China's capital controls are working, and that's bursting the global real-estate bubble

More news on the Chinese crackdown on money-laundering and its impact on the global property bubble: the controls the Chinese government has put on "capital outflows" (taking money out of China) are actually working, and there's been a mass exodus of Chinese property buyers from the market, with many abandoning six-figure down payments because they can't smuggle enough money out of the country to make the installment payments.

The market is being kept on life-support by Chinese money-launderers who smuggled their cash out of China before the controls came in; they're using their offshore cash reserves to make payments on the properties they've speculated on (presumably they can access even more capital by remortgaging some of their properties). There are also big-money speculators who have the sophistication needed to circumvent the capital controls.

But the median speculator/money lender is dead in the water, it seems. With demand softening, it is likely that there will be a collapse in housing prices (luxury houses first, but then "normal" properties in overheated markets like Seattle and London, bought as teardowns with the intention of erecting McMansions), which could trigger a cascade of sell-offs. First, because the big-money investors who can evade the controls will see their investments declining in value and liquidity — this latter is very important, as the real-estate bubble has created the historically unique situation in which property is extremely liquid, with owners being able to sell off and get their cash out in a matter of days or weeks, allowing for much more leveraged speculation — and second, because banks will make margin calls on mortgages that are "underwater" — asking for immediate payment in full on properties whose valuation is suddenly lower than the speculators' outstanding debts to the banks.

The more sell-offs, the lower the prices will go, and the more sell-offs there will be. For example, about one third of buyers in London's iconic Spire tower have actually made the payments they had promised to make. If 30+% of units in The Spire suddenly go on the market, the remaining units would likely see a decline in value. Skittish speculators might spook at that point, selling their units, triggering more price declines and more sales.

This also bodes ill for the recent Bitcoin bubble, which has been almost entirely driven by Chinese money-launderers. The Chinese government has the whip-hand over the blockchain. There are Chinese miners who have enough compute-power to compromise the entire ledger, but who choose not to out of a combination of stewardship for the blockchain and self-interest in the continued stability of cryptocurrencies. But these firms could be coerced by Beijing into injecting much mischief into the blockchain as a means of scaring off potential money-launderers from using Bitcoin to evade the capital controls. Just the threat of such action may be enough to make the biggest miners into willing deputies for the official anti-laundering measures, with the companies taking "voluntary" measures to prevent the use of cryptocurrencies to get around export controls (for small-fry launderers, at least — those with political clout may still find a warm welcome in cryptocurrency circles).

"If it's too difficult, I'm out,'' said Mr. Zheng, 66, a retired civil servant in Shanghai who declined to give his first name to avoid attracting regulatory scrutiny. He may abandon a 2.4 million yuan ($348,903) home purchase in western Melbourne, even after shelling out a 300,000 yuan deposit last August. He's due to make another big payment next month.

The change spooking Zheng and his compatriots came in a statement from the State Administration of Foreign Exchange on Dec. 31, hours before the reset of Chinese citizens' annual foreign currency quotas. Among other requirements, SAFE said all buyers of foreign exchange must now sign a pledge that they won't use their $50,000 quotas for offshore property investment. Violators will be added to a government watch list, denied access to foreign currency for three years and subjected to money-laundering investigations, SAFE said…

…For Zheng, the decision on whether to walk away from his Melbourne property or risk breaking China's foreign-exchange rules is fast approaching. He's scheduled to wire another 800,000 yuan to Australia in late February to cover the rest of his down payment.

"I can probably meet future mortgage payments with rental income from the villa, but a more imminent problem is whether to wire money abroad now," Zheng said. "I'm not too sure about that. It's safer not to stick my neck out."

China's Army of Global Homebuyers Is Suddenly Short on Cash
[Emily Cadman, Sharon Smyth, Dingmin Zhang, Prashant Gopal, and Emma Dong/Bloomberg]

(via Naked Capitalism)

(Image: The Slow Down Show)