I’ve been trying for a few months now to explain to my Regional Center and EB-5 Project clients the nature of “hot money” in China, and why I believe we in America have a unique opportunity right now to drive EB-5 capital to our shores. In the past three weeks with Sharon, traipsing through a half dozen Chinese cities, presenting dozens of seminars for Lake Point EcoVentures, and speaking with hundreds of investors, I’ve been able to go a little deeper into this subject. This blog entry will attempt to convey what I have learned but I will begin by warning you: this will only be of interest to those of you contemplating EB-5 financing for your project.
“Hot money” isn’t bad like it sounds. The Federation of American Scientists (FAS) has a great article on "hot money" in China here. Originally referring to the massive foreign investment entering China from abroad, within the context of current Chinese economic reality, “hot money” refers to perfectly legal, properly earned capital which is “hot” only because it has nowhere to be invested. Whether foreign or domestic in origin, China is overflowing with investment capital, and it's getting worse.
Consider the real estate market in China as an example of the problem: when the Chinese real estate market started to become a speculative mine field racing out of control, the government stepped in and did a number of things which we in America would consider, well, un-American. Things like mandating strict policies to prohibit real estate speculation and forcibly cooling sales to drop housing prices. A notable policy differentiation from our own on Wall Street, i.e., fabricating catastrophic, interest-only mortgage structures, inviting buyers to fabricate income levels, creating a mythology of infinite appreciation, marketing directly to greed (“get in now before prices go UPUPUP!”), and fueling rampant speculation by the uber un-savvy… ultimately leading to the collapse of the American financial system. (Look, folks, I’m not advocating the Chinese alternative to a truly free market but let’s be honest here: freedom comes with a price. If instead of kowtowing to Wall Street’s ludicrous reassurances our government had even SLIGHTLY “taken over Wall Street” way back when the you-know-what hit the fan, things would be pretty different today in America. Despite our chuckling, Gordon Gecko was wrong: greed isn’t good.)
China’s Premier Wen Jiabao reiterated Sunday:
“We would like to stress that there is no possibility of loosening the real estate policies. Our target is to let the property price fall to a reasonable value.”
And therein, as David Carradine so beautifully put it in Kill Bill, lies the problem: no investor – Chinese, American, or Martian – wants their government to decide what is “reasonable” in a free economy. As a result of this policy, China’s real estate brokerage industry is starting to look like ours (figures taken from November 8th China Daily) :
- Shenzhen’s mighty Centaline announced Thursday that it is closing 60 offices and laying off of 1000 workers;
- Century 21 China shuttered 34 offices in the first half of this year and more since.
- Beijing’s Geland closed 50 offices in February when the government had last stated that the policy would not be lifted;
- The sale of pre-owned homes has dropped nearly 50% on an annualized basis.
How about that? All roads lead to Rome, it would appear, regardless of who’s in charge; alternatively, no matter where you go…there you are. Like the hunting of deer to cull overpopulated forests, the Chinese government is culling the real estate sector until it returns to a “reasonable” state. And so, while the poor Chinese RE industry is culled, investor funds pool into “hot money” as RE investment opportunities become increasingly scarce.
If there is one thing we have learned about China in the past decade, it is its might. Like the concept of a “benign dictatorship”, one party rule, like it or not, is infinitely more effective than democracy when it comes to fiscal policymaking. And so their Premier is unapologetic in his explanation about their RE investment policy…while we sit around wondering how many butts have been pinched by the clueless-that-he’s-doomed Mr. Cain. NOT effective.
The reality is this: more than one quarter of affluent Chinese families wish to emigrate to the U.S. or Canada, primarily to insure the futures of their children. I’ve spoken to a TON of these people in the past few weeks, and they all say the same thing: “Give us a fair deal and we’ll come to America”. Frankly, after learning specifics about Canada’s progressive investment residency program from our new partners in China, our EB-5 is a Yugo to their Jaguar (or “Jag-YOU-are”, as the blokes would prefer us to pronounce it) but, thank goodness, America is still America…first choice.
Nature abhors a vacuum and the vacuum in real estate investment opportunities in China demands equilibrium from alternative sources. Our EB-5 opportunities, fair and reasonable ones which protect the investor by limiting risk, are the first option for these investors. But, for the most part, American EB-5 projects are more about shiny marketing materials, colossal projections, and nebulous exit strategies into which no wise investor – Chinese, American, or Martian – would ever park a single dollar.
At this point in history, it appears to be China’s turn to open their wallets and invest in the world, and God knows that America and Europe’s futures depend significantly on that kind of financial firepower. But if you are looking for Chinese investment dollars, know that a healthy pragmatism precedes even the most voracious interest in foreign investment…especially with the lame EB-5 projects they've seen and are still seeing. As long as Sharon and I can take them fair deals and look them square in the eye, we’ll be racking up miles over the Pacific.
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