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Chart of the Week

Trading Places: Chinese Flee Stocks for Offshore Property [Chart]

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Trading Places: Chinese Flee Stocks for Offshore Property [Chart]

Trading Places: Chinese Flee Stocks for Offshore Property [Chart]

Canadian and Australian housing sales set new monthly records in June

The Chart of the Week is a weekly feature in Visual Capitalist on Fridays.

Every transitioning economy has its growing pains.

This turns out to be especially true when that economy is an unusual Jekyll-Hyde type of hybrid: it’s run by a communist government that favours control, but at the same time wants to harness the growth of free market dynamics.

Over the last two years, the Chinese government has worked to relax margin restrictions. By changing these rules, it would allow more regular folks to borrow on margin to buy into and fuel the stock market. The only problem was that most of the public had never invested before, and intense speculative buying replaced any disciplined search for value or growth.

The market soared to new heights. New investors saw the gains and just kept piling in. Between June 2014 and May 2015, more than 40 million new trading accounts were opened, and many of these new equity investors had less than a high school education.

The Shanghai Composite Index, which tracks shares traded on Shanghai’s stock exchange, climbed over 150% since late 2014.

Then, the party abruptly came to an end. Over the last month, the market crashed and lost about 30% of its value, worth about $3 trillion. The government had taken unprecedented steps to slow down the crash, including halting IPOs, cutting interest rates, and other “stability measures”. Top brokerages even pledged to collectively buy 120 billion yuan ($24 billion) of shares to steady the market. Finally, the China Securities Regulatory Commission banned sales of shares for major investors for six months, and suspended trading in over 1,000 stocks.

The once frothy market has had mixed reactions over the last few days, but remains near its three month low.

The Pacific Connection

While surely some people have lost faith in Chinese stocks as of late, that doesn’t mean money wasn’t made. The market is still up 80% from a year ago and many that were in early made a killing.

What are some of these people doing with their newfound capital? Many are buying real estate in China to store their wealth.

In a survey carried out by the Southwestern University of Finance and Economics in Chengdu, 28,140 respondents were polled between June 15 and July 2. They found that more people were taking money from the stock market and buying property. In Q2, 3.7% of stock investors bought housing compared to 2.3% in the first quarter. Of those that bought property, 70% of households have made money in the stock market.

People from China have also looked abroad to store their wealth in housing. It’s no secret that Canada, Australia, and the United States have all felt the effects of foreign buying in their property markets over the years.

Cities such as Vancouver and Toronto have had an influx of new buyers fueling the boom, and this is part of the reason why Canada is now considered to have the most overvalued housing market in the world.

Sydney and Melbourne have seen similar effects, and Australia was recently ranked by the Economist as the second most overvalued housing market relative to income.

In the United States, the Bay Area continues to also have a bull market in property. Technology plays a big role in this, but foreign buyers have also been helping drive prices there as well. California is a popular destination for Chinese buyers, as 30% of all Asian-Americans reside in the Golden State.

The Numbers

In the month of June, housing prices and the number of sales have reached record levels in some of these markets.

The two hottest Canadian markets remained on fire, despite the country edging into a technical recession. In Vancouver, housing sales were 29.1% higher than the 10-year average for the month of June. This brought the benchmark housing price to C$1.1 million for a detached home. June was the fourth straight month with over 4,000 sales, a new record for the city. Luxury sales rose 48% in the period between January and June compared to last year.

Toronto’s luxury market is even hotter, with sales increasing 56% over the first half of the year. The benchmark housing price in the city for a detached home is now C$1.05 million, a 14.2% increase over the last year.

Two of the more prominent markets in Australia also kept their momentum. In Sydney, prices have soared 22.0% over the last 12 months for homes, to a median price of A$900,000. Melbourne, which started to cool off in the beginning of 2015, found resurgence in June that brought it back to strong double-digit annual growth.

Melbourne, which typically has less expensive homes than Sydney, Vancouver, and Toronto, is starting to join the million dollar club as well. Recently, there are 17 new postal codes that now have homes with A$1 million median prices.

From the Front Lines

The million dollar question is: to what extent do exits from the Chinese stock market and capital flight influence the markets in the above cities. Everyone can agree there is some influence, but narrowing down the specifics is much more difficult.

This is because there are not many official records on the specifics of foreign ownership, and much of the time transactions are done indirectly through family and friends.

Aside from the correlation with the numbers above, there is mainly anecdotal evidence from people on the ground.

In Vancouver, for instance, a Reuters survey found that of 50 land titles for detached Vancouver Westside homes worth over C$2 million, that nearly half of purchasers had surnames typical of mainland China. Five real estate agents primarily focused on sales on Vancouver’s more luxurious west side estimated that between 50% and 80% of their clients had ties to mainland China.

