It’s China’s Turn To Play
The opinions expressed in this article are ahansen’s, and do not necessarily reflect those of the owner, administration, or readership of thehousingbubbleblog.com.
“Shadow Inventory” May Not Be So Shadowy After All….
I recently spoke with a dear friend in Singapore. An international arbiter by profession (or arr biter as he likes to call himself,) “Softhawk” is the go-to guy when somebody’s harbor leaks into someone else’s international trade center and each party wants someone else’s insurance companies to pay for repairs.
Over the last twenty years Softhawk has correctly predicted the unlikely ascendancy of then-governor G.W. Bush, (“Because he is God’s anointed on earth,”) the build-up and eventual bursting of what came to be known as the dot.com bubble, (“Do any of these people even know what dotcom means?”) the rise of Shanghai/Guangzhou as international centers of raucous, unbridled capitalism, (“They’re building like it was 1980.”) and the collapse of the Thai baat, (“I’m trying to corner the market on suitcases.”)
Let’s just say the man is connected.
So when he told me that in this last year Chinese investment has quietly shifted its US focus from Treasuries to REIT’s, I took notice. After all, China’s official sovereign wealth fund, CIC, just announced its intended purchase of 2B worth of US REITs via the Treasury’s Public-Private Investment Program, PPIP; (this within a few hours of the FED’s announcement that Treasury would no longer be buying back some 300B USD of its own bonds.)
(Note: the PPIP matches whatever a private investor puts up, then credits six times as much capital—with the FDIC guaranteeing the debt.)
And this is just the “official” investment. According to Softhawk, China has also been busily buying up huge swathes of Africa and Mexico in the last 18 months, and now controls a majority of the deep water ports along the western coast of North America– as well as both mouths of the Panama Canal.
Given all this investment out of de-monitized Treasuries, coupled with the severity of the American housing crash, perhaps not all that “shadow” housing inventory we’ve assumed the banks have “just sitting there” actually is just sitting there. What if a lot of those houses we thought the banks were “holding back” have already been bundled and sold to sovereign wealth funds? Or more likely, bundled, leveraged, and sold as US banks wholesale their losses to the Chinese. As unlikely as it seems, maybe when the NAR crows about an “uptick” in sales, (and at those maddeningly sticky price points,) for once they’re not lying? Apparently there actually are “ rich foreigners” out there. And some of those endless blocks of empty overgrown houses with no “For Sale” signs out front have been sold off to them in bulk. Cheap.
Japanese redux?
In the mid-to-late 1980’s one could drive down miles of Wilshire Blvd and marvel at the thousands of empty luxury condos and office buildings sitting vacant—sometimes for years– and wonder if “The Japanese” really did have enough money to just buy them as pieds- a- terre in case they happened to be in town or needed a place to stash a girlfriend. The silent towers all had tasteful offering signs with absurd asking prices, and no one was buying– yet new buildings kept going up.
Then Sony bought Columbia Pictures, and Toyota announced it was moving its manufacturing plants into the United States. At the very zenith of the commercial real estate bubble (or nadir, depending on where your money was stashed,) a Japanese consortium bought Pebble Beach Golf Club and golfers everywhere despaired—was nothing sacred? Were the Japanese fated to be everyone’s landlords?
For those of us renting (bitterly,) from the sidelines, it was good fun to watch American business interests’ xenophobia competing with their greed. Despite all the patriotic breast-beating and thinly-disguised racism, greed won out every time.
As it turned out, Pebble Beach was that bubble’s Last Hurrah. Things turned very sour very quickly and we all know what happened to the Japanese economy.
And now, apparently, it’s China’s turn to play. It makes sense, of course, for when the dollar officially devalues—as it ultimately must—instead of holding worthless paper, Chinese investors will at least be holding hard assets. Overpriced, certainly, and likely highly leveraged, but real estate nonetheless. Conversely, it would appear that the US has been quietly wholesaling its enormous losses to China. A win win for everyone except us worker bees on both sides of the Pacific, the ones who still have savings accounts.
