S. Treasury securities have dropped, at nearly $1.2 trillion as of December 2017, they were still equivalent to 8 percent of total Treasuries outstanding and 29 percent of the U.S. Federal Reserve’s balance sheet, meaning that Beijing can exert influence over the level of U.S. interest rates.
China remains the largest non-U.S. holder of U.S. debt, followed by Japan, whose holdings totaled $1.06 trillion. While Beijing’s buying is seen as seeking to prevent the Chinese yuan from appreciating, the political implications of such holdings have also been noted, such as Hilary Clinton’s reported comment saying, “How do you deal toughly with your banker?”
Meanwhile, property markets worldwide have grown accustomed to Chinese buyers and could feel the effects of their reduced influence. From London to Tokyo and across the Asia-Pacific region, property data has revealed a surge in Chinese buying that has sparked concerns from locals about being priced out of overheated markets.
This has led to cities imposing extra taxes or restrictions on overseas buyers, ranging from penalties for leaving apartments vacant, as seen in Sydney, Melbourne and Vancouver, to additional stamp duty, as imposed in all of these cities along with Hong Kong and Singapore.
The resulting slowdown in Chinese buying may be seen in cities such as Sydney, which at one point saw one in four new homes being “snapped up by a Chinese buyer,” but has since cooled following state government duty surcharges on foreign buyers and Beijing’s restrictions. After rising at a double-digit pace, Sydney house prices dropped by 0.9 percent in December, with Chinese buyers reportedly now eyeing other markets.
ANZ Research sees China’s overseas investments shifting to Asia, reflecting Chinese travel trends.
“There are signs that Chinese buyers prefer Asian locations, given fewer restrictions against foreign buyers. Anecdotally, overseas travel also supports cross-border fund flows, but the authorities are clamping down on this,” the Australian bank’s economists said.
A January international travel survey showed Chinese consumers favoring Asian destinations in 2018 at 23 percent of those polled, compared to 20 percent for the United States and 15 percent for Europe. Among the Asian destinations, Thailand ranked top at 61 percent, followed by Malaysia (20 percent), Singapore (17 percent), and Japan (15 percent).
Meanwhile, property tightening measures in China have discouraged household buying of domestic properties, preventing any overheating of the domestic property market. According to ANZ Research, buyer prepayments are now the major source of finance for local property investment, as opposed to mortgage loans, which accounted for more than 50 percent in 2016 but have since fallen into negative territory.
Yet at the same time, deleveraging by the authorities has pushed down government bond prices, giving local investors little choice of investments “other than to buy equities or wealth management products,” ANZ Research said.
Hong Kong Benefits
The winner is likely to be Hong Kong’s equity market, since “the only official channel to alleviate the pressure of China’s savings glut seems to be Hong Kong equities denominated in Hong Kong dollars.”
According to ANZ, Chinese households can invest in Hong Kong stocks via stock connect schemes, subject to limits. But with the market predominantly consisting of listed mainland companies, “technically, the capital outflows are not entirely tapping offshore assets,” it said.
As at February 23, the benchmark Hong Kong Hang Seng index stood at 31,267, having posted a one-year return of 35 percent, albeit with only a 4.5 percent rise in 2018. In January, the Hong Kong bourse soared past its previous peak reached in October 2007 of 31,638, buoyed by investment from mainland buyers via the Shanghai and Shenzhen stock connects.
In contrast, the Shanghai Stock Exchange composite index has dropped 0.55 percent this year, with a one-year return of only 3 percent. On February 23, the benchmark index stood at 3,289, well below its 2007 peak of 6,092.
In 2005, then U.S. Fed governor Ben Bernanke warned of the “global saving glut” and its consequences, including a decline in long-term real interest rates and increased inflows into safe haven assets such as U.S. Treasuries. For now though, there appears little prospect of the glut diminishing, even while China pauses its global buying spree, keeping Asia waiting for the next wave of investment.