Jake's View

Record land sale more likely a case of mainland capital flight

The HK$16.86 billion paid by mainland developers for a residential site at Ap Lei Chau was almost 50 per cent more than market valuations. The flight money is now looking for hard assets now and does not care much what it pays

PUBLISHED : Sunday, 26 February, 2017, 3:02am
UPDATED : Sunday, 26 February, 2017, 3:18am

Two mainland developers yesterday paid HK$16.86 billion for a plot of residential land at Ap Lei Chau – ­a record price for the city that topped market valuations by almost 50 per cent.

SCMP, February 25

I have a hard time finding any reason to think that the prospects of the Hong Kong property market had much to do with the size of this bid. What we are talking of here is capital flight from the mainland and in this case not just flight from mainland authorities or mainland investment prospects but from the renminbi. The flight money is looking for hard assets now and, as generally the case with flight money, does not care much what it pays.

All this may seem a little curious at first glance. So far this year the yuan has actually strengthened a little against the US dollar, as the first chart shows, and the word from Beijing is that a clampdown on capital flight has begun to bite at last with a series of measures to stop people from taking their money out.

But you have to wonder whether the authorities have not mistaken the wish for the deed. For one, that recent yuan strength mostly reflects a general weakening of the US dollar since the beginning of the year against all US trading partners. The yuan has moved little against the euro, for instance.

And the balance of payments figures up to the end of last year certainly showed no sign of a slowdown in the outflow. They indicated that the deficit on the capital account continues at about US$600 billion a year. So far this year the preliminary figures on trade and foreign reserves indicate the trend is intact.

There is also the evidence of yuan deposits in Hong Kong. As the second chart shows the retreat from holdings of yuan here is actually accelerating. From a peak of more than 1 trillion yuan in mid-2015 it is now down to 546 billion yuan.

Thus if you are a mainland billionaire who wants out of both the mainland and out of renminbi and you are looking at Hong Kong, what do you see on offer if there is no worthwhile local fixed income market and the stock market is heavily weighted towards mainland stocks? What do you have left but property?

Chinese builders pay record HK$16.86b for Ap Lei Chau site

It helps that the Hong Kong government has swung things your way by a series of anti-speculative measures that have had the effect only of undermining the secondary market. Your market when you come round to sell the completed development will be the primary one.

But none of this says that Hong Kong property is actually worth 50 per cent more than most people thought a day earlier.

Higher interest rates are still in prospect, there is plenty more new housing coming on stream and the overall economy is only just idling along, not racing upwards.

We bend with the winds of fortune in this town and they are mostly mainland winds. They are also fickle ones. Be prepared to bend back again when a gust blows the other way.