KPMG warns of Chinese property defaults

The Australian 12:00am February 15, 2017

Glenda Korporaal

China’s crackdown on capital outflows could hit the Australian property market, with private Chinese investors having potential problems settling on deals, KPMG’s China experts warned yesterday.

“There might be some problems in the residential real estate property markets in Australia and other centres where Chinese have been buying property,” KPMG’s head of financial services in China, Simon Gleave, told The Australian.

Mr Gleave said the market was still watching to see the full implications of tighter controls on capital outflows announced late last year by Chinese government departments.

He said the measures, which involve stricter policing of existing rules and a crackdown on the nature of overseas investments by private and state owned enterprises, were designed to help stabilise the Chinese currency, following record amounts of capital flowing out of the country. “There has been a lot of concern about the currency,” he said.

“Last year an estimated $US800 billion ($1.04 trillion) flowed out of China. It is an astonishing amount of money to be leaving the country when you have a closed capital account.”

Mr Gleave said the tighter controls could particularly hit the offshore investments being made by private companies from China, particularly if Chinese authorities considered them to be speculative rather than as part of their core business.

“I am not sure that the government is going to be giving individuals permission to buy assets offshore as they have done in the past,” he said.

“I suspect that if you said in the past that you were going to buy a house in Australia because your kid was studying here, the answer might be now, you had better rent one.

“Exactly how much it could affect pricing in the property market I don’t know, but wherever there has been Chinese buying in the residential property market, there is going to be less interest than there has been.”

Mr Gleave said under the new measures an offshore investment by a state-owned enterprise in its core areas would be approved such as a state-owned bank buying into a bank offshore. But he said where a company was looking to make a very large offshore transaction or one outside of its core business in China, authorities could take a much tougher approach to requests to take foreign exchange out of the country.

The range of measures by Chinese authorities follow a plummet in China’s level of foreign exchange reserves from more than $US4 trillion in mid-2014 to about $US3 trillion at the moment.

KPMG’s partner in charge of Asia and International Markets, Doug Ferguson, said that a “comprehensive and definitive number of policy measures” had been announced by Chinese authorities in the last quarter of 2016 in response to the capital outflow. He said there had been a “massive spending binge” by Chinese state-owned enterprises and private companies in 2015 and 2016 that resulted in a $US725bn offshore investment.

Mr Ferguson said there had been a “very sudden squeeze on capital outflows” in the last quarter of 2016 following the tighter measures.