Massive Chinese Capital Inflows will Shift World Wealth

Economics, Premium POM

Expect Real Estate Reversals in Vancouver, Toronto and Sydney

By JC Collins

In the coming years we can expect that a massive reversal in capital outflows from China will take place.  This reversal and expansion of capital inflows will be a direct result of the liberalization of the renminbi and the deregulation of Chinese financial markets.

The forthcoming RMB bonds will be gobbled up by foreign asset managers from around the world as the new SDR composition containing the RMB comes into effect this October.  The process and issuance of RMB bonds will be slow at first and will pick up pace with each passing month and year.

Do not expect that this will happen overnight and cause a collapse of the US dollar.  The shifting of wealth between the USD denominated assets and RMB denominated assets will take place over an extended period of time.

The development and inclusion of an SDR bond market will extrapolate the increase in RMB bonds and Chinese capital inflows.  China itself will issue large amounts of SDR bonds and directly contribute to the growth of an SDR liquidity market.  It should be considered that the growth in SDR liquidity and RMB liquidity are connected through a need to diversify world wealth and shift existing imbalances.

The capital outflows from China which have been taking place for years now have exported potential additional bubbles from the Chinese mainland to real estate markets around the world.  Such bubble markets from Chinese investors exist in Vancouver, Toronto, and Sydney.  There are others but these three specifically have experienced catastrophic valuation increases.

As Chinese financial markets become more open and foreign asset managers begin to take advantage of the new bond markets of the RMB and SDR, the capital will be pulled from these regions and the real estate markets will experience a severe lack of buyers with enough money to purchase the homes which have been inflated.

A recent publication titled China: The New Frontier for Foreign Asset Managers presents a compelling case for an increase in Chinese capital inflows.

  1. Strong Fundamentals
  2. On-Going Deregulation
  3. Product Innovation and Cross Border Opportunities.

The publication explains that:

“Previously, the market was only open to a handful of foreign investors, and there was a strong bias toward public sector investors; now it’s been opened up to nearly all investors”

For those worried about the recent volatility in the Chinese markets the publication states:

Despite a recent economic slowdown and high market volatility, China shows robust long-term fundamentals to support a growing asset management market.”

The International Monetary Fund and the Bank for International Settlements would tend to agree, as they are moving forward on the multilateral monetary transformation.

The shifting of world wealth does not mean that the US will experience a downturn.  In fact, I’m expecting the United States to experience massive capital inflows as well as demand on the dollar decreases and it can depreciate to a level which would encourage growth in American manufacturing and exports.  Real wealth will shift back into America.

The sloshing of global liquidity will cause some volatility as a new equilibrium is established.  Do not panic and think the world is about to end.  Some will gain while others will lose.  That is how the system functions, such as it is at this time.  – JC