Intercedent Insight – October, Onwards and Outwards

Intercedent predicts that the next wave of Outbound Investment will be made by wealthy Chinese individuals and that, over time, the value of remittances will exceed State and private sector corporate investment.  Moreover, gradually easing control over the outflow of these private funds is part of the goal of the Chinese government, particularly the People’s Bank of China, to have the local currency emerge by 2020 as a fully convertible international reserve currency.

Consider that, currently, the State Administration of Foreign Exchange (SAFE) permits individuals to convert and remit offshore up to US$ 50,000 dollars annually. Meanwhile, Morgan Stanley and others estimate that there are over 1 million mainland Chinese who, not counting their principal residence and real estate holdings, presently hold in excess of US$ 1 million in liquid assets such as cash and securities.  If all individuals in this category exercised their full quota, then the amount available for remittance abroad this year is US$ 50 billion.

This figure swells to US $ 200 billion per annum by 2020 if one assumes that new individuals with substantial holdings of liquid assets emerge each year between now and then at a rate of 10% per annum and SAFE allows the yearly cap for individuals to gradually rise to US$ 100,000.

As offshore remittances grow, new and expanding markets will appear into which can be sold international real estate, antiques, mutual funds, securities, bullion and other investment products geared to China’s wealthy elite.  Property price increases in recent years in cities like Vancouver with large Chinese populations show what this purchasing power can do.

Save for where the rate of appreciation of the renminbi against the currencies of the main developed world economies occurs too fast – something which is unlikely in our view given the continued rigorous management of the local currency – we are confident that there will be a steady increase of purchases by mainland Chinese of offshore real estate, luxury cars, boats, planes, vintage wines, bullion and investment products.

Of necessity, value outflows of this magnitude will continue to be closely managed as China becomes more enmeshed in the global economy and the administration moves forward with its goal of developing the renminbi as a safe haven currency with international reserve status.

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