China property, carmaking sectors to suffer from capital flight

February 10, 2015 18:34
As more capital leaves China, less is available for expensive domestic purchases such as cars. Photo: Bloomberg

Capital outflows from China were between US$600 billion and US$700 billion each year between 2009 and 2013 and gathered speed in last year's last quarter.

The amount of capital fleeing the country throughout 2014 is estimated at between US$800 billion and US$900 billion. 

The figure could surpass US$1 trillion this year if it maintains the monthly level of nearly US$100 billion seen in November and December.

That would account for over 10 percent of China’s gross domestic product, exceeding the 7.3 percent growth in GDP last year. That means the country's wealth is contracting because of the massive capital outflows.

It would be easy to print money to fill the gap. However, that could lead to serious issues of sustained currency depreciation and high inflation in the long term.

The central bank deal has already cut the reserve requirement ratio by 50 basis points (0.5 percentage point), which is obviously not sufficient. At 19.5 percent, the RRR is too high and could be cut by a further 4 or 5 percentage points.

Apart from the struggling property sector, the motor industry is also cause for concern.

The government imposed car purchase restrictions in Shenzhen recently, and car sales there have fallen 80 percent. If other cities and provinces follow suit, the sector faces more pain.

Meanwhile, between US$200 billion and US$250 billion in funds left the country to pay for education and investments in property overseas last year.

Yuan Guiren, the minister of education, recently said universities should avoid the use of teaching materials that “disseminate western values”.

His remarks promptly triggered heated discussion and may encourage wealthy families to send their children overseas for their studies.

About 600,000 Chinese students are already studying at US colleges and graduate schools.

So Chinese parents are spending US$24 billion in tuition fees for their children at US universities each year given annual tuition of about US$40,000. The total spending by those students amounts to between US$70 billion and US$80 billion a year, including living costs and other expenses.

There are also 300,000 Chinese students at middle schools in the US. Chinese account for a considerable share of the students at top boarding schools, where the annual cost could reach US$60,000.

Meanwhile, Chinese consumers contribute to US consumption.

About 2.2 million tourists arrive in the US and Canada each year from across the Pacific Ocean, 42 percent from China. That means about 800,000 Chinese tourists visit US or Canada per year, driving up high-end consumption in major US cities year after year.

Chinese are also buying property in the US, in particular in California, New York, Florida and Washington DC.

In the last three years, Chinese have bought no fewer than 300,000 homes in the US.

Assuming an average price of US$500,000 and that 70 percent of these transactions were paid for in cash, the total Chinese investment in US property reaches US$100 trillion.

And the total investment in property is even larger if commercial real estate, such as shopping malls, is included.

This article appeared in the Hong Kong Economic Journal on Feb. 10.

Translation by Julie Zhu

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adjunct professor in the Department of Finance at HKUST Business School