July 18, 2018 by Dymphna

Another tsunami of money coming? These charts say YES!

The property boom of 2014 might be set to repeat

I’m watching ‘the trade wars’ between China and America very closely.

And it’s not because I love the theatre of whatever rom-com Trump is acting in, it’s that I think Aussie property could become collateral damage.

Actually, that’s not the right term. What’s the positive opposite of that? Collateral beneficiary?

In fact, if history repeats, as it often does, these wars could send a wall of money Australia’s way, and we could see a repeat of the property boom we saw in 2014.

Let me explain what I mean.

Take a look at this chart here. This is the Chinese Renmimbi / US Dollar exchange rate, over the past ten years. Early on, there was a peg so it didn’t move much. After the peg, the Chinese Yuan (CNY) started appreciating.

The CNY reached its peak in the middle of 2013 – where I’ve put that little tidal wave image.

From that point on, as the Chinese economy slowed, the authorities allowed the CNY to depreciate. Chinese authorities play a pretty active role in managing the currency.

But with a clear intention to let the CNY devalue, people started to ‘cash out’ their CNY holdings, and started to look for better places to put their money.

That unleashed a wave of capital on the world.

The capital ultimately found its way into various markets around the world, but property markets in developed countries were major beneficiaries.

And with Australia enjoying safe-haven status, our capital city market received a major boost.

There were other factors driving Aussie prices higher at the time, but this flood of Chinese money played a major role in the booms in Sydney and Melbourne.

Anyway, are you following the causation I’m trying to lay out here?

Falling CNY -> Flood of money -> rising property prices.

Now, why am I following the trade wars so closely?

Well, look at what’s happening. Chinese authorities are letting the CNY fall in anticipation, and markets are thinking the momentum is to the downside.

The CNY is falling.

Let me zoom in so you can see exactly what’s happening:

This is the one-year chart, and you can see that since the start of June, the CNY has fallen sharply.

So what is that going to mean?

Well, it might depend on how long the falls hold. It’s one of the interesting things that Trump brings to global diplomacy. He can be talking tough one day, shaking hands the next.

But my guess, based on recent form, is that we’ll see capital flight out of China – another wave of money.

I don’t expect it to be as big as Wall of Money 1.0 for a couple of reasons. First, the money that left in 1.0 is largely still tied up in foreign countries. It didn’t come back. So there’s not as much money looking for a new home.

Secondly, Chinese authorities have tightened up their capital controls over the past year or so, generally making it harder to get money out of the country.

However, it still has the potential to be substantial.

And with Australian property prices holding up, albeit with an orderly correction in place (incredibly orderly by global standards!) you’d have to think that Australian property will be as attractive as ever.

So Wall of Money 2.0?

Could be. That’s what I’m thinking. Watch this space.