It's a vendors market in Australia at the moment, but how many Australians can afford to buy? Photo: Rob Homer
The "wall of Chinese capital" hitting property markets in Sydney and Melbourne will not ease up until the government introduces its anti-money laundering legislation, says an expert in 'flight capital'.
James Tee, an ethnic Chinese property developer whose business specialises in "capital expatriation" – that is, getting money out of China and into his property developments in Malaysia – told Fairfax Media the exodus of capital from China was accelerating, thanks to the government's anti-corruption drive.
"We have been tracking this for two years," says Tee. Those outflows from China are compounded by the flight of capital out of Canada which is now "bursting" to find a home in Australia.
"There is a mountain of liquidity. China is bursting with flight capital," says James Tee.
"There is a mountain of liquidity. China is bursting with flight capital," says James Tee. Photo: Supplied
Due to the bubble in Canadian house prices and ensuing concerns over social dislocation, Canada's government shut down its investor visa program last year. Some 40,000 Chinese visa applicants with a minimum loan to governments of $C800,000 were handed back their capital.
"That's roughly $32 billion," says Tee. "The Canadian government said: 'We don't want your money anymore' and that capital is now hitting the Sydney market."
"There is a mountain of liquidity. China is bursting with flight capital. They can't go to the US, they can't get it into Singapore anymore, or Hong Kong."
As reported here last month, there is at least a partial solution to the problem of housing affordability in enforcing the Anti-Money Laundering (AML) legislation the government promised to introduce eight years ago. Despite international pressure, however, successive Australian governments have dithered on introducing the second tranche of AML which covers real estate.
Tee says that if real estate agents were required to comply with AML – as was already required of fund managers and casinos – the bulk of the capital inflows would cease, and therefore moderate the rise in house prices.
The $US50,000 limit on exchanging Chinese currency into $US and $A was being breached in the majority of Chinese property deals in Melbourne and Sydney, and once the AML laws were introduced, the "wall of capital" from China would dry up.
Tee, a colourful entrepreneur educated at Harvard, admits he is "talking his own book". As a Malaysian property developer, his Titan Square project in Malaysia stood to benefit from Chinese capital, so he had a vested interest in Australia addressing the problem of excessive Chinese capital inflows in metro property markets here.
Nonetheless, he makes a valid point. Property prices in Sydney and Melbourne don't reflect market fundamentals as Chinese investors are not worried about a property crash since their principal objective is parking money in a secure environment offshore rather than achieving an investment return.
"That means they can afford to take a 20 per cent to 30 per cent haircut," says Tee.
"Sydney becoming like Singapore and Hong Kong where an entire generation has been locked out of the property market. There are social consequences for this.
"I don't think anybody understands just how much money is coming in. The anti-corruption drive in China … they [the government of Premier Xi Jinping] are really serious about it".
Indeed, the dramatic effects have been felt in Macau where the crackdown on black money leaving China has seen gross gaming revenues drop by 39 per cent in the month of April, representing 11 successive months of decline.
"Obviously the slowdown in Macau is more severe in truth than any of the operators foresaw. I don't think any of the operators could have predicted what has happened now," James Packer told CNBC last month. "As an Australian investor in China and Macau, it's very hard to be critical of a corruption crackdown ... [but] when and how that ends is something that no one knows."
Packer's Crown casino business has large casino operations in Macau.
Tee says recent figures in the media which put Chinese investment in the Sydney property market at 25 per cent of total sales were too low. He says it might be twice this level but it is hard to tell because of the lack of transparency on ownership.
Most Chinese purchases hide behind trustees and proxies. Third parties such as friends and relatives were often used.
"Chinese students are being paid 2 per cent of the purchase price of the property to purchase property on behalf of relatives," says Tee.
Another person au fait with Chinese property transactions in Australia told Fairfax Media it was simple for Chinese investors to get around the foreign capital restrictions.
"The money never really moves. In a simple example, Kunlun is a forex trading and money exchange company. It has bank accounts in many countries with significant cash balances. So if someone wants $40 million in Australia they put the money in a Kunlun China account and Kunlun transfers the money from their Australian accounts to the person's friend's Australian account.
"Kunlun is just one example – any large trading multinational will hold large reserves of cash in each country so they can effect a transfer with an internal paper transaction. No banks or government scrutiny involved. And given that they don't do effective reporting in this country, who will ever trace it?
"The current situation is that one of the best assets a local Chinese can have is a permanent Australian residence. They will have 'friends' lining up to 'loan' them money to buy properties in Australia.
All the government needs to do is follow the cash."
Sadly, for a generation of young homebuyers it seems the government is not interested in following the cash. Otherwise our politicians, of both major parties, would have introduced the second tranche of AML legislation by now and real estate agents would have to prove that their clients' funds were legitimate.