China, the Feds, and the End of Real Estate
China has a number of problems causing its economy and stock market to shrink. The biggest is the slowdown in manufacturing.
Caixin Media Co. said Monday that its China Manufacturing Purchasing Managers’ Index was at 48.2 last month, down from 48.6 in November. This is the tenth straight month of a below-50 reading for the index. A reading below 50 indicates a contraction in manufacturing activity.
Conditions continue to deteriorate. China has too many factories and falling demand. Signs are everywhere.
Exports from China have been falling for five years. Exports to China are also down. Exports from Africa to China — mainly commodities for use in factories — were down 40% in 2015.
China's number one problem is balancing supply and demand in a deleveraging process. This is always painful.
In 2012, the Communist Party General Secretary Xi announced an anti-corruption campaign — with good reason.
In 2014, China ranked 100 on the corruption scale. This is right up there with Suriname, Liberia, Mexico, and Niger. That's not good company.
The fight against this vast and widespread graft has taken its toll. The share prices of luxury goods producers have dropped precipitously, and revenue in the gaming houses of Macau has been destroyed.
Several top politicians and bureaucrats have gone to jail, and a much greater number of mid-level flacks have as well. There have been headlines of late about Chinese billionaires disappearing. No one knows if they are in jail or on the lam.
Just look at these headlines:
The “Warren Buffett of China” Disappears — Forbes
Another Chinese billionaire has disappeared — CNN
Metersbonwe's Billionaire Chairman Goes Missing — IBT
Two days ago, Xi called for a China in 2016 where nobody dares to be corrupt. The president said he will hunt down 1,000 economic fugitives who have fled overseas.
Currency Devaluation/Money Fleeing Abroad
Obviously, if you are one of those who might be in the crosshairs, you'd want to get out of Dodge. The smart money that took Xi at his word in 2012 started moving money out of China by buying real estate in other parts of the world, from Vancouver to Dubai.
Money is still flowing out of China as the yuan drops. Even aboveboard operators are looking for better returns overseas. China saw its foreign exchange hoard drop 13.3% in 2015, or by $500 billion, to $3.3 trillion by the end of December.
Xi is trying to stem the flow, and it looks like he made a deal with U.S. Treasury Chairman Jack Lew.
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Real Estate Bubble 2.0
In a shock to high-end realtors in New York, the Treasury Department just announced that it will start to identify and track secret buyers of high-end properties. It will start in Manhattan and Miami-Dade County.
According to the New York Times, this is the first time the federal government has required real estate companies to disclose names behind cash transactions. Future investigations will go after those who assist in money laundering including real estate agents, lawyers, bankers, and LLC agents.
This means that the game of moving hot money out of China and into U.S. real estate is over. It would also suggest that the bubble in $700,000 crap shacks in California will soon end.
That's right. Those bureaucrats that made fortunes in the China Dragon days are getting squeezed.
All the best,
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.
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