Receiving foreign investment sounds like a great thing for an economy. Unless you are Canada and are receiving a ton of money from China. The cash flow, part legal and part illegal, is reportedly causing a surge in property prices and particularly benefiting criminal organizations in Canada.
According to a report by The New York Times, nearly US$1 trillion went out from China between 2015 and 2016. The reason for this is pretty straightforward — the Chinese do not trust their own government. They are afraid that Beijing’s economic policies might end up ruining China, thereby devaluing the yuan and wiping out a good portion of their assets. To avoid such a scenario, wealthy Chinese take out a large chunk of their money and invest in countries like Canada, the U.S., Australia, and so on.
In Canada, real estate is one of the biggest targets of Chinese investors. They lap up Canadian real estate so aggressively that many blame Chinese money for causing property prices to spike in regions like Vancouver. In fact, the government raised the tax on property purchases by foreign buyers to 20 percent last year to prevent Chinese money flows from inflating local real estate values to the point that native Canadians are unable to afford a home.
More expensive homes are subjected to additional taxes in the case of foreign investors. In fact, the Canadian government has introduced a “speculation tax” that targets foreign investors who neither pay income tax nor live in the homes they buy in British Columbia. Though introduced with good intentions, the law has created additional problems for local homeowners as they are now required to prove they are not a speculator.
“The idea you would be labeled a speculator unless proven otherwise, every single year by taking 20 minutes to fill out government paperwork… is outrageous and I’ll be surprised frankly if the government doesn’t back down on this within a week,” Kris Sims, BC director for the Canadian Taxpayers Federation, said to Nanaimo News Now.
However, there is a more sinister problem with Chinese cash flows — increased criminal activity. Since most of the money that comes into Canada from China is illegal, the Chinese investors use local criminal organizations to “clean up” their money. It is estimated that close to US$1.7 billion was laundered by China-linked mobs in Canada between 2013 and 2017 by pumping money into casino earnings. In 2016, the criminal organizations “cleaned up” US$1 billion of Chinese money by investing it in real estate.
Canada is not the only country struggling to deal with Chinese cash flows. Australia is also facing the same issue. As of 2018, foreign buyers, most of them Chinese, accounted for about 10 to 15 percent of homes under construction in Australia.
Chinese investors bought nearly US$1.5 billion worth of residential building sites in 2015, which came to a third of all building sites in the country. To stem the flow of Chinese money into local real estate, the Australian government introduced a set of rules that seek to restrict foreign property buyers.
“I’m not saying we should stop foreign buyers, but it should be more difficult because a lot leave their properties empty, which clearly has an impact on the rental market, and those ghost homes also have a wider impact on the microeconomy — what happens to the local coffee shop or newsagent when there are fewer people living in the area than there should be?’ Doug Driscoll, a real estate expert, said to News.Com.Au.
Foreign buyers owned close to 400,000 homes in Australia as of 2017, according to some estimates. Market experts predict the number could quickly jump to a million homes over the next few years, with the majority of the properties being owned by the Chinese. And in a country of just 10 million dwellings, that is a pretty big figure.