China is cracking down on flight capital, starting with Australian banks. As the most casual readers of the business press know, the international wealthy, particularly Russians and Chinese, have been using residential real estate in “world cities” as their favorite lockbox. As we’ve written, it’s stunning to see how much real estate has been hoarded in London. Mayfair was depopulated during the petrodollar recycling of the 1970s; now much of Belgravia, Chelsea near Sloan Square, and Kensington are visibly underpopulated. Vancouver has been bid to the sky by Chinese flight capital. New York is a big destination for Russian and Chinese investors, and Chinese money has been pouring into Australian real estate.
The Chinese move may be an admission of stress on the financial system. Victor Shih predicted the risk of Chinese capital flight in 2011, and also said it would take some time to manifest itself. From our post then:
We’ve written about Victor Shih’s work on Chinese banks and wealthy households. He argues that the Chinese financial system and economy are at risk if enough capital moves overseas. While the release of this video is coming at a juncture when the US and Europe seem to be engaged in a beauty contest between Cinderella’s stepsisters, Chinese business have been making aggressive investments in other economies as well, such as agricultural land in Africa, so it’s worth remembering that advanced economies are far from the only targets for offshore funds.
See this report from MacroBusiness for more on Chinese saber-rattling toward Australian banks. If the news media starts reporting about efforts to block flight capital directed at other nations’ banks, that would bear out Shih’s hypothesis, that the outflows are hitting a level that is starting to be unhealthy for the Chinese financial system, and the authorities are trying to stave off bad outcomes.
This piece is cross-posted from Naked Capitalism with permission.