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.
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.
Visualizing the Life Cycle of a Mineral Discovery
Building a mine takes time that poses risks at every stage. This graphic maps a mineral deposit from discovery to mining, showing where value is created.
Visualizing the Life Cycle of a Mineral Discovery
Mining legend Pierre Lassonde knows a little bit about mineral exploration, discovery, and development. Drawing from decades of his experience, he created the chart above that has become a staple in the mining industry—the Lassonde Curve.
Today’s chart of the Lassonde Curve outlines the life of mining companies from exploration to production, and highlights the work and market value associated with each stage. This helps speculative investors understand the mining process, and time their investments properly.
Making Cents of Miners: The Stages of a Mineral Discovery
In the life cycle of a mineral deposit, there are seven stages that each offer specific risks and rewards. As a company proves there is a mineable deposit in the ground, more value is created for shareholders along the way.
This stage carries the most risk which accounts for its low value. In the beginning, there is little knowledge of what actually lies beneath the Earth’s surface.
At this stage, geologists are putting to the test a theory about where metal deposits are. They will survey the land using geochemical and sampling techniques to improve the confidence of this theory. Once this is complete, they can move onto more extensive exploration.
There is still plenty of risk, but this is where speculation hype begins. As the drill bit meets the ground, mineral exploration geologists develop their knowledge of what lies beneath the Earth’s crust to assess mineral potential.
Mineral exploration involves retrieving a cross-section (drill core) of the crust, and then analyzing it for mineral content. A drill core containing sufficient amounts of metals can encourage further exploration, which may lead to the discovery of a mineable deposit.
Discovery is the reward stage for early speculators. Exploration has revealed that there is a significant amount of material to be mined, and it warrants further study to prove that mining would be feasible. Most speculators exit here, as the next stage creates a new set of risks, such as profitability, construction, and financing.
This is an important milestone for a mineral discovery. Studies conducted during this stage may demonstrate the deposit’s potential to become a profitable mine.
Institutional and strategic investors can then use these studies to evaluate whether they want to advance this project. Speculators often invest during this time, known as the “Orphan Period”, while uncertainty about the project lingers.
Development is a rare moment, and most mineral deposits never make it to this stage. At this point, the company puts together a production plan for the mine.
First, they must secure funding and build an operational team. If a company can secure funding for development, investors can see the potential of revenue from mining. However, risks still persist in the form of construction, budget, and timelines.
Investors who have held their investment until this point can pat themselves on the back—this is a rare moment for a mineral discovery. The company is now processing ore and generating revenue.
Investment analysts will re-rate this deposit, to help it attract more attention from institutional investors and the general public. Meanwhile, existing investors can choose to exit here or wait for potential increases in revenues and dividends.
Nothing lasts forever, especially scarce mineral resources. Unless, there are more deposits nearby, most mines are eventually depleted. With it, so does the value of the company. Investors should be looking for an exit as operations wind down.
Case Study: The Oyu Tolgoi Copper-Gold Discovery, Mongolia
So now that you know the theoretical value cycle of a mineral discovery, how does it pan out in reality? The Oyu Tolgoi copper deposit is one recent discovery that has gone through this value cycle. It exemplifies some of these events and their effects on the share price of a company.
- Concept: 15+ Years
Prospectors conducted early exploration work in the 1980s near where Oyu Tolgoi would be discovered. It was not until 1996 that Australian miner BHP conducted further exploration.
But after 21 drill holes, the company lost interest and optioned the property to mining entrepreneur Robert Friedland and his company Ivanhoe Mines. At this point in 1999, shares in Ivanhoe were a gamble.
- Pre-Discovery/Discovery: ~3 years
Ivanhoe Mines and BHP entered into an earn-in agreement, in which Ivanhoe gained ownership by completing work to explore Oyu Tolgoi. A year later, the first drill results came out of drill hole 150 with a headline result of 508 meters of 1.1 g/t Au and 0.8%. To get a sense of how large this is, imagine the height a 45-story building, of which a third of story is copper. This was just one intersection of an area that could stretch for miles.
Wild speculation began at this stage, as steadily improving drill results proved a massive copper-gold deposit in Mongolia and drove up the share price of Ivanhoe.
- Feasibility/Orphan Period: ~2 years
In 2004, the drilling results contributed to the development of the first scoping study. This study offered a preliminary understanding of the project’s economics.
