Well, maybe we’ve picked the wrong country to talk about the debut of Financial Martial Law. The Chinese are way ahead of everyone.
“China shares jumped almost 5 percent on Wednesday on suspected government intervention, with a flurry of buying just before the market close helping to undo much of the losses posted on Chinese stock exchanges earlier this week”, reports Reuters.
It gets weirder. Shares in China’s largest brokerage firm, CITIC Securities, rallied strongly and suspiciously at the close. This, after the news that four top officials at the firm were under police investigation for suspected ‘malicious trading’ and ‘insider trading’. Chinese authorities also clamped down on trading in the commodity future markets, where they suspect the rumour-mongering manipulators could strike next.
It’s hard to choose sides on this one. But what’s clear is that no one is on your side. The police are acting on orders to intimidate market participants into buying stocks. It reminds you of the fake production numbers in the old Soviet Union. They didn’t fool anyone except the people at the top, who needed statistics and reports to contradict the reality that their system destroyed more wealth than it produced.
The Chinese want market signals to obey their wishes. That’s both deceptive and authoritarian. But you don’t exactly sympathise with top officials at brokerage and trading firms either, do you? There is most likely a lot of ‘insider information’ that trades hands to make people rich. And it’s becoming increasingly clear, in China and in US and UK markets, that computer-generated trading means the ‘insiders’ are playing by much different rules than you and I are.
Let’s stick with China and move to another type of capital control. Authorities in Beijing are making it a lot harder to get money out of China and into property markets in Canada and Australia. Australia’s cities have been popular destinations for Chinese money. Over A$92.6bn in Chinese capital has flowed into residential and commercial property in Australia, along with resource investments, according to Australia’s Foreign Investment Review Board (FIRB).
Those are just the official statistics. No one knows what the unofficial statistics are, of course. If you’re trying to get money out of China and into, say, a buy-to-let Sydney flat, you’re not exactly going to report it, are you? And the Australian real-estate agent getting a commission on the sale may not be inclined to kick up a fuss either.
Chinese authorities are kicking up a fuss. Under Chinese law, you or a family member can legally transfer up to US$50,000 from China to a foreign bank account. Chinese property investors, according to the Australian Financial Review, have gotten around this capital control by getting family and friends together to each send $50k and then paying them back domestically. Credit Suisse reckons Chinese buyers accounted for 15% of all new home purchases in Australia last year.
You have to have a certain amount of sympathy for the Chinese investor here, don’t you? If you had your savings locked up in a currency being systematically devalued by the authorities, if those authorities were rigging the stockmarket to try and prevent a bigger crash, and if you know your bank transactions were being monitored for ‘suspicious activity,’ would you want to get as much of your wealth out of the system as possible?
But governments on both sides are against you. In Australia, the Chinese buying has polarised public opinion. I lived in inner city Melbourne for almost a decade and can tell you there were two camps on opposite sides of the issue. Baby-boomer property investors loved it. You can sell to a cashed-up Chinese buyer and fund your retirement. Happy times, mate!
The children and grandchildren of those boomers find the goal of home ownership increasingly unreachable. Median property prices have gone through the roof. Even with a good wage, the amount of money you have to save up for a deposit, and the percentage of your disposable take-home pay you’d have to pay for a mortgage, make buying a house a disastrous financial decision (which leaves you with the maximum exposure to rising interest rates and falling prices).
The coalition government began cracking down earlier this year. The FIRB changed the rules on the ‘golden visa’ offered mostly to wealthy Chinese people. That programme allowed you fast-track your application for Australian citizenship with a $5m deposit in an Australian bank, held in escrow. It was called the ‘Significant Investor Visa’.
As attempts to attract foreign capital to your shores go, it’s not a bad one. But when the money coming in amounts to a transfer of ownership of residential property from Aussie boomers to Chinese investors, you’ve created a social and political problem. In July, the Aussie government changed the rules and required SIV applicants to put money in non-property investments such as venture capital or start-up companies.
It’s not really an incentive to move your capital anymore, is it? If you go from China, with its own capital restrictions, to Australia, with a new set of capital restrictions, you’re restricted all the same. Granted, you’re trading one currency for another. And there are other factors, like the transparency of the legal system and the rule of law.
But it’s a degree of difference, not of kind. The general trend is the same: restrictions on the freedom of movement of your money. It doesn’t really matter where you are. The Chinese and Australians are leading the way because it’s been one of the most active ‘capital highways’ in the last few years.
As a side note, I should put my cards on the table and say I have dual citizenship. I became an Australian in March of this year, after two four-year visas, permanent residency, nine years of living there, three Boxing Day tests, and seven years of membership to the North Melbourne Football Club (go Roos!).
Why does that matter? Well, I can tell you that there were 11 ships in Arthur Phillip’s First Fleet that left from Portsmouth to eventually wind up at Jackson’s Cove. I can tell you that Don Bradman only needed four runs in his last Test innings (at the Oval) to average 100 for his test career, and that he was bowled on the second ball from the Vauxhall end. I can tell you that the Governor General of Australia, the Queen’s representative there, dismissed a democratically elected government at the end of the 1975 constitutional crisis.
I can’t tell you what Vegemite tastes like. I’ve so far refused to try it. But my point is that there’s more to citizenship than having a passport. As a migrant, I think it’s fair to expect people who come to your country not only to know and abide by your laws, but to respect (if not embrace) your traditions. A nation is more than a name. It’s a whole set of ideas and beliefs.
This is obviously a pretty important discussion in Europe right now. I won’t get into it here. But I will say that Australia—which yes, failed miserably in the Ashes—is dealing with this question in a direct way. Human capital is the most important capital in the world. But it’s also the most volatile.
One last thing about Australia. Six prime ministers in eight years! The newest one is ex-Goldman Sachs money man Malcolm Turnbull. Both the Liberal and Labour parties have spilled prime ministers during the middle of a term to try and allay a slide in the opinion polls. The political instability is directly related to volatility of Chinese capital flows, first in resources. Then in property. More on property tomorrow.
Category: Economics