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Sydney’s real estate agents were celebrating this week after a Mosman waterfront property – which had been sitting on the market for three years – sold for what was the second highest price this salubrious North Shore suburb has seen so far this year. 
According to the selling agent, two buyers – a Sydneysider and a buyer from China – ended up vying for the property, which helped push the price above the $11 million mark. And although in this case the local won out, Sydney agents are deeply aware that mainland Chinese buyers are providing a welcome boost for the languishing top end of the Sydney property market. 
Sydney, of course, isn’t alone. Chinese buyers are helping to drive up the price of Hong Kong’s luxury apartments, and are emerging as key players in property markets as far afield as London, Singapore, San Francisco and Melbourne. 
There are two reasons why Chinese buyers have become increasingly interested in acquiring offshore assets such as property. In the first place, there’s mounting concern about the Chinese economic outlook, particularly now that exports are clearly slumping. At the same time, Chinese buyers also see their offshore property purchases as a handy insurance policy, in case of rising political instability in their homeland. 
The latest Chinese trade figures show that the European recession is hitting China hard, with exports growing at a miserable annual pace of 1% in July, down from June’s 11.3% rate. The slowing global economy is a major concern for mercantilist countries such as China – which rely on exporting their surplus savings to the rest of the world and importing excess demand. They reap huge benefits when the global economy is growing, but they pay a high price when global growth falters, and when demand for their exports withers. 
But growing capital outflows represent a major economic challenge for Beijing. For the past decade, the Chinese central bank has been engaged in a massive money-printing exercise aimed at preventing the Chinese currency from rising. Huge quantities of yuan were printed so that Chinese banks could absorb the foreign currency flowing into the country, both from the Chinese trade surplus, and as hot money flowed into the country to take advantage of strong Chinese growth and rising asset prices. 
Now this massive inflow of funds has stopped. According to figures released by China’s central bank this week, Chinese banks were net sellers of 3.8 billion yuan ($597 million) in foreign exchange last month, a clear sign that investors are pulling funds out of the country, and that some exporters are choosing not to convert their foreign exchange earnings into yuan. 
Indeed, over the last 10 months, China’s banks have only purchased 145 billion yuan in foreign exchange, a tiny fraction of the 905 billion yuan that China has earned as a result of its trade surplus with the rest of the world. 
As a result, Beijing is now struggling to support its currency, rather than fighting to stop it from rising. Since the beginning of the year, the yuan has dropped 0.7% against the dollar, and the Chinese central bank has had to battle to stop it from falling even further. 
But the pick-up in hot money outflows is also having an impact on Chinese asset prices. There’s little doubt that the huge capital inflows over the past decade played a major role in pushing Chinese real estate and equity markets higher. Now that they’ve changed course, Chinese asset prices are deflating. The Shanghai Composite Index is down 17% compared with a year ago, while Chinese house prices remain under pressure. 
Beijing will be deeply concerned that falling asset prices are savaging business confidence and causing investment to slide, crippling its attempts to revive the flagging Chinese economy.
This article originally appeared on <a href="https://www.businessspectator.com.au/" target="_blank">Business Spectator.</a>
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Chinese buyers bolstering Sydney luxury property, but Chinese property market under pressure

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Australia could face a balance of payments crisis if a sharp slow-down in China results in a slump in export earnings at the same time that imports of capital goods soar as miners hurry to finish their major investment projects. According to the latest budget projections, Australia’s current account deficit is expected to swell to 4.75% of GDP in 2012-13, and to 6% of GDP the following year.  According to Treasury, the deterioration reflects the fact that the trade balance is likely to fall into deficit as miners step up their imports of foreign-made investment equipment while export earnings sag as a result of lower commodity prices. At the same time, Treasury expects that Australian consumers will take advantage of the strong Australian dollar by spending more on overseas travel and imported consumer goods. Import volumes, it says, are likely to rise by 7.5% in 2012-13 and by 5.5% in 2013-14. Even though commodity prices appear to have peaked in the third quarter of 2011, Treasury expects that our export earnings will remain relatively buoyant in the next two years, due to continuing strong demand from China and India. Australia’s coal and iron ore exports are likely to rise, following major expansions in resource projects in Western Australia and along the east coast, while rural exports are expected to remain at historically high levels. Still, the strength of the Australian dollar is proving to be a handicap for exporters of elaborately transformed manufactured goods, and for firms that sell services – such as tourism and education-related travel – to foreigners. But Treasury’s forecasts are based on the assumption that China’s economic growth will remain robust, even though its largest export market, the European Union, is slumping deeper into recession. Treasury is forecasting that China will notch up a growth rate of a little over 8% a year for the next three years. If China’s growth rate stumbles, we could see an alarming blow-out in Australia’s current account deficit. The problem is that the extremely long lead times involved in developing major resources projects means mining companies are committed to spending huge amounts of money buying foreign-made capital goods and equipment. As Treasury itself notes, despite the continued uncertainty over the global economy, “the resources sector has committed to, or commenced construction on, over half of the estimated $456 billion resources investment pipeline.”  Even if a sharp drop in Chinese demand caused global commodity prices to slump, it would be difficult for the large mining companies to pull out of major investment projects now under way. As a result, miners will find it difficult to scale back their purchases of foreign-made capital goods and equipment, which will mean that our import bill will continue to soar. A slump in commodity prices, however, would see our export earnings collapse. Already Treasury is expecting that increased global supply will weigh on commodity prices in the next two years, and that our terms of trade (the relation between export and import prices) will decline by 5.25% in 2012-13 and 3.25% in 2013-14. The risk is if Treasury’s assumptions about China’s growth prove to be overly optimistic. If the brutish combination of surging imports and a collapse in export earnings were to push our current account deficit to, say, 8 or 9% of GDP, we could see international investors become very anxious about lending to Australia. In that situation, our banks could find it much harder to raise money in offshore markets, and would likely have to pay higher interest rates to access funding. Meanwhile, the Australian dollar would collapse, pushing up the cost of servicing our foreign debt. And it would probably take some time before Australia’s tourism, education and manufacturing sectors felt the benefit of the lower exchange rate. Australia would be caught in a current account deficit trap, unable to curb its voracious appetite for imports, despite a slump in export earnings.
This article originally appeared on <a href="https://www.businessspectator.com.au/" target="_blank">Business Spectator.</a>
 
