The drama of the U.S. election is in full swing, spooking the markets, but investors should not lose sight of another phenomenon that has influenced the global economy perhaps more than politics: capital outflows out of China. The latest signs are that the flow may be about to turn into a trickle.
Back in August, I wrote about how Chinese capital might be blowing a gigantic real estate bubble in property hotspots around the world. Chinese government stimulus money finds its way abroad via investment by Chinese companies and individuals, who take their money out because they try to shelter it from the depreciation of the yuan.
But now, while investors' eyes are fixated on Washington, signs are emerging that the People's Bank of China (PBoC) is increasingly wary of providing cheap and seemingly limitless funds.
An article in the South China Morning Post a week ago noted how the interest rate in a treasury fund auction jumped last week by 40 basis points, indicating that the PBoC is tightening its liquidity tap. A Bloomberg article yesterday said that the PBoC has allowed a slow but steady increase in money market rates, tightening monetary policy by stealth.
The PBoC is doing this partly as an attempt to try and limit a hot domestic real estate market, but it will have to walk a tightrope to avoid damaging the economy.
"If the housing market tightening starts to work as we expect, the resulting housing slowdown would exert downward pressure on producer price inflation. Compounded by further currency depreciation, China would then be deflationary yet again in 2017," Societe Generale's China expert Wei Yao wrote in a recent research note.
"If housing market tightening fails to contain housing inflation (a risk scenario with 20% probability, in our view), consumer price inflation could rise above 2.5% by mid-2017, which would be tricky for the PBoC to manage against a lackluster growth backdrop."
In other words, do not count on deeper yuan depreciation going forward. What this means is that outflows from China could slow down as fears that savings will lose value will subside. Coupled with measures to tighten controls over money pouring out, this could further diminish the amounts available for investment by the Chinese in foreign assets.
One area that is particularly vulnerable to this is real estate; one particular sector of concern is that of U.K. homebuilders. They could suffer worse than other sectors because, on top of a slowdown of Chinese speculative investment in real estate in major cities, they also have been hit by the effects of the Brexit vote.
U.K. home sales volumes, already low, fell further after the vote and various measures of home prices have shown weakness starting to creep in.
Persimmon (PSMMF) said in a brief trading update yesterday that it was running out of homes to sell, so hot was demand for new homes in the third quarter after the June 23 vote to leave the European Union. This sent its shares up by more than 2%, but on Thursday they were down again by more than 1% in early morning trading in London.
The whole U.K. homebuilding sector has been suffering badly after the Brexit vote, with an index of the main companies showing a fall of more than 35% since June 23. The index now trades on a price/earnings multiple of 9x, a deep discount compared with a global P/E of 16.7x, according to FactSet data.
It does not mean that U.K. homebuilders cannot get cheaper. It is true that the pound surged after today's High Court ruling that only parliament can trigger Article 50 of the Lisbon Treaty, not Prime Minister Theresa May as it had been planned. But the decision should not be taken as a strong signal that Brexit could be reversed.
If anything, it means that more, not less, uncertainty is ahead. And a cyclical business such as homebuilding is prone to be one of the main victims of uncertainty.