The continued appreciation of the yuan could put pressure on the Chinese Government to ease the capital outflow restrictions which have impacted investment in Australian commercial property.
The issue for China is that the yuan is up massively over the last 12 months and that has been driven by the new capital control regulations which have been very effective in turning around the outflow of capital.
However that appreciation could see Chinese goods becoming less competitive and that is not what the Chinese will want to see.
If that is the case then it seems clear that some tinkering with those new capital outflow regulations, and among them those pertaining to real estate transactions, will occur and that will help to both stabilise the yuan at a level that is acceptable to China, and of course benefit Australian commercial property.
According to a report from London based Pictet Wealth Management, China’s total capital outflow was estimated at US$166 billion in 2017, down 78% from US$761 billion in 2015 and 67% from US$500 billion in 2016 as a result of the new regulations.
China’s initial tightening of capital outflow rules in 2016 followed a fall of nearly 7% in the value of the yuan against the USD which had been the largest depreciation since 1994.
The foreign exchange turnaround, he said, had seen the yuan appreciate 10.4% against the USD over the 12 months to December.
But more importantly if we look at the movement over the last two months from December when 1 USD bought 6.62 yuan and then last week when 1 USD bought 6.29 yuan we see an appreciation of 5.2% in just six weeks.
That is a huge appreciation of the yuan on top of the significant rise over the last 12 months, and, if it continues, then it must be troubling for at least some sectors of the Chinese manufacturing industry which of course is a hugely significant contributor to capital inflow.
The sheer weight of Chinese capital seeking offshore property investment remains very significant with Australia still the number two destination in the world behind the US for Chinese investors.
We need to keep in mind that while investment outflows from China have been curbed, Chinese investors are adjusting to the new rules and fine tuning their investment strategies.
To date in the new year we have seen little change in interest from Chinese investors, if anything, what may have restricted sales volumes, has been as much about the lack of quality stock in increasingly tightly held markets.
That has been particularly the case in the retail sector, while falling vacancy and incentive levels have been very encouraging for office market landlords.
A further factor driving continued Chinese investor interest in Australian property were regulations aimed at curbing Chinese domestic real estate activity in restricting developers’ ability to raise finance for their projects.
On the one hand we have the regulations restricting developers from seeking off-shore opportunities and on the other hand also being restricted in their activities at home.
It is a difficult time for property developers on the domestic front, who, under the centralised banking system, already face limited options for funding new projects.
It is not inconceivable then that the further restrictions on their ability to raise finance through debt and equity, may have them looking offshore where finance for their projects may prove easier to come by. Source CBRE