***This blog entry is a guest post from Elton Steinberg, Marketing Associate at United Realty***
American fund managers should be aware of current and future trends that may make the Chinese account for a more significant portion of overall foreign investment in United States real estate. A variety of economic and political conditions in China are making investing in US real estate increasingly attractive to Chinese investors; these include a newly wealthy segment of the population looking to find a safe haven in which to deposit wealth, the threat of an economic slowdown, and the economic policies the government is implementing to liberalize the economy.
China’s impressive economic growth in past decades has enriched many who now look to invest funds abroad. Government policy strengthening manufacturing – along with an artificially weak renminbi and investments in infrastructure and housing – transformed China into the economic power it is today. The country’s rapidly developing economy has been unique in that it has been able to move hundreds of millions out of poverty, while simultaneously forming a wealthy oligarchy. Developments in recent years, however, threaten to undo past trends, encouraging wealthy individuals to make relatively safe investments in US real estate.
A number of changes are likely to come about with regard to Chinese investment in US real estate in response to the threat of economic slowdown and subsequent action by the Chinese government. Although a healthy dose of skepticism about the historically conservative Chinese central bank enacting widespread economic reforms would be appropriate, a recent economic slowdown in China is pressuring Chinese policymakers to adapt, lest limited economic growth lead to political turmoil. To stimulate the economy, the Chinese central bank will likely loosen restrictions on foreign investment and allow the currency exchange rate to fluctuate. Fewer regulations hindering the flow of capital will provide Chinese investors more opportunities to invest abroad, while a more volatile renminbi will prompt Chinese investors to look for a safe haven. Both policies will increase the likelihood that Chinese investors will choose to deposit funds in the US.
Any economic policy changes, however, might be too little, too late. China has for decades relied on an export driven economy. To achieve growth, state sponsored projects have drawn on a cheap supply of labor to minimize expenses. The cost of labor has, however, risen, limiting China’s comparative advantage. As the economy continues to mature, the Chinese government will have to enact reforms to allow domestic consumption to drive economic development and achieve sustainable growth. It is still an open question whether or not the Chinese government has power or even the political will to alter the course of the economy fast enough. If the government cannot sufficiently address a number of underlying weaknesses in the economy, subsequent instability will also likely motivate many Chinese investors to move wealth abroad. As it stands, it seems that Chinese investors will eye assets abroad, whether or not government reforms manage to stimulate growth.
Keeping the risk of US government action against those seen as threats to national security in mind, American fund managers should seriously consider the benefits of attracting investment from Chinese investors. Current trends are making acquisitions of US real estate enticing to the Chinese. American fund managers should also not be thrown off by Western names adopted by investors from East Asia. It cannot be denied that they mean business. If the current trends aren’t convincing enough, perhaps American fund managers should consider that China is looking to invest $3.4 billion of foreign currency in safe, inflation protected assets.