Using this study, the company needed to secure enough money to build a mine to extract the valuable ore. It was not until two years later, when Ivanhoe Mines entered into an agreement with major mining company Rio Tinto, that a production decision was finalized.
- Development: 7 years
By 2006, the Oyu Tolgoi mineral deposit was in the development phase with the first shaft headframe, hoisting frame, and associated infrastructure completed. It took another two years for the shaft to reach a depth of 1,385 feet.
Further development work delineated a resource of 1.2 billion pounds of copper, 650,000 ounces of gold, and 3 million ounces of silver. This first stage of development for Oyu Tolgoi made Mongolia the world’s fastest growing economy from 2009 to 2011.
- Startup/Production: Ongoing
On January 31, 2013, the company announced it had produced the first copper-gold concentrate from Oyu Tolgoi. Six months later, the company stated that it was processing up to 70,000 tonnes of ore daily.
- Depletion: Into the Future
The Oyu Tolgoi deposit will last generations, so we have yet to see how this will affect the value of the mine from an investment perspective.
It’s also worth noting there are still other risks ahead. These risks can include labor disruptions, mining method problems, or commodity price movement. Investors will have to consider these additional conditions as they pan out.
The More You Know
Mining is one of the riskiest investments with many risks to consider at every stage.
While most mineral discoveries do not match it perfectly, the Lassonde Curve guides an investor through what to expect at each stage, and empowers them to time their investments right.
Visualizing 200 Years of Systems of Government
At the start of the 19th century, less than 1% of humanity lived under democratic rule. See how systems of government have changed over the last 200 years.
Visualizing 200 Years of Systems of Government
Centuries ago, most of our ancestors were living under a different political paradigm.
Although democracy was starting to show signs of growth in some parts of the world, it was more of an idea, rather than an established or accepted system of government.
Even at the start of the 19th century, for example, it’s estimated that the vast majority of the global population — roughly 84% of all people — still lived under in autocratic regimes or colonies that lacked the authority to self-govern their own affairs.
The Evolution of Rule
Today’s set of charts look at global governance, and how it’s evolved over the last two centuries of human history.
Leveraging data from the widely-used Polity IV data set on political regimes, as well as the work done by economist Max Roser through Our World in Data, we’ve plotted an empirical view of how people are governed.
Specifically, our charts break down the global population by how they are governed (in absolute terms), as well as by the relative share of population living under those same systems of government (percentage terms).
Classifying Systems of Government
The Polity IV data series defines a state’s level of democracy by ranking it on several metrics, such as competitive and open elections, political participation, and checks on authority.
Polity scores are on a -10 to +10 scale, where the lower end (-10 to -6) corresponds with autocracies and the upper end (+6 to +10) corresponds to democracies. Below are five types of government that can be derived from the scale, and that are shown in the visualization.
A territory under the political control of another country, and/or occupied by settlers from that country.
Examples: 🇬🇮 Gibraltar, 🇬🇺 Guam, 🇵🇫 French Polynesia
A single person (the autocrat) possesses supreme and absolute power.
Examples: 🇨🇳 China, 🇸🇦 Saudi Arabia, 🇰🇵 North Korea
- Closed Anocracy
An anocracy is loosely defined as a regime that mixes democratic and autocratic features. In a closed anocracy, political competitors are drawn only from an elite and well-connected pool.
Examples: 🇹🇭 Thailand, 🇲🇦 Morocco, 🇸🇬 Singapore
- Open Anocracy
Similar to a closed anocracy, an open anocracy draws political competitors from beyond elite groups.
Examples: 🇷🇺 Russia, 🇲🇾 Malaysia, 🇧🇩 Bangladesh
Citizens exercise power by voting for their leaders in elections.
Examples: 🇺🇸 United States, 🇩🇪 Germany, 🇮🇳 India
A Long-Term Trend in Question
In the early 19th century, less than 1% of the global population could be found in democracies.
In more recent decades, however, the dominoes have fallen — and today, it’s estimated that 56% of the world population lives in societies that can be considered democratic, at least according to the Polity IV data series highlighted above.
While there are questions regarding a recent decline in freedom around the world, it’s worth considering that democratic governance is still a relatively new tradition within a much broader historical context.
Will the long-term trend of democracy prevail, or are the more recent indications of populism a sign of reversion?
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