Mixed blessing from China’s stock market crash

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Pedestrians walk past an electronic display showing the closing figures of Hang Seng Index in Hong Kong, China. BLOOMBERG

Mixed blessing from China’s stock market crash

While the devaluation of the yuan may work in overseas property markets’ favour, including Cambodia, what has been referred to as ‘Black Monday’ could drag down the local real estate sector, said industry experts.

China rattled global financial markets when the People’s Bank of China (PBoC) weakened the yuan by 1.9 per cent on August 11 from the previous day, its biggest one-day drop in two decades and dropped a further 1.6 percent the following day.

Signaling the Chinese government’s growing worry about the country’s slow economic growth, the yuan devaluation is believed to boost China’s flagging export sector, however, at the same time, the buying power of Chinese investors outside their currency zone would be harmed.

This has raised concerns over Chinese investment in Cambodia as their investment largely contributes to Cambodia’s fast-changing skyline.

It was previously reported that during the first four months of last year, China’ public and private sector invested about $1.4 billion in Cambodian construction projects, while the total amount was $2.7 billion in 2013, according to Tep Thon, undersecretary of state for the Ministry of Land Management, Urban Planning and Construction.

Grant Knuckey, CEO of ANZ Royal Bank, said the shift in the value of the yuan does not necessarily impact the investment climate for the Cambodian property.

“In fact, precedent suggests that perception of a weakening yuan normally cause investment outflow from China and at the margin that may even increase demand for property investment here. It’s a bit counter-intuitive, but the flow can work that way,” said Knuckey.

Although the Chinese authorities called the currency move a one-off fix to make its exchange rate more market-oriented and said there is no basis for continued currency depreciation, Knuckey said that if Chinese investors anticipate a more pronounced depreciation trend, they would choose to move more cash offshore regardless if the PBoC does not have a definitive stance to further weaken the currency.

Meanwhile, Tan Ying Kang, Asia Pacific senior research analyst for Knight Frank Asia Pacific, echoed the sentiment that if investors see that the Chinese economy is becoming more risky, it would be a boon for other markets.

“If the Chinese economy is in a worse state than thought [investors will] seek diversification to preserve their wealth. This substitution effect may boost investment in overseas properties,” he said.

According to CBRE Cambodia, Chinese cross-border capital outflows into commercial real estate have grown rapidly, reaching $11.7 billion last year. Halfway through 2015, its global real estate investment totaled $6.6 billion, up 19.7 per cent on the same period last year.

While the impact on overseas property markets has yet to be revealed with updated figures, associate director of CBRE Cambodia Simon Griffiths said most of the economic evidence suggests that currency plays a very small role in transnational real estate investment.

“The size of the savings pool in China and the imperative for Chinese institutions to build up more diversified portfolios are too great for a devaluation of the yuan to impact the flow of capital from China into world real estate markets, even if it reaches up to eight per cent, as some expect,” said Griffiths.

With 20 per cent to 30 per cent of business coming from Chinese companies and nationals, CBRE Cambodia sees an in-flow of investment from China for long term investment, geo-political or commercial reasons. Griffiths expects to see such investment characteristics from China to continue for years to come.

However, the rosy future for the local property market may have been dampened as the fears of a Chinese economic slowdown have haunted investors, resulting in the biggest slump in the Chinese stock market in eight years.

China’s benchmark Shanghai Composite Index went into free fall plunging 8.5 per cent on what the Chinese state media dubbed ‘Black Monday’.

The next day, worries over a deeper plunge brought China’s central bank to cut the interest rates by 0.25 per cent and the required reserve ratio by 0.5 per cent.

That same day, Moody’s, one of three big rating agencies, published an announcement on possible spillover effects the Chinese stock plunge could have on various Cambodian markets noting that “...Cambodia’s economy has benefited significantly from Chinese trade, concessional loans, and investment.”

Although the Chinese authorities claimed that during the second quarter of this year the GDP grew seven per cent, some argued that China’s growth is significantly lower.

“The extent of the slowdown is still unknown, with the official growth numbers likely to overstate the true picture,” said Jay Menon, lead economist for trade and regional cooperation at the Asian Development Bank. “The fact that the yuan has been devalued is an indirect indicator of the likelihood that the growth slowdown is much larger than the official numbers suggest.”

“The property market is certainly going to be one of the main casualties,” he said, explaining China’s slowdown is likely to have a noticeable impact on the economy as it is a major investor and lender to Cambodia.

While the global markets are still buzzing about devaluation of the yuan and the stock markets’ crash, one thing is certain: the currency move has affected other Asian countries not pegged to the US dollar.

On the August 11 crash, emerging Asian currencies dropped to multi-year lows: Indonesian rupiah and Malaysian ringgit hit fresh lows not seen since the Asian Financial Crisis in 1998, the Singapore dollar and the Philippine peso fell to their weakest levels in five years, while the South Korea won touched a near four-year trough.

Cambodia, however, where the US dollar remains to be the major currency for large transactions in the country, has remained unaffected by currency volatility.

“Certainly the currency depreciation occurring in neighbouring markets affects the relative return for a US dollar investor and erodes competitiveness for Cambodia,” said Knuckey in terms of regional payoff.

“Conversely, some may see US dollar property in Cambodia as a currency hedge, if they foresee US dollar strength to continue. In short, there is not a singular impact,” he said, adding the US dollar is currently in a structural bull trend, especially relative to Asian currencies.

If this continues to last, Tan explained that “investors may actually be attracted to Cambodia to profit from the currency play.”

Regardless, investors would have had a better foreign exchange gain if they had converted foreign currency to US dollar to buy property in Cambodia a few months ago, added Knuckey.

Knuckey said while this bull trend may not last, “as long as Cambodia remains a US dollar market, it will at least provide currency diversification for Asian investors.”

As talk of China’s economy, and the yuan, continues to reverberate across the globe, Tan reiterated the fact that for investors, currency value is not the only factor driving investor’s decisions.

“Particularly for institutional investors interested in commercial properties, the long-term prospects of Cambodia [is] the most important consideration,” he said.


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