Could Detroit Bring Down The Chinese Economy?

Wealthy Chinese Are Fleeing China For Places Like Detroit

“So much wealth and so much power,  Armstrong thought, yet with a little luck, we can bring you down like Humpty-Dumpty…” -James Clavell, Noble House

For those of you who missed it, Gordon Chang at Forbes wrote a great piece today about Chinese real estate speculators buying property like crazy in Detroit and how they are encouraging other rich Chinese to park their money in Detroit.

Chinese shoppers can’t resist a bargain.  Where else can you buy a two-story home in the U.S. for $39?  China Central Television, the state broadcaster, in March reported that two houses in Detroit cost the same as a pair of leather shoes.  No wonder a poster on Sina Weibo, the Twitter-like service, asked, “Seven-hundred thousand people, quiet, clean air, no pollution, democracy — what are you waiting for?”

Who says the Chinese are waiting?  Dongdu International Group of Shanghai bought, sight unseen, two downtown icons, the David Stott building for $4.2 million and the Detroit Free Press building for $9.4 million, both at auction this September.

Moreover, Chinese purchasers are making bulk purchases of “inexpensive properties” — those selling for $25,000 or less — in the rings surrounding the city center.  “They’re banking on the downtown resurgence spiraling out into those rings,” explains Kelly Sweeney of Coldwell Banker Weir Manuel.  Mainland parties often buy at tax and foreclosure sales, hold their property, and patiently wait for appreciation.

china-bubbleGordon Chang, who has lived and worked in Hong Kong and Shanghai for over two decades makes an interesting observation about Chinese business strategy when it comes to Detroit. He says it’s about patience. A business concept that most Americans have long since forgotten.

He also says not to expect Chinese businessmen to be pumping millions of dollars into renovation projects into their recent acquisitions like the old Detroit Free Press building anytime soon. As Chang points out, “China’s rich are investing in the Motor City like they invest in their own country, where they buy multiple units at a time. In China, like here, they often keep their acquisitions vacant, treating new properties like stores of value.”

 The long term Chinese investment strategy in Detroit and in other parts of the U.S. indicates there is more to the story.

The bigger story is the amount of wealth being moved offshore from China. Although the Chinese only have 13% of their wealth parked offshore compared to the global average of 20% to 30%, its the number of rich Chinese who are leaving mainland China that should be frightening  Chinese leaders.

A study conducted by Bank of China found that over half of China’s millionaires have taken steps to emigrate to the West.   Boston Consulting Group estimates that Chinese millionaires hold $450 billion in assets outside their country with the number doubling over the next three years. Where as, WealthInsight believes the number to be closer to $658 billion.

CNBC called the movement of Chinese capital “one of the largest and most rapid wealth migrations of our time: hundreds of billions of dollars, and waves of millionaires flowing out of China to overseas destinations.” 

Although all this investment may be good for Detroit, it says less about Detroit’s prospects as it does about the economic outlook of China. As Chang observes, “as grim as the future is for Motown, it is evidently better than China’s, at least according to many Chinese.  They are pouring their cash into Detroit.

 

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