Can commodities benefit from China’s real estate curbs?

By Andrea Hotter

New York 19/12/2016 – China has been tweaking its regulations in a bid to tighten credit-lending standards and rein in rising home prices, but will restrictions push investors into lower tier cities, or into investments outside real estate, such as commodities? 

It would not be the first time that the country’s hot money has rotated out of real estate and into other asset classes, including commodities, equities and bonds. It is currently back in property, reflected by the dramatic rise in housing prices through the year.

Shenzhen, the location of the London Metal Exchange’s planned spot commodity trading platform, is now second only to San Jose in Silicon Valley in terms of property prices, according to research by consultancy firm Longview Economics.

Even the surging divorce rate in China has in part been attributed to moves by couples to fake their split in order to be treated as independent buyers and avoid restrictions limiting purchases of property.

The authorities are now taking action.

The government has been implementing measures to stimulate house purchases in the country’s lower tier cities, an effort to cool the staggering level of investment in tier 1 and some tier 2 cities and make inroads into soaking up the vast number of empty houses in other locations.

Similarly strict capital controls designed to help slow the continuing devaluation of the yuan mean that Chinese citizens are only allowed to exchange $50,000 a year. These restrictions on capital outflows mean that Chinese investors are already having to focus on domestic investments.

Actress Cate Blanchett found this out the hard way; the Chinese buyer of her $21 million home in Sydney had to back out because of this inability to move large sums of money around.

But according to estimates by US investment bank Goldman Sachs, as much as $600 billion of funds each year could be looking for a new home following the restrictions on property investment.

Obviously all of this would not suddenly flow into commodities, including metals. Yet as the bank points out, even if just 2.5% of these funds shifted into copper, net speculative length in the metal would double from its current level of around $15 billion.

How achievable such inflows might be is debatable, however.

For sure, the Chinese bond market has fallen out of favour with investors amid a highly leveraged corporate sector and the increasing number of non-performing loans.

Equities look more attractive, although the Shanghai Composite Index is under pressure, the yuan is approaching eight-year lows and share prices of those leveraged corporates are suffering.

But do not forget that the government has made it very clear it does not intend to allow China’s domestic commodity futures markets to become a hot bed for speculators. Through 2016, it has raised trading margins and upped transaction fees at the country’s iron ore, steel and coal exchanges, and last month copper and other base metals saw higher margins and trading limits.

Even if speculative money wanted to flow into commodities en masse, therefore, the level of it would be limited, at least on a day-to-day basis.

The government’s new focus is spending on infrastructure, often on the basis of public-private partnerships. That will likely be positive for commodities demand, but probably also for tier 3 and 4 cities as well as new clusters of towns being built around the mega-city hubs. 

(Editing by Wei Jun Lau)