“I had a property for sale in West Vancouver,” said the elegant woman, who emigrated from India to Canada in the 1970s and went into the real estate business. “The owners wanted $3 million,” she said. “It’s a lot for the particular property, even in our elevated Vancouver market.”
The woman was attending the Agora Financial Investment Conference in Vancouver this past July. We chatted during a break in the action in the conference room at the Fairmont Hotel.
The woman continued. “I had a call from a Chinese man,” she said, “who lives here in Vancouver. He and I have worked in the past. He had a Chinese client who flew in from the mainland. The client wanted to see the property. They were driving over as we spoke on the telephone.”
I sensed that I was listening to a good story. I leaned forward to hear more. The woman went on.
“The two Chinese men stopped at my office,” she said. “We went over to the property in West Van. The mainland visitor got out of the car and looked at the place. He just stood there in front of the house and stared at it. Then he held a short discussion in Chinese with his friend, the man who first called me.”
“This is for $3 million?” said the Chinese man from Vancouver.
“Yes,” I replied. “Shall we go inside and look around?”
“No,” said the Chinese man from Vancouver. “We just want to be sure that this is the property and that it’s for sale with good title.”
“Well, yes,” replied the woman. “The chain of ownership is entirely in order.”
“Good,” said the Vancouver-based Chinese man. “We have the money. How soon can we complete the papers? Tomorrow? The day after? My client needs to finish this up quickly. He has to be back in China very soon. His family misses him.”
A Trunk Full of Cash
The woman was taken aback. Evidently, when the man said, “We have the money,” he wasn’t kidding. In the trunk of his car, he had two suitcases holding millions of dollars of Canadian currency. His client, the mainland Chinese guy, was cashed up and ready to buy real estate in Vancouver — the sooner the better.
According to the woman, “I explained how, here in Canada, we don’t do large cash transactions like that. There are banking and tax requirements. We need to go through lawyers and record all the transactions properly.”
What happened? “The two Chinese understood the legalities. The man from mainland China went home. He came back a few weeks later for a closing. We sold the property with bankers and lawyers in the room. It was all quite proper.”
The summary? “The Chinese men didn’t like our Canadian way of doing real estate deals. For them, it was too public, with the lawyers and legal filings. And of course, the mainland man’s family didn’t miss him at all. It was his employer that didn’t know that he was in Canada buying real estate.”
China’s Monetary Hemorrhage
Just by itself, this story about a Chinese man buying expensive real estate in Vancouver with suitcases full of cash makes for an interesting tale. But it illustrates a larger issue as well. There’s massive capital flight out of China.
As I’ll describe, over the past decade, about $3.8 trillion has left China illicitly. Indeed, the trend is accelerating because, according to a recent study, over $600 billion left China outside of “normal channels” in just 2011 — around $50 billion per month!
In other words, despite its well-known, world-influencing economic growth, China is simultaneously undergoing a monetary hemorrhage. China’s fugitive money is not just fueling a real estate boom in Vancouver. Chinese cash flows are influencing and altering, if not perturbing, investment dynamics across the globe.
“To Each According to His Needs?” Not So Fast…
First, let’s look at a few basics. No less than the father of communism, Karl Marx, once explained his philosophy as providing “to each according to his needs” (for the purists out there, Marx was citing French socialist Louis Blanc). Yet today, though nominally communist, China has little in the way of a Western-style social safety net.
Marx’s famous dictum is simply not the case in China, where, if you don’t have money, you don’t eat. Nor do you get “free” medical care. Nor do you get a “free” apartment or a “free” cellphone or anything else. Almost nothing comes “free” to the people from the Chinese government — let alone from the Communist Party.
In short, Chinese society is structured and incentivized in keeping with historical Chinese Confucianism. Chinese culture, and the current Chinese political system, fosters a strong work ethic that underpins personal and family survival.
Most Chinese revere education and anticipate the future need to educate their children and retire without a state subsidy — because their children will help them. Thus, Chinese people tend to think ahead and save a large fraction of their income.
It follows that, like most savers, the Chinese want the best returns possible on the money they put away. The higher the return, the better. After all, the Chinese deal with the same price inflation — in energy, food and other resources — as everyone else in the world. They know where the trends are headed. Heck, the Chinese buy gold hand over fist!
Low Interest Rates Subsidize State-Sponsored Boondoggles
If you follow developments in China, you may know that China’s state-owned banks “underpay” depositors due to mandatory ceilings on deposit rates. This means that if you save money in China, you’ll lose purchasing power to inflation over time. Most of the Chinese are economically savvy and understand this. It’s basic stuff, really.
The predicament for a Chinese saver is not unlike that of savers in the U.S., where the Federal Reserve has a long-term scheme to keep interest rates low. Low Fed interest rates rob U.S. savers of potential return while masking the true costs of federal and state government borrowing. In the U.S., in other words, savers indirectly subsidize the American welfare-warfare state.
Getting back to China, national economic policy keeps interest rates similarly low on savings accounts. It’s an overt, albeit indirect, government subsidy to banks. The banks, in turn, make dicey loans, on favorable terms, to favored, often state-controlled entities.
The result of low Chinese interest rates and many years’ worth of overly risky loans is embodied in stories about excess capacity across Chinese industry and uneconomic showcase projects that are monuments to the vanity of some big-shot official.
That is, in China, as everywhere else, money that’s “too cheap” leads to all manner of silly boondoggles. Just consider some of the stories that come along, like thunder out of China, about empty airports, see-through cities, bridges to nowhere, idle steel mills and silent shipyards.
I’ve got a lot more to say on this, but for now let’s cut it short. I’ll stop back tomorrow to follow up on this unfolding situation in China.
Thanks for reading. Enjoy your holiday!
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