Michael Pallier, the Principal at Sydney Sothebys International Realty, said recently that volatility in the Chinese market was prompting more interest in local properties in the luxury market.

“Last month in our office we sold 20 properties for $115 million turnover in June, of which 25 per cent were sold to Chinese buyers, so we do have a lot of experience dealing with Chinese markets,” said Mr. Pallier, “They’d rather put the money into a property than put it into cash or into shares.”

David Fung, the vice-chair of the Canada China Business council, said that the stock market crash and volatility drives more investments into Canada, including British Columbia’s hot property market.

“They’re not looking necessarily for a very high return because it is for their own insurance,” said Fung.

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Central Banks

The History of Interest Rates Over 670 Years

Interest rates sit near generational lows — is this the new normal, or has it been the trend all along? We show a history of interest rates in this graphic.

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The History of Interest Rates Over 670 Years

Today, we live in a low-interest-rate environment, where the cost of borrowing for governments and institutions is lower than the historical average. It is easy to see that interest rates are at generational lows, but did you know that they are also at 670-year lows?

This week’s chart outlines the interest rates attached to loans dating back to the 1350s. Take a look at the diminishing history of the cost of debt—money has never been cheaper for governments to borrow than it is today.

The Birth of an Investing Class

Trade brought many good ideas to Europe, while helping spur the Renaissance and the development of the money economy.

Key European ports and trading nations, such as the Republic of Genoa or the Netherlands during the Renaissance period, help provide a good indication of the cost of borrowing in the early history of interest rates.

The Republic of Genoa: 4-5 year Lending Rate

Genoa became a junior associate of the Spanish Empire, with Genovese bankers financing many of the Spanish crown’s foreign endeavors.

Genovese bankers provided the Spanish royal family with credit and regular income. The Spanish crown also converted unreliable shipments of New World silver into capital for further ventures through bankers in Genoa.

Dutch Perpetual Bonds

A perpetual bond is a bond with no maturity date. Investors can treat this type of bond as an equity, not as debt. Issuers pay a coupon on perpetual bonds forever, and do not have to redeem the principal—much like the dividend from a blue-chip company.

By 1640, there was so much confidence in Holland’s public debt, that it made the refinancing of outstanding debt with a much lower interest rate of 5% possible.

Dutch provincial and municipal borrowers issued three types of debt:

  1. Promissory notes (Obligatiën): Short-term debt, in the form of bearer bonds, that was readily negotiable
  2. Redeemable bonds (Losrenten): Paid an annual interest to the holder, whose name appeared in a public-debt ledger until the loan was paid off
  3. Life annuities (Lijfrenten): Paid interest during the life of the buyer, where death cancels the principal

Unlike other countries where private bankers issued public debt, Holland dealt directly with prospective bondholders. They issued many bonds of small coupons that attracted small savers, like craftsmen and often women.

Rule Britannia: British Consols

In 1752, the British government converted all its outstanding debt into one bond, the Consolidated 3.5% Annuities, in order to reduce the interest rate it paid. Five years later, the annual interest rate on the stock dropped to 3%, adjusting the stock as Consolidated 3% Annuities.

The coupon rate remained at 3% until 1888, when the finance minister converted the Consolidated 3% Annuities, along with Reduced 3% Annuities (1752) and New 3% Annuities (1855), into a new bond─the 2.75% Consolidated Stock. The interest rate was further reduced to 2.5% in 1903.

Interest rates briefly went back up in 1927 when Winston Churchill issued a new government stock, the 4% Consols, as a partial refinancing of WWI war bonds.

American Ascendancy: The U.S. Treasury Notes

The United States Congress passed an act in 1870 authorizing three separate consol issues with redemption privileges after 10, 15, and 30 years. This was the beginning of what became known as Treasury Bills, the modern benchmark for interest rates.

The Great Inflation of the 1970s

In the 1970s, the global stock market was a mess. Over an 18-month period, the market lost 40% of its value. For close to a decade, few people wanted to invest in public markets. Economic growth was weak, resulting in double-digit unemployment rates.

The low interest policies of the Federal Reserve in the early ‘70s encouraged full employment, but also caused high inflation. Under new leadership, the central bank would later reverse its policies, raising interest rates to 20% in an effort to reset capitalism and encourage investment.

Looking Forward: Cheap Money

Since then, interest rates set by government debt have been rapidly declining, while the global economy has rapidly expanded. Further, financial crises have driven interest rates to just above zero in order to spur spending and investment.

