The stock market upheaval in China this week could convince Chinese investors to move their money into assets not linked to the renminbi currency, including B.C. real estate, in even greater volumes, according to a Canadian economist.
But Scotiabank Economics vice-president Derek Holt also cautions that there is considerable uncertainly regarding how Beijing will proceed with devaluing its currency in a bid to make the renminbi more market-driven. Some options could have adverse effects on the local housing market.
Chinese stock markets opened 2016 with four straight days of losses, several of which were so dramatic that a “circuit-breaker” was triggered when the main index dropped more than seven per cent.
On Thursday, Beijing also further devalued the renminbi against the U.S. dollar by 0.51 per cent, which added to the extended sell-off, Holt said.
“When you are a saver in China and you see that your government is trying to make exports more competitive and creating more balance in the economy, it’s natural for you to say, ‘Oh my God, I need to get my savings out and protect my family,’” he said. “And I think it’s that rush-for-the-exits, the large pickups in capital flows out of China, that’s indicative of what’s happening.”
Holt noted that Chinese investors will likely look to the U.S. dollar as a main investment instrument, but he noted the Canadian dollar’s persistent weakness has also made real estate in Vancouver more attractive.
“Canadian real estate ... because our own currency has depreciated so much ... that has put Canadian assets on sale from the vantage point of, say, Asian investors,” Holt said. “If we judge Vancouver and Toronto in that context, it’s not cheap for us here in Canada … but in the context of other Pacific-Rim cities like San Francisco or Singapore, and given our currency depreciation and what you can buy cashing in on foreign currencies, we look pretty cheap right now.”
TD Economics senior economist Leslie Preston said it is difficult to say if the market panic will lead to more Chinese money coming to Canada, given the lack of data tracking the exact impact of Asian buyers on B.C.’s housing prices.
But she said the upheaval has already hit Canada, noting that the TSX has dropped about five per cent this week because of events in China and falling oil prices.
“I think we’ve already seen it spill over to equity markets elsewhere in the world,” Preston said. “We’ve seen oil head lower this week, which is very important for Canadian equity. So to that extent, we’ve already seen it in the Canadian markets.”
But Preston said Beijing has some controls in place to prevent capital moving offshore, which will limit the number of buyers driven to the Canadian market. And she stressed that a TD Economics forecast for a slower Chinese economy — with a 6.2-per-cent annual growth rate for 2016 — has not changed in light of this week’s developments.
“China is slowing, we’ve known that for a number of years, and we haven’t seen any data that would lead us to downgrade our outlook further,” Preston said. “I think it’s important to take a step back and remember that financial markets are always a lot more volatile than the underlying economies. Financial markets are by their nature very, very volatile, and if you take a look at China, there hasn’t been a lot of new news out about the state of the economy.”
Andreas Schotter, a professor of international business at the Ivey Business School at the University of Western Ontario, said the Chinese stock market malaise is being driven by the fact that individuals make up 80 per cent of investors, meaning volatility tends to be higher in comparison to markets where institutional investors are more prominent.
Schotter said that the “circuit-breaker” mechanism may itself have contributed to the problems this week, setting off a panic.
“The ‘circuit breaker’ is also being used by the S&P 500, but only at the 20-per-cent drop level,” he said, noting the seven-per-cent limit may be too low for Shanghai. “Until more institutional investors participate in the market, I do not see that the Chinese ‘circuit breaker’ makes much sense. In fact, instead of reducing panic in the market, it triggers a massive sell-off once it is lifted.”
Schotter also agreed that more Chinese investors may be looking to protect their money by purchasing assets in Canada and other foreign markets.
“I think ‘exodus’ is too harsh of a word, but for sure, investors will try to balance their portfolios more away from the renminbi,” he said, while also noting any expectations of a huge wave of overseas investment should be tempered. “For the average individual investor in China, (getting money out) is not as easy as it is for a Canadian investor in Canada. (But) for those who are able to move money out of China, Vancouver and other metropolitan real estate in Canada remain very attractive, particular right now with an undervalued loonie.”
Holt said that, while uncertainty in Shanghai may drive some money into Vancouver’s real estate market, Beijing has a number of options to further devalue the renminbi and spur exports. One of those, he noted, is a one-time, large-scale devaluation similar to the one in Argentina in 2002, when the peso lost considerable value within days of being de-pegged from the U.S. dollar.
While he said there are no signs that Chinese regulators will take such a step, the uncertainty is not helped by current measures, which Holt called “somewhat flawed” and “opaque.”
“If you do a large, sudden devaluation (of the renminbi), then what happens?” he said. “And you’d probably accompany that with stricter capital controls to prevent people from getting around it in the short term. What that does is it wipes out, with one swift stroke of the pen, a fair portion of Chinese household savings. And what is driving foreign appetite for real estate abroad, including markets like Vancouver? Those household savings.”
chchiang@vancouversun.com
