Chinese capital outflows accelerate

Via Goldman:

…as Goldman points out, amid the lingering trade tensions and continued depreciation of CNY in the first half of June, the bank’s preferred gauge of FX flows showed a dramatic jump in June outflows to the tune of $20 billion compared to an inflow of $13 billion in May, while the exporters’ trade repatriation ratio fell further in June. At the same time, the bond market saw a net inflow of around $11BN, modestly lower than the $16BN in May.

According to Goldman’s calculation using the SAFE dataset of “onshore FX settlement”, non-banks showed net FX outflows of around US$13bn (vs. an inflow of US$19bn in May). This was composed of US$23bn in net outflow via outright spot transactions, and US$11bn in net inflow via freshly entered and cancelled forward transactions. Meanwhile, another SAFE dataset on “cross-border RMB flows” shows that on a net basis, the amount of RMB flow from onshore to offshore was around US$7bn.

As a result, Goldman’s usual “preferred” gauge (FX settlement data mentioned above and the cross-border RMB flows) showed a net FX outflow of around US$20bn in June, vs an inflow of US$13bn in May.

According to Goldman, “trade tensions lingered in June and CNY depreciated in the first half of the month, contributing to the increased FX outflows” which of course were visible well prior thanks to the surge in cryptos since April, a big part of which was due to Chinese capital flight, which however failed to be documented in official data.

As you can see, it is still very small relative to the 2015 gusher. Nonetheless, it is worth watching how much of it arrives in Aussie housing. We saw a corresponding lift in Q2 foreign buyers, via NAB:

The trend decline in foreign buyers of Australian residential property over 2018 and into early-2019 can be attributed largely to the crackdown on capital outflows in China in recent years and to local state government charges on foreign buyers and stricter lending limits by Australian institutions. But this trend reversed in Q2 with the market share of foreign buyers in the market rising to 7.1% in new property markets (from 4.9% in Q1), and to 4.1% in established markets (3.5% in Q1). While this may be just a blip on the radar, weakness in the Australian dollar, further declines in domestic house prices (particularly in key cities) and more recent political unrest in Hong Kong may have reignited some interest in the Australian market.

The share of sales to foreign buyers in new housing markets jumped to 12.2% in VIC (4.8% in Q1). Market share almost doubled in NSW to 7.8% (4.1% in Q1), but was broadly unchanged in QLD (6.8% vs. 6.7%).

In established housing markets, the share of sales to foreign buyers also increased to 4.1% (3.5% in Q1). Foreign buyers in this market were most active in NSW (5.2% vs. 3.0% in Q1), followed by VIC (4.0% vs. 4.8% in Q1), QLD (3.7% vs. 3.3% in Q1) and WA (2.8% vs. 3.5% in Q1). The share of foreign buyers in established housing markets remains however well below survey average levels in all states.

I do not expect this to be a material factor in any new housing cycle. Indeed, with Chinese authorities ready to slam the trade if it accelerates, and tourism plus students falling, this is still more likely than not to be an overall headwind relative to the last cycle.

David Llewellyn-Smith
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