It is clear that the arc of lending bends towards ever-decreasing interest rates, but how low can they go?

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Chart of the Week

Ranked: Which Economies Are the Most Competitive?

The world’s top countries excel in many fields—but there can only be one #1. How have the most competitive economies shifted in the past decade?

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Ranked: Which Economies Are the Most Competitive?

What makes a country successful from an economic perspective? Many think of this in terms of GDP per capita—but in a rapidly changing world, our definitions of progress have evolved to encompass much more.

This animated Chart of the Week visualizes 10 years of global competitiveness, according to the World Economic Forum, and tracks how rankings have changed in this time.

How Do You Measure Competition?

The WEF’s annual Global Competitiveness Report defines the concept of ‘competitiveness’ as an economy’s productivity—and the institutions, policies, and factors which shape this.

This year’s edition unpacks the national competitiveness of 141 countries, using the newly-introduced Global Competitiveness Index (GCI) 4.0 which looks at four key metrics:

  1. Enabling Environment
    Includes: Institutions, Infrastructure, ICT Adoption*, Macroeconomic Activity
    *Refers to information and communications technology
  2. Human Capital
    Includes: Health, Skills
  3. Markets
    Includes: Product Market, Labor Market, Financial System, Market Size
  4. Innovation Ecosystem
    Includes: Business Dynamics, Innovation Capability
  5. Each country’s overall competitiveness score is an average of these 12 main pillars of productivity. With that out of the way, let’s dive into the countries which emerge triumphant.

    The Most Competitive: Movers and Shakers

    The world’s top countries excel in many fields—but there can only be one #1. In 2019, Singapore wins the coveted “most competitive economy” title, with a 84.8 score on the GCI.

    The nation’s developed infrastructure, health, labor market, and financial system have all propelled it forward—swapping with the U.S. (83.7) for the top spot. However, more can be done, as the report notes Singapore still lacks press freedom and demonstrates a low commitment to sustainability.

    How have the current scores of the most competitive economies improved or fallen behind, compared to 2018?

    RankEconomy2019 Score2018 Score2018-2019 Change
    #1🇸🇬 Singapore84.883.5+1.3
    #2🇺🇸 United States83.785.6-2
    #3🇭🇰 Hong Kong83.182.3+0.9
    #4🇳🇱 Netherlands82.482.40
    #5🇨🇭 Switzerland82.382.6-0.3
    #6🇯🇵 Japan82.382.5-0.2
    #7🇩🇪 Germany81.882.8-1
    #8🇸🇪 Sweden81.281.7-0.4
    #9🇬🇧 United Kingdom81.282-0.8
    #10🇩🇰 Denmark81.280.6+0.6

    Finland (80.2) and Canada (79.6) are notable exits from this top 10 list over the years. Meanwhile, Denmark (81.2) disappeared from the rankings for five years, but managed to climb back up in 2018.

    Regional Competitiveness: Highs and Lows

    Another perspective on the most competitive economies is to look at how countries fare within regions, and how these regions compete among each other.

    Middle East and North Africa (MENA) has the widest gap in competitiveness scores—Israel (76.7) scores over double that of poorest-performing Yemen (35.5). Interestingly, the MENA region showed the most progress, growing its median score by 2.77% between 2018-2019.

    The narrowest gap is actually in South Asia, with just a single-digit difference between India (61.4) and Nepal (51.6). However, the region also grew the slowest, with only 0.08% increase in median score over a year.

    RegionBest Performer2019 ScoreWorst Performer2019 ScoreRegional
    Gap
    Europe and North America🇺🇸 United States83.7🇧🇦 Bosnia & Herzegovina54.729
    Latin America and the Caribbean🇨🇱 Chile70.5🇭🇹 Haiti36.334.2
    East Asia and Pacific🇸🇬 Singapore84.8🇱🇦 Laos50.134.7
    South Asia🇮🇳 India61.4🇳🇵 Nepal51.69.8
    Eurasia🇷🇺 Russia66.7🇹🇯 Tajikistan52.414.3
    Middle East and North Africa🇮🇱 Israel76.7🇾🇪 Yemen35.541.2
    Sub-Saharan Africa🇲🇺 Mauritius64.3🇹🇩 Chad35.129.2

    Across all regions, the WEF found that East Asia’s 73.9 median score was the highest. Europe and North America were not far behind with a 70.9 median score. This is consistent with the fact that the most competitive economies have all come from these regions in the past decade.

    As all these countries race towards the frontier—an ideal state where productivity growth is not constrained—the report notes that competitiveness “does not imply a zero-sum game”. Instead, any and all countries are capable of improving their productivity according to the GCI measures.

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