Changing Currents, Rising Tides
Chinese capital outflow continued strongly in the first half of 2016. Despite the somewhat lower volume in this period, there are deals both completed and on-going in the second half, which promise to bring the full-year results on par with last year’s.
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The US is now firmly established as the most important destination for Chinese capital. Investment grew strongly in the first half of the year, with New York once again the favoured destination, attracting most of the capital inflow, although West Coast tech hubs also saw increased interest from Chinese companies. Meanwhile deals in offices continue to dominate the market.
London attracted a significantly increased Chinese capital inflow in the first half of the year. There was no sign of tapering off even after the Brexit vote. Large private investors have taken the lead over insurance giants, favouring the City and West End locations.
The volume of Chinese investment in Australia is down considerably year on year because of a lack of mega-deals in the first half. Amid competition from other Asian buyers, however, there is a strong appetite from Chinese investors and recently developers for en-block commercial properties in both Sydney and Melbourne, attracted by rental growth supported by strong tenant demand and a supply shortage.
Hong Kong offices attracted more interest as the city positions itself as the international financial centre closest to Mainland China. For Chinese developers, Hong Kong residential land is considered attractive compared to hotly contested land markets in major Chinese cities.
Going forward, continued RMB devaluation, tightening capital outflow controls and a low interest-rate environment should continue push Chinese investment capital into tangible assets, especially real estate. However, risks caused by policy uncertainty may erode market fundamentals and impact investment in the near to medium term.
Although China’s capital outflow control has been a push factor so far, it could be a double-edged sword. It was designed to prevent the erosion of the country’s vast foreign exchange reserves, but its stringent requirements have made it very difficult for some investors, especially smaller ones, to get foreign exchange clearance.
To manage this, some sizeable investors have been investing through their overseas subsidiaries. The risk, however, is that over time, these subsidiaries will also run out of funds if the grip on foreign exchange reserves is not loosened. This is something that all destination markets should keep a close watch on.