“Wealthier people in China have a sense of political insecurity, that if you get on the rich lists or attract too much attention bad things can happen to you,” Chovanec explained. “So why not take at least some of their money and put it overseas? If the winds change, or if there is ever a crackdown, at least you won’t be poor.”
California’s role as a refuge for corrupt officials came into the spotlight this month, when a government official from Zhejiang Province was found to have fled to Orange County, where he had purchased seven luxury homes with one-off cash payments. Palo Alto realtors report that many of their clients will seek green cards for their wife and child, but not for themselves, fearing the financial scrutiny that may follow.
During a recent home-buying tour in the neighboring town of Menlo Park, a group of Chinese and Taiwanese buyers marveled at the luxurious backyard of a home priced at just under $2 million.
“It’s such a beautiful place. Why didn’t Bo Xilai come here to buy his villa?” one Taiwanese buyer joked to laughter from the group, referring to the use of a French villa as evidence at the trial of the disgraced Communist Party official.
But the surge in Chinese home purchases in the area represents more than just an exit strategy for wealthy Chinese: It is also one more leak in a Chinese financial system designed to keep money in the country. Capital controls, a fixed interest rate, and a restrictive banking system create what economists call “financial repression.” By limiting the potential deposit and investment options for Chinese citizens, the government ensures that the savings of the Chinese public are funneled into state-controlled banks that make cheap loans to favored borrowers: state-owned enterprises and local government finance vehicles. Money that doesn’t flow directly into the banks is often invested in domestic real estate, fueling what many observers call a massive Chinese property bubble.
When wealthy Chinese circumvent capital controls by moving their money through Hong Kong into overseas real estate, they are opting out of the Chinese system and letting steam out of financially repressed markets. But while the movement of funds remains small relative to the amount of liquidity in China, further leaks or the loosening of capital controls could spell major changes for Chinese asset markets.
“If money actually flows out of China, a lot of the bubble effect coming from all this capital trapped in China bidding up asset prices may go away,” Chovanec said. “If you have all this money chasing global investments, that would undercut the pumped up valuations in the system.”
Chovanec cautions that the recent surge in real estate investment is “a drop in the bucket” compared to a true loosening of capital controls. But given the central role the rich play in bidding up Chinese home prices, more activity in overseas real estate could cool the country’s red-hot housing markets. As the channels for, and savviness with, overseas investment grow, domestic property markets will lose their captive audience of investors.
But while this flow of funds may work to deflate Chinese property valuations, it may also help contribute to skyrocketing prices in the Bay Area. With prices rising rapidly throughout the region, analysts have pointed to the abundance of all-cash offers as culprit in an emerging bubble; cash buyers aren’t constrained by the evaluation of lenders when bidding up the price of a house. But that process can become a positive feedback loop, as investors’ own actions reinforce their beliefs about the ever-rising value of assets. For Chinese buyers accustomed to rising real estate prices in their home country, properties in Palo Alto fit the conceptual mold of a sure-thing investment.
Many of Lan Bowling’s Chinese clients look to Palo Alto real estate as a safe haven, but the very presence of mainland buyers can complicate predictions about prices.
“My clients want to see the value in the purchase,” Lan said. “But right now how do we determine the real value when the market is so hot?”