The instability of Chinese markets has driven many to look overseas for opportunities. Due to China’s slowing economy, the government has taken heavy measures to devalue the Yuan (RMB), often without any prior warning. In August of 2015, the government devalued the RMB for three straight days. While China likely made these measures to increase exports to boost the economy, it shook public confidence in the domestic market. This lack of confidence also probably contributed to the stock market crash in 2015. A cyclical process started. As the stock market fell, so did investor confidence. In addition, according to Alex Frangos, state-owned enterprises were ordered to buy back stocks. As a result, $3.5 trillion could have been put back into the market only adding to investor worries over inflation.
According to a semi annual report from the Department of Treasury, between $520 and $530 billion dollars left China for America in the first eight months of 2015. From a financial standpoint, the Chinese government flooding the market with cash caused this large sum. The government injected more cash into the economy to help industries after the recession and to lower exchange rates with the hopes to increase exports. This monetary policy combined with the previous government policies easing restrictions on moving money have helped Chinese investors move liquid cash abroad.
The United States must eventually restrict these investments. As more wealthy Chinese start investing and eventually immigrating to American cities, housing prices and the general cost of living will rise. The increase in costs will displace U.S citizens who will not be able to afford the change in expenses. Vancouver, the destination of many wealthy Chinese immigrants, already experience this type of gentrification. According to the Real Estate Board of Canada, housing prices in September 2015 were up almost 16 percent compared to the previous year.
As the cost of daily life and business go up, existing residents and business find it difficult to cope, causing discontent to increase among local populations. In Vancouver, the increased cost of living has led to ethnic tensions. Local governments never desire a heavily divided population. Therefore, in 2014, the Canadian government stopped its investor visa program, the program used by many Chinese to enter the country. The Ministry of Finance stated that participants were not making positive financial contributions though this statement has been criticized on racial lines.
Like Canada, the U.S. should also limit Chinese investment to avoid small housing bubbles. According to Zillow, housing prices in Palo Alto, California were up around 16.4 percent in January 2016 compared to the previous year. Chinese immigrants have been flocking to Palo Alto for years. Some have probably immigrated due to President Xi Jinping’s anti-corruption reforms. According to the Wall Street Journal, Xi Jinping has taken more measures to prevent wealthy Chinese from leaving. Chinese banks have increased efforts to hamper individuals wishing to move large sums abroad. As restrictions increase on moving liquid cash, Chinese demand for U.S. properties will eventually decline, causing prices to fall. Should the Chinese government decide to suddenly crackdown more on international wealth transfers, communities such as Palo Alto may see a sudden drop in property values, as if at the end of a housing bubble. Given Xi Jinping’s strong attitude towards corruption and emigration, it would not be surprising if the Chinese government imposes more drastic, sudden limitations in the future.
While the United States cannot predict when or if the Chinese government will impose more restrictions, it can take its own steps to slowly curb Chinese investment. One significant measure is to tighten restrictions on the EB-5 investor visa. The EB-5 visa gives a green card to anyone and his or her family if they invest at least $1 million in a commercial enterprise that can create or support at least 10 full time jobs. Many Chinese use the money invested in American properties as a way to fulfill the monetary requirement while using projects on the property to fulfil the job requirement.
The United States should increase the amount required to obtain the visa. Many Chinese investors can put down $1 million with ease. The United States could also decrease the cap on visas given per year and only offer them to the highest bidders. This would decrease the amount of people entering the United States with this visa while also maximizing investment in comparison to just a general cap. The U.S government should implement reforms slowly though. If the United States hastily restricts Chinese immigration, housing prices in cities like Palo Alto would drop rapidly, American investor confidence in the over all real estate market could shrink.
China must also do more to reverse the exodus of wealthy Chinese. The more investors buy American property, the more Yuan they dump on the currency market. While China has attempted to devalue its currency to raise exports, the increasing efforts to depreciate the Yuan in comparison to the U.S. dollar will only encourage investors to buy American properties faster to avoid further losses. While Chinese banks have stepped up monitoring if people are following existing rules that limit exporting money to $50,000 per year, this measure will not be enough in the long run. The lack of Chinese confidence in their domestic market is the root of the problem. To improve confidence, the government needs to take a more hands off approach toward the markets. By letting markets take care of themselves, investors will not have to worry about sporadic government intervention that has been historically hard to predict. When government intervention is necessary, the Chinese government should give investors warnings about what actions it might take in the future. This will allow investors to prepare ahead of time and give more certainty to the market. However, to make these approaches work, there must be consistency between different Chinese administrations. One aspect of not only market instability but also government instability is the ease with which policy can change with leadership changes in Beijing. Increasing domestic market confidence will enable Chinese to invest at home, something that may help China’s slowing economy.
While Chinese investors have helped the real-estate markets in certain areas, the benefits will not last forever. China does not need more of its affluent citizens leaving the country and the United States does not need to see small housing bubbles across the country. Both countries need to rethink current policies before these issues become bigger. When markets suddenly boom after a slump, not many think about the long-term effects of what will happen. At least on the part of the United States, the US government must not let the current success of Chinese real estate investment get in the way of looking at long term consequences.