The effect of the China on the world’s economy, stock markets and asset prices has become more and more significant over the last two decades. China is now the second largest economy in the world, its biggest manufacturer and the largest consumer of coal, cement, copper, luxury goods and cars. As the economy has advanced, China has experienced a wealth boom of unprecedented proportions.
The middle class is now 20% of the country’s population, a figure that will rise to 33% by 2020. Furthermore, according to China CITIC Bank there were 1.34 dollar millionaires in China in 2016, a 11% rise over the previous year. In total, Chinese households control a massive $23 trillion in assets, again second only to the United States.
Understanding China is therefore of vital importance in order to glimpse into what the future may hold for the global economy, financial assets and most important of all, your wealth. As Chinese HNWIs look for ways to invest their increasingly larger assets, new and large price booms in many asset classes are sure to happen. Interestingly, an alternative investment asset class of Fancy coloured diamonds, for reasons explained later on, are among those that stand to benefit. But first, let’s look at the background of some of China’s economic fundamentals.
The Chinese economy is slowing, with GDP up 6.7% in Q4 2016, or close to a 26 year low. Trade, which constituted 40% of GDP in 2016, is stagnating. In 2016 exports fell 7.7%, the worse figure since 2009, and the trade balance surplus shrunk by 9.1%. In February 2017 the economy posted its first trade deficit in 3 years, with exports falling 1.3% YOY. This has resulted in weakness in the Yuan versus the US dollar since 2014, and the Chinese government has attempted to temper the fall by using its large foreign reserves, with limited success. After hitting a record $4 trillion in June 2014 they now stand at $3 TLN, the lowest level in 6 years. During the same period, the Yuan has nevertheless depreciated by 10%.
The weakening of the Yuan has unleashed massive capital flight abroad, reaching a record $725 billion in 2016. This compares to $484 billion in 2014 and only $125 billion in 2005. Chinese HNWIs are increasingly worried that the government could decide to give up on defending the Yuan and let it float freely. A similar action in 1993 brought to an instant 30% currency devaluation. Also, they are increasingly afraid as the government is retaliating with more measures to crack down on capital flight. China has implemented a series of new measures in late 2016, including additional procedures for citizens seeking to convert the Yuan into foreign currencies and extra vetting of foreign investments worth $5 million or more. The capital leaving the country is directed to various assets, for various reasons.
HNW Chinese have been avid buyers of real estate in Canada and Australia as a first step to obtaining citizenship in those countries. More than 80% of the recipients of an American EB-5 visa, which grants residency in exchange for investment, are Chinese. In addition, the Chinese have been increasingly active in buying antiques, ceramics, vintage cars and other hard assets worldwide. Bitcoin, the digital currency, has seen a massive boom in Chinese demand and as a way to escape the Yuan.
When sending capital abroad is not possible, Chinese households turn to local property, which has led to major price increases. According to consultancy Knight Frank, eight out of the top 10 cities for fastest growing prices globally in Q3 2016 were in China, and 10 Chinese cities recorded annual price growth above 20%. Average new home prices in 70 major cities rose 12.4% in December 2016 YOY according to data from the National Bureau of Statistics. The investment choices of Chines HNWIs, both domestic and foreign, could however be on the verge of major changes.
Real estate, both domestic and foreign, is losing its appeal. In China, local governments are cracking down increasingly on property speculation and prohibiting in many cases the purchase of
houses for investment. In Q4 2016 about 20 Chinese cities rolled out policies, including raising down-payment requirements and banning non-residents from purchasing a second home. In Shenzhen, second home buyers now have to come up with at least a 70% down payment, up from 40% before. Housing prices in Beijing and Shanghai are now, relative to local incomes, more than twice more expensive than in London. Abroad, the situation is also worsening. Vancouver, one of the top destinations for Chinese money, slapped a 15% tax on property sales to foreigners in July 2016, quickly leading to a collapse in Chinese purchases. Australia has similarly added new stamp duty taxes to curb the property boom.
The stock market is also an unappetising alternative. China experienced a massive 500% increase in stock prices over 2005-2006 before a swift collapse of almost 70%. Another price boom then took the market up 130% in 2014-15, before another 35% fall. The extreme volatility and frequent scandals plaguing stocks have led Chinese investor trust in the market to fall significantly. It has also brought more investors to opt for real estate starting in 2015, one of the factors behind the current price run up.
With stocks too risky, real estate inflated and a weakening Yuan, Chinese HNWIs are increasingly cornered. So what could be their next asset of choice to protect their money against currency devaluation, inflation and capital controls?
The answer could well be a select array of alternative investments – the kind of investable asset one can touch, store safely and transport with ease. It is a tangible and profitable way to store wealth and protect it against inflation, volatility and taxation. This is a trend which may last many years, as these valuable assets continue to perform surprisingly, or unsurprisingly depending on your perspective, well in times of turmoil.
If we look at the Fancy Colour Diamond segment, Interest in this market is already strong, with record auctions occurring throughout Asia. In April the Pink Star Diamond was auctioned for a record $71.2 MLN to a Chinese buyer, a world record. The investment performance of fancy coloured diamonds has already been excellent, with fancy pink diamonds up almost 200% in the last 7 years. And this could just be the beginning.
The diamond market is worth about $80 billion a year. This is a grain of sand compared to the $70 trillion in global equity market capitalisation and the more than $100 trillion in bonds. The buying power of Chinese UHNWIs is big, to say the least, compared to the size of the fancy coloured diamond market. If Chinese investors shift even a fraction of their $21 trillion in assets to fancy coloured diamonds, this will make prices skyrocket.
And this shift may happen at any moment, as more traditional investment options lose their appeal and the window to move capital abroad continues to narrow, a deliberate intention of the Chinese government. Increasing political instability would of course add further fuel to the fire. China is increasingly at odds with the USA over trade issues, while geopolitical tensions in the South China Sea and with North Korea continue to flare. The question is whether this would encourage Chinese UHNWIs to invest in more alternative investments as political instability and economic uncertainty increase. It would take very little buying to push the price up strongly – and that too in a blink of an eye.
Find out today how Argyle Assets can help you protect and increase your wealth by investing in Fancy Coloured Diamonds. Call us now at 0207 8560 315 or e-mail us at email@example.com for a FREE consultation and let us help you find the best solution to your investment needs.