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BC's Lax Investment Rules Endanger Vulnerable Overseas Workers

Chinese capital flight to places like Vancouver creates risk of disaster for hundreds of millions of labourers.

Mitchell Anderson 4 Jul

Mitchell Anderson is a freelance writer based in Vancouver and a frequent contributor to The Tyee. Find his previous Tyee columns here.

For those still reluctant to consider the impact of offshore money on our bloated real estate market, there is another reason to be concerned: the disastrous implications of international capital flight for vulnerable workers in the developing world.

There are no hard figures for the exact influence of non-resident buyers in our current housing crisis, and that glaring omission seems almost by design. The B.C. government still does not require collection of basic data, such as the country that property investors pay the majority of their taxes in.

That said, most observers would agree that the tidal wave of money fleeing China -- $1 trillion last year by some estimates -- has reduced affordability of what were already nosebleed local housing costs.

Say what you want about human rights in the Middle Kingdom (and there is much to say), but their economic boom of the last few decades has raised some 600 million fellow humans out of grinding poverty.

Those gains are now imperiled by a massive flight of capital by wealthy Chinese citizens who have the means to circumvent government restrictions on transferring money out of their country. Such restrictions are sensibly focused on preventing outflows from dangerously devaluing the Chinese currency -- something many economists are already gravely concerned about.

Under Chinese law, residents are limited to converting the equivalent of US$50,000 per year from yuan into foreign currencies. These limits are routinely breached by business owners who can engage in practices like mis-invoicing. Goods are transferred at inflated prices to subsidiaries outside Mainland China and beneficiaries can then freely spend the difference around the world.

Such accounting shell games are unavailable to the multitudes of migrant workers toiling in mega-factories to supply First World consumers with our iPhones and other gadgets under conditions that can require suicide nets.

But China is changing. Tectonic demographic shifts driven by decades of a one-child policy have led to increasing labour costs. Ever fickle global capital is now chasing cheaper and more desperate workers farther down the affluence ladder in countries such as Vietnam and Bangladesh.

Seeking 'comfortable, compliant jurisdictions'

Besides rampant corruption, pollution and political instability, the well-to-do class of China now has a new reason to secret their wealth outside their borders. Their famously frothy economic growth is grinding to a halt. Incredibly, when capital flight is considered, China is currently running a trade deficit. Those with the means to do so desperately want to stash their cash in comfortable compliant jurisdictions that don't ask too many questions. Welcome to Super Natural British Columbia.

Canada is arguably so complicit in a historic (and often illicit) transfer of offshore wealth that we might well be undermining the stability of the world's second largest economy.

But how can that be plausibly suggested? Fully $1 trillion fled China last year yet Vancouver real estate only ballooned by a mere $89 billion.

First of all, Vancouver is not the only place awash in offshore money. Toronto housing prices are also heading towards the stratosphere. About $110 billion of Chinese investment was poured into the U.S. real estate market last year -- an amount projected to double in the next five years.

Secondly, the Chinese government is burning through what was almost US$4 trillion in foreign exchange reserves to prop up the sagging yuan. This cushion is now down to $3.2 trillion and has shrunk 14 per cent since this time last year. As prodigious as their piggy bank is, such spending can't go on forever.

At the same time, debt loads in China have reached 250 per cent of GDP, creating a precarious exposure for state-owned banks that some analysts have called potentially "fatal" to the Chinese economy.

The geopolitical and economic consequences of a domestic Chinese meltdown would be catastrophic -- especially for a re-impoverished Chinese working class.

B.C. is certainly not the only place that Chinese wealth is landing, but it is near the top of the list. Recently a major Chinese bank successfully secured an order from the B.C. Supreme Court freezing the assets of a Shijiazhuang businessman who defaulted on a $10-million loan after buying four luxury properties in the Lower Mainland.

Panama Papers a warning

This is a small example of global problem. The Washington-based non-profit Global Financial Integrity reported that $6.6 trillion in illicit funds fled the developing world between 2003 and 2012. This flight of lucre from the poorest countries is growing by almost 10 per cent per year -- double global GDP. China led the list of nations with illicit capital outflows by a wide margin.

The Panama Papers give a whiff of how the world's wealthy are increasingly circumventing public oversight and taxation, a situation that seems only to grow worse.

Is B.C. sleepwalking towards being a desired destination for this disturbing global trend?

The Chinese government is trying to tighten oversight on wealth leaking outside its borders, which may temporarily cool our housing market.

Speaking even as someone forced to move twice in the last year, our recent housing woes are a quintessential First World problem. A more pressing potential catastrophe is the prospect of millions of people driven back into poverty as the Chinese millionaire class absconds elsewhere with destabilizing amounts of domestic currency.

China's consul-general in Vancouver rightly remarked last year that B.C. shares the responsibility for the irresponsible flows of money from China into the province, pointing to our lack of government oversight.

In the fullness of time our current politicians will have to answer for their shocking disinterest in the tsunami of dubious offshore investments that may permanently alter affordability in Canada's largest cities. However at least they can make the lazy argument that the real estate frenzy improves the province's short-term bottom line. The B.C. government now makes more money from property transfer taxes than from casinos, tobacco, booze, the carbon tax or all resource royalties combined.

So-called progressives have their own inaction to answer for. So enfeebled by fear of appearing racist, many have ignored the social justice implications of allowing our community to become a dumping ground for dubious wealth at the expense of the vulnerable elsewhere in the world.  [Tyee]

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