Make money, not war.
It is notoriously difficult for Chinese nationals to purchase properties in the United States. The yuan is not easily converted to USD, (132B in a suitcase notwithstanding,) and unless one already has assets in the US, the State Department makes it very difficult to acquire any. (We all remember the brouhaha that resulted when China tried to buy Unocal.) But REITs, especially REITs subsidized by US savers, (then matched and leveraged 6x by Treasury and guaranteed by FDIC!) Well, apparently that is doable.
Consider also, that wealthy, politically-connected Chinese have been sending their children to American universities ever since Nixon officially reopened the two countries to trade in the early 1970’s. With the advent of rampant Chinese capitalism and the proliferation of Chinese-owned multi-nationals, a whole new generation of upwardly-mobile tycoons is seeking a hot new status symbol for their children… an American spouse.
Just as a generation of American heiresses was loosed upon an impoverished-but-titled Great Britain in the days of the Robber Barons, so now is a generation of young, mostly male Chinese from powerful families seeking landed (or landable,) American citizens to marry– and buy property with.
A case in point:
Ten years ago my blonde-haired, blue-eyed American niece, lacking appropriate employment after graduating from a venerable US university with a useless degree, expatriated and established herself as an English teacher and part-time television commentator in Jenin, PRC—where the jobs were. The number of well-bred, well-educated American kids who have taken this route may surprise you. It did me. ESL brokers now recruit on nearly all US college campuses, and they’re having a banner year.
Surrounded every day by smart, wealthy, and ambitious young “communists” all eager to learn English and make lots of money, she had a perfectly lovely time for several years, and eventually fell in love with and married the young son of the Agricultural Minister for a large southern province. (A State cabinet position similar to say, the California State Water Commissioner, this is the guy who gets executed if SARS takes hold in the province.)
Although the Minister lives (by our standards,) modestly in a State apartment, at the wedding banquet he and his wife gifted the newlyweds with not only matching gold watches, and a new car, but with a new home as well. In San Diego, CA. USA,–where the groom was set to pursue his MBA.
For “Ba’ba” it was an expedited way to get a half a million out of China and into a US investment. For his son, the sum provided a toehold in a new economy (relatively) free of the political oversight the US State Department would impose. For my niece, it was a dream come true–an adorable husband with international connections, and a nice house in San Diego close to the beach.
Now happily ensconced and not at all concerned with the fact that their home has lost 40% of its value, my niece, who speaks fluent Mandarin and not-bad Cantonese– as well as SD Homeboy Spanish– has combined her love of event planning (she used to put on raves in the CA foothills,) with her language skills, and with a further infusion of funds from Ba, has a thriving business bringing Chinese businessmen into Mexico City then facilitating their financial acquisitions there. Business, she says, is booming. Her husband will complete his MBA next year.
Next project on their agenda? A full-service real estate agency for Chinese investors interested in purchasing defunct US housing tracts and commercial buildings. I gave her the number of a commercial banker friend who has been desperate to unload toxic commercial properties in San Diego and San Bernardino Counties. Apparently they hit it right off.
This new American family is being duplicated all across the country by a generation of kids for whom international borders are essentially irrelevant, and fear of The Foreign a quaint joke.
So, before everyone starts freaking out about outsourcing and national identity– and Asian Hoardes turning the west coast into China’s Sudetenland– please try to keep in mind that with cultural melding comes a new cultural dynamic…and often a whole lot of money. Singapore for example, has in only forty years became an international investment center and economic powerhouse despite having a population about the size of Phoenix—and a hugely diverse one at that. Those who are concerned that an army of “excess” Chinese males may soon resort to mayhem and invade our Kentucky Fried Chicken franchises, have missed the point –they already have invaded –and married our wimmins.
Perhaps we may take comfort in the knowledge that in general, folks are far less likely to blow up their own investments –let alone their own relatives. Whether Chinese investments in American real estate blow up in their faces, however, remains to be seen.
ahansen
