Moves by Beijing to stem capital outflows are escalating and as such pose a potential risk to Australia's red-hot property market, according to one of the world's biggest asset managers.
Capital outflows are shaping up to be a massive headache for China’s economy and currency in 2017, according to Anthony Chan, AllianceBernstein's Hong Kong-based Asian sovereign strategist.
To many, he argued, US president Donald Trump’s trade policy may seem like the greatest potential economic threat to China in 2017.
"But prolonged and accelerated capital outflows represent the greatest clear-and-present challenge for Beijing’s policymakers, in our view," he said in a research report.
"The problem, which could lead to a loss of confidence in the renminbi and spiral into a crisis in a worst-case scenario, is the largest economic conundrum facing the country’s policymakers in 2017."
Capital outflows have created a dilemma over whether China should defend its fast-draining foreign exchange reserves or let the renminbi (RMB) fall at the hands of market forces.
And the question then extends to how far China’s FX reserves can drop before the market starts to panic.
"We think all of the new measures implemented over the past month are pointing to a reinstatement of capital controls in China," said Chan.
"The authorities have tightened their grip on direct investment outflows, offshore corporate bond issuance and US-dollar remittances by households — aimed at heading off a potential drop in the renminbi (RMB), or a forced rise in domestic interest rates in tandem with US rates."
That said, the strategist has assessed the possibility of a large RMB devaluation this year at less than 20 per cent, noting that this is a crucial year for President Xi Jinping, who needs to consolidate power and revive confidence in the economy as he prepares for a second five-year term as leader.
Among the tools at Xi’s disposal is the ability to force state-owned enterprises to repatriate US dollar funds they accumulated offshore during previous episodes of heightened RMB devaluation risk.
“The size of the offshore pool is hard to estimate, but it could be hundreds of billions or even trillions,” added Chan. “The caveat is that this could lead to a mass liquidation of offshore assets — mainly property in major international cities.
“There’s good news, from the Chinese government’s point of view, in signs of a marked slowdown in capital outflows in December as a result of heightened official scrutiny.
“On that basis, capital outflows should come to a halt in early 2017 and provide the authorities more breathing space,” said Chan, who also believes that such a slowdown will not solve the root causes of the outflows, which include an intensified crackdown on corruption.
Importantly, Guy Bruten, AllianceBernstein’s Melbourne-based economist has noted the relevance of this analysis for the Australian property market.
"It highlights the risks to the downside that exist in the Australian residential housing sector, whether from tighter domestic prudential regulations, growing oversupply of apartments or, as in this case, the risk of a reversal of foreign-buyer participation, which has been important for the market," he noted.