It’s no secret that China has a housing bubble and that Peking policy makers are attempting to deflate it. A typical Peking apartment now costs approximately 22 times average incomes in the city and with savings rates low and the stock market in the doldrums….what’s a Chinese investor to do?. Absent a social safety net like we have here in the US, real estate continues to be the only option for flush Chinese investors and we have heard reports of some buying 5 to 6 apartments to help them “save” for their retirement future. This creates a problem for policy makers who, in the middle of a housing boom, are trying to provide affordable housing to the massive number of people who are moving from rural communities seeking a better life in the cities. This unfortunately has lead to unhealthy economic policy that moves in fits and starts
What are government policy makers to do? Well…why not recommend to investors that they buy real estate in the US?….it is cheap relatively speaking and deals can be had for the shrewd Chinese investor. And in fact, the Chinese government is recommending doing just that. Earlier this week, in a newspaper considered a voice of the Ministry of Commerce, the “International Business Daily”, there were a series of reports discussing whether it’s a good time to buy US real estate and what cities to focus on. As well, the US National Association of Realtors reported recently that China was the fourth largest source of foreign home buying in the US after Canada, Mexico and Great Britain.
Clearly, astute Chinese investors have already seen the opportunity and are looking for a way to diversify their investments and take advantage of the drop in US property and the huge number of foreclosed properties here…California naturally is a beneficiary of this trend thanks to the stronger Yuan and the Chinese government’s attempts to achieve a soft landing for their economy.
One problem has surfaced though and policy makers here in the US should take note as they rethink tax policy. Currently the US taxes capital gains at a rate of 23% for foreigners who own US real estate whereas in London there are no capital gains taxes levied.
Think of the opportunity to bail our real estate market out…in a best case scenario…in a quid pro quo bilateral arrangement between the US and China…China liberalizes their capital account, allows the Yuan to free float and approves the free flow of capital across their borders and in return we allow freer access to our economy and capital markets (including real estate) via broader free trade agreements and tax reform…..that would go a long way toward solving many of the worrisome Sino American economic imbalances that still exist….including providing an even bigger bid to our ailing real estate market and by extension providing much needed economic growth.
Unfortunately…the probability of this scenario occurring is low because A) The Chinese leadership is too shortsighted and wedded to their “Capitalism with Chinese Characteristics” which includes their confining command and control methods; and B) our parochial political leadership here in the US, on both sides of the aisle, who lack the bravery and foresight to think out of the box…pity! So for now China investment here in all asset classes will remain a trickle…when with the right mutually beneficial policy mix it could be a flood!!
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