Why Vancouver housing is back in the cross hairs amid the new China risks

Wealthy mainlanders have new impetus to secure offshore havens following the Communist Party’s proposal to scrap presidential term limits

PUBLISHED : Thursday, 01 March, 2018, 10:45am
UPDATED : Friday, 02 March, 2018, 1:44am

In Robert Caro’s sweeping biography of President Lyndon Johnson The Passage of Power, he keenly observes how power works: “Power doesn’t always corrupt. Power can cleanse. What I believe is always true about power is that power always reveals. When you have enough power to do what you always wanted to do, then you see what the guy always wanted to do.”

That represents a singular understanding for any politician who is fearful to find himself powerless in his world in which power is the crucial commodity.

In a sharp rebuke to Deng Xiaoping’s constitutional statute of collective leadership, a proposal by the Communist Party to eliminate presidential term limits in China has awakened worries about the return of one man rule in China. The issue has been raised before, but even the most ardent mainland supporters were surprised when it actually occurred. The amount of defensive and convoluted rationalisation being generated sound flimsy: ensuring the continuity of the country’s internal policies and pursuing its growing international interests as a superpower- even if means weakening governing institutions.

Formal approval will create a thin line between China’s claim to be a one party technocratic state versus being run by a “paramount leader or great helmsman.” The world has not experience beneficial historical outcomes for the latter under Chinese, European or African cultures.

Yet in less than 40 years after Deng opened up China’s economy and instituted collective leadership here is the world’s most populous and one of its most prosperous countries returning to the governance model that it so desperately needed to escape from. That is why President Xi Jinping’s proposal represents a major shift in China’s political development that requires a revised risk assessment.

It is difficult to measure the risk without being cruelly objective and open minded. Avoid the narrative fallacy- fooling yourself with stories that cater to investors’ hope and thirst for clear patterns and dependable stories.

History is opaque. Nassim Nicholas Taleb’s wrote in The Black Swan: The Impact of the Highly Improbable, “You see what comes out, not the script that produces events, the generator of history. There is a fundamental incompleteness in your grasp of such events, since you do not see what is inside the box, how the mechanisms work. There is an illusion of understanding or how everyone thinks he knows what is going on in a world that is more complicated or random than they realize.”

Yet, no one in today’s China wants to return to Mao’s world; they couldn’t even return if they wanted to because China is integrated into global trade and finance. Even though its closed capital account kept it out of the global financial crisis in 2008, its strategic goal of internationalising the yuan will be more difficult with this additional political risk. Eventually, a freely convertible yuan could easily translate itself into a platform for massive capital flight. It’s easy to defend this action as an internal affair, but China’s global influence makes it an international concern.

China’s lack of a free press and transparent government mean that other metrics are needed to gauge investor sentiment towards President Xi’s play. One useful metric is short interest. Data shows that large cap, US-listed mainland companies with large short interests are being used as proxies for the mainland economy.

The absence of term limits will dramatically influence domestic and international capital flows. Expect money laundering to actually increase as those who are already involved become more desperate to move their funds out of China and into Hong Kong and ultimately into other places.

The anti-corruption purge will continue without respite and those with ill gotten gains will have to move quickly. Expect an acceleration of legitimate and illegitimate capital outflow from China as mainlanders continue to diversify their domestic risk. The recently imposed 20 per cent fee on Vancouver real estate purchases by foreigners probably won’t have much of an affect on mainland buyers looking to launder money offshore.

Peter Guy is a financial writer and a former international banker