 
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If China's economy stumbles, Australia's deficit will soar: Karen Maley

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The US share market faced a stark reality check earlier this month, with new data showing that housing prices in 20 major US cities dropped in December to the lowest level since the housing crisis first began in mid-2006.

As the Dow closed above 13,000 for the first time since May 2008, investors were optimistic that consumer confidence data, which showed the strongest sentiment in over a year, was indicative of a strengthening US economy. 
But according to the S&amp;P/Case-Shiller index, home prices in the final three months of 2011 fell 4% from the same period a year earlier. Nineteen of the 20 cities measured saw a year-over-year decline in housing prices, with Atlanta recording a 12.8% drop. Detroit, where prices rose 0.5%, was the only bright spot.
On a monthly basis, house prices dipped 0.5% in December from the prior month after adjusting for seasonal variations. As S&amp;P’s David Blitzer noted, “if anything, it looks like we might have re-entered a period of decline as we begin 2012.”
Although US house prices have already fallen around one-third from their peak, the market looks set for further troubles. An estimated five million houses in the United States have been lost to foreclosure since 2006. But banks look likely to seize more than one million US homes this year. The foreclosure process had been jammed since 2010, but the Obama administration’s recent $25 billion settlement with major home lenders over foreclosure abuses means the banks are now free to resume repossessing houses. As a result, the housing market looks set to be flooded with even more distressed sales, which will drag US housing prices even lower.
But as Robert Reich, the former US Secretary of Labour under President Bill Clinton, points out, the fall in the housing market has dire effects for America’s middle class, which is already squeezed by falling real wages and rising petrol prices. And with consumer spending making up 70% of the US economy, any robust economy recovery must involve America’s vast middle class.
In an article in the Financial Times, Reich points out that because houses are the major assets of the middle class, most Americans are now far poorer than they were six years ago. At present, almost one in three homeowners with a mortgage is now 'underwater', meaning that they owe more to the banks than their homes are worth.
Reich points out that we’re seeing a huge shift in how Americans view their homes. From the end of World War II on, houses were seen as safe investments, because housing prices rose continuously. In the 1960s and 1970s baby boomers took out the largest mortgages they could afford, and watched their homes grow in value.
As he points out, in the housing boom, homes morphed into ATMs, with Americans using them as collateral for additional loans. Most people assumed their homes were their retirement savings. When the time came, they’d sell up, move into a smaller unit, and live off the capital gains.
But plunging housing prices has changed all this. Young people aren’t buying homes anymore, instead they’re renting. They’re no longer confident that they can get, or hold, jobs that will allow them to reliably meet their mortgage payments. Middle-aged couples are underwater, or unable to sell their houses at prices that would enable them to recoup their initial investment. They can’t move to find employment. They can’t retire.
Reich notes that so far the Obama administration has tried to rectify the housing market’s woes by relying on low interest rates, and by making it easier for homeowners who have kept up with their mortgage payments to refinance their underwater loans. But he argues that, in the current circumstances, these steps are simply not enough.
As a result, Reich argues that “the negative wealth effect of home values, combined with declining wages, makes it highly unlikely the US will enjoy a robust recovery any time soon.”
This article originally appeared on<a href="https://www.businessspectator.com.au/" target="_blank"> Business Spectator</a>.
 
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Karen Maley

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