There is a link, albeit not immediately discernible, between the seemingly never-ending flow of real estate purchases made by wealthy Chinese in premium locations, and the overseas investments in infrastructure made by Chinese firms and funds. Net of all the rhetoric and hype surrounding the “Belt and Road Initiative” (BRI), these two pools of investments have much in common: while they are the effects of issues troubling the Chinese economy, they are also causes of the distortions currently affecting developed economies.
The size and growth rate of these two financial streams indicate the scope of these phenomena and their underlying dynamics: only last year, Chinese buyers invested USD 33 billion in overseas commercial and residential property, marking a year-on-year increase of nearly 53%. Although initially limiting their activities to Canada, Australia and the United States, Chinese buyers have now started to lead in the European real estate market. Similarly, between 2006 and 2016, Chinese infrastructure investments in Europe have witnessed an eightyfold increase. It has become very rare for scheduled infrastructure projects or infrastructure assets on sale worldwide not to feature an actual or potential Chinese investor.
Judging by a number of recent public statements, this trend is expected to continue. COS Capital, for instance, has announced its intention to invest up to EUR 1 billion in the European real estate market. A similar statement was made by the Silk Road Fund, which seeks to direct a substantial part of its USD 40 billion firepower to infrastructure investments in Europe.
The main root of these two phenomena is an impressive and constantly growing gap between the funds available to Chinese investors and the lack of domestic opportunities available to them. The Chinese middle class continues to grow at an astounding rate in absolute numbers, as a percentage of the population, and by purchasing power. While this combination of factors is not matched in the corporate sector, the almost unstoppable flow of credit gives Chinese firms – mainly but not only large in size and state-owned – plenty of funds to invest in real estate and infrastructure projects abroad.
These funds cannot be deployed domestically, or only to a very limited extent, for a number of reasons peculiar to China: its real estate market seems to be stuck in a permanent and ever-expanding bubble. While many observers, particularly in the West, have constantly predicted an imminent burst of the bubble, repeated interventions by central and local authorities have succeeded in maintaining it intact. House prices continue to grow at an even faster rate due to a number of factors such as urbanization, a complaisant banking system, and peculiar demographic and social conditions.
It thus comes as no surprise that members of the expanding Chinese middle class, whom to a large extent already own properties, have no incentive to invest in their domestic real estate market. It is in this context that properties in prime locations across Europe, North America, Southeast Asia and Australasia have become particularly appealing. Similar dynamics are arising in the realm of infrastructure, where excessive investments and excessive reliance on infrastructure for growth have led to a situation where most new infrastructure projects are destroying value rather than creating it.
From this perspective, one of the main drivers behind the significant increase in Chinese investments in European real estate and infrastructure projects and assets becomes clear: the possibility that returns may not be domestically available to investors. There are of course other contributing factors at both micro and macro levels, but expected returns certainly play a key role.
The gap between domestic and overseas opportunities (especially but not only in real estate and infrastructure) is such that, left to market forces, it would result in a destabilizing outflow of capital. This is in part what happened between 2015 and the beginning of this year, before the government crackdown on capital outflow started to produce its effects. The scale of this crackdown (a good indicator of the scale of the capital flight it addressed) was such that it delayed and in many cases torpedoed M&A deals and real estate purchases by Chinese investors worldwide. While effective, such a crackdown cannot be sustainable in the long run, and Chinese firms and individuals are not short of countermeasures to circumvent regulatory restrictions. A clear example of this is the extensive use Chinese investors have made of Bitcoin to funnel money outside of the country.
As per the receiving end of these two forms of financial flow, with particular reference to Europe, this situation does not seem to pose any risks. On the contrary, it could offer valuable opportunities at a key juncture in which economic and political signals seem to converge in favouring better EU-China relations. While steps have been taken by certain countries in the European Union to attract and facilitate the execution of investments in the real estate and infrastructure sectors, additional policies may boost and shape the inflow of Chinese capital, possibly turning it into a catalyst for a European economic comeback.
Edoardo Agamennone is Research Fellow at T.wai, and Senior Legal Advisor at EDF, based in Paris.
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