Why Chinese cash will continue to feed Phnom Penh bubble
In the last of a two-part series on its housing market, Antonio Graceffo explains why the Cambodian capital will still appeal to Chinese investors
Chinese investors are some of the largest housing investors in the Kingdom of Cambodia. Chinese companies also dominate Cambodia’s construction sector, building high-profile large-scale projects. Much of this construction is being carried out by Chinese state-owned enterprises or by private companies with close ties to state-owned enterprises, using money borrowed from state-owned banks.
Chinese construction in the Kingdom dropped by 30% between 2014 and 2015 and is expected to drop by at least half again in 2016. This decrease in Chinese investment is most likely attributable to a slowing Chinese economy and a tightening of both credit availability and capital flight. Construction and the housing market should be treated as separate phenomena: as one is driven by the government and the other by individual investors.
Cambodia observers see a decrease in Chinese construction as a sign that Chinese investment in the Kingdom — including Chinese housing purchases — will decrease. But there may actually be a reverse correlation between these two factors. A decrease in Chinese construction investment is positively correlated with a downturn in the Chinese economy: as the economy goes down, the Chinese government may invest less in construction abroad. But the reverse is true of housing purchases. As the Chinese economy becomes increasingly uncertain, more and more Chinese investors will seek to move money out of the China. Chinese investors tend to invest heavily in real estate — and Cambodia, with its easy investment climate and quickly appreciating housing market, is seen as an excellent investment option.
Cambodia is geographically desirable for Chinese investors. It is only a few hours’ flight from Hong Kong or Shanghai, and the visas are extremely easy to obtain. If you look at a list of China’s neighbors, they include: Russia, India, Kazakhstan, Mongolia, Pakistan, Myanmar, Afghanistan, Vietnam, Laos, Kyrgyzstan, Nepal, Tajikistan, North Korea and Bhutan. Many of these countries are either impossible or undesirable places to invest in bricks and mortar.
Aside from being geographically convenient for Chinese investors, Cambodia is also easy to invest in because of the large number of local Chinese who can act as agents or middlemen. Chinese is now the second-largest foreign language in the Kingdom, after English, with at least 30,000 Cambodians enrolled in Chinese classes in Phnom Penh alone.
One other unique advantage Cambodia has is that the US dollar is used for all large purchases. Therefore, home purchases in Cambodia are a way of converting and storing large quantities of Chinese yuan in dollars. The appreciation on these housing investments will also be earned in US dollars. And this money need never be transferred back to China or converted back to yuan. So, this gives Chinese investors an investment — a store of wealth, and future appreciation — all denoted in US dollars.
A Chinese investor could theoretically fly anywhere in the world and exchange yuan for local currency, then use the local currency to purchase dollars, but this would entail paying double transaction fees. The transaction would also be subject to legal limits as most countries won’t let you fly in and exchange, say, US$500,000 in yuan for local currency, then use the proceeds to purchase the same quantity in dollars, then open a dollar-denominated bank account, deposit the money and collect interest on your dollars with no limits and no restrictions. But in Cambodia, you can do all of the above with very little, if any, paperwork and without paying transaction fees.
Supply and demand
Moreover, to keep Chinese products cheap and competitive in world markets, China has devalued the yuan several times in the last two years. Every time the yuan is devalued, savers in China see their savings drop in value against the dollar. By moving their money to Cambodia and investing in housing, Chinese investors have a hedge against currency exchange rate risk.
Observers see the new apartment towers going up in Phnom Penh and remaining unrented. But home purchased by Chinese in Cambodia, just as in the US, are purchased for the purpose of storing money in US dollars and with the expectation that earnings will come from housing appreciation, rather than rent. In other words, there was never an intent to rent the houses out or to live in them.
In the case of Cambodia, the economy has grown by at least 6% in all but one of the last ten years. Therefore, investments that mirror the growth of the overall Cambodian economy will outpace bank interest or investments in the general Chinese economy. Chinese economic growth has slowed to 6.7%, which is only a bit higher than that of Cambodia. But with major significant depreciation of the yuan since 2015, an investment in the general Cambodian economy gives a higher rate of return.
While downturns in the Chinese economy may be bad for Cambodia’s construction sector, they are good for the Cambodia housing market. While a depreciating yuan may be good for Chinese exports, it is bad for Chinese savers, and thus good for Cambodia’s housing market. The current Cambodian housing market is not a bubble.
The appreciation of housing is simply the result of supply and demand. The recent drop in prices is simply a return to normalcy. Prices may drop further in the near term, due to the 2017 and 2018 elections, but these drops will signal an exceptionally good buying opportunity. The Chinese economy is expected to continue to slow as public debt, unemployment, and a depreciating currency adversely impact Chinese investors. The demand for Cambodian housing will continue into the future, and will most likely reward long-term investors.
Antonio Graceffo (@brooklynmonk) is the author of seven books about China and Southeast Asia. He works as a lecturer at Shanghai University and holds a PhD from Shanghai University of Sport, as well as a China-MBA from Shanghai Jiaotong University.