Derek Scissors speaking at an event in the US
While it’s easy to portray China’s outbound investment boom as a symbol of the country’s economic success, one of the best-known students of the country’s recent acquisition spree sees it as a sign of failed reforms.
Speaking at an event in Shanghai last week, Derek Scissors, a resident scholar at the American Enterprise Institute, a conservative think tank in Washington, pointed to overseas investment by China’s real estate sector as a product of the country’s slackening pace of reform in recent years.
“If you have a failure of Chinese reform, there are going to be people who feel that they can’t work with the status quo, and they’re going to send their money overseas,” Scissors said. “That set of investors is the real estate set.”
Outbound investment from the technology sector was also noted as being driven by a lack of reform, while the Stanford-trained economist pointed out that state-run companies, particularly in the energy sector, might be more likely to invest overseas if more competition were introduced to the marketplace.
Scissors, who has built one of the most authoritative databases of Chinese overseas investment globally, was in Shanghai for a series of meetings, and was speaking at a gathering of the American Chamber of Commerce in Shanghai.
The US real estate market attracted $3.1 billion of capital from China last year – an increase of more than 900 percent from the $264 million invested in 2012, according to data from property consultancy JLL.
Even Big Chinese Companies Struggle to Compete
While Scissors’ theory may at first seem counterintuitive, with large state-owned firms such as Greenland Group playing prominent roles in overseas development projects, and presumably benefitting from central government policies that continue to promote state-run enterprises, many of the companies moving their cash out of China are private enterprises.
Private sector real estate companies such as China Vanke or Country Garden, and even investment firms such as Fosun, may find that China’s bias towards state-owned enterprises make overseas deals more attractive.
In his presentation in Shanghai, Scissors noted the preference among Chinese private investors for international investments.
“I was at an event in New York and all of these private Chinese entrepreneurs were coming to me and asking, ‘Where can I invest money in the US, so that I can get it out of China,” he recalled.
Individual Investors Also Frustrated By Slow Reforms
Chinese corporate investments in US real estate, as well as in other countries, can also be seen as a response to the frustrations of China’s middle class with slower than expected reforms and with an array of challenges currently facing the world’s second-largest economy.
As China’s middle class and newly wealthy have grown more prosperous, they have gained access to more choices, and many of them are choosing to buy homes overseas, or to go ahead and emigrate.
Residential real estate developments such as a 61-storey tower recently begun in Manhattan by China Vanke or the $4 billion Atlantic Yards project acquired by Greenland Group last year, are hoping to sell many of their units to Chinese investors eager for overseas homes.
In the case of a Greenland Group project which went on sale in Sydney last year, the company sold RMB1.5 billion (US$246 million) in homes during the first weekend of sales – many of them from the company’s home market in China.
Inflated home prices in China – driven up by a lack of alternative financial products, the country’s closed capital accounts and an expansive monetary policy – have also helped make overseas real estate investments look more affordable, and more stable, to Chinese buyers.
So instead of Chinese outbound investment being a sign of the country’s growing strengths, there are a number of ways that the trend signifies China’s ongoing struggles to reform its economy.
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