A lot of people spend a lot of time engaging in the reading of Chinese government tea leaves.
It is the modern equivalent of the Cold War exercise of Kreminology where platoons of pointy heads watched the Kremlin and tried to work out what the commies were up to.
When it comes to capital flows the “SinoSpooks” get very very excited on almost a daily basis as they try to work out whether the Chinese government has turned the capital flow tap on or off.
- Are the Chinese tourists allowed to buy more than 10 tins of baby formula?
- Can they buy investment properties in Australia, Canada and elsewhere?
- Are the Chinese using bitcoin to get capital out of the reach of CCP minions.
- Are Chinese developers pulling back or striding forth?
- Is the Chinese government buying US treasuries via Belgium?
The list of potential capital flows are endless so it is a ripe field for observation.
Capital inflows are the issue
The point about capitals flows, that is almost always ignored, is that capital inflows are the problem not outflows from China and that is entirely within our control.
It is capital outflows that are hard to stop as they merely require someone outside China ageeing to sell them something and finding some way of settling the deal.
Thus why the Chinese government is having some difficulty.
Rather than clutching our knitting and wondering whether China will successfully stop or allow outflows we need to be talking about what Australia is doing about regulating capital inflows.
And not just from China. In fact China gets more attention in this department than it deserves.
Australia has a long and shabby history of allowing in capital from anywhere without any regard as to whether it is productive or unproductive. Much of our most unproductive capital comes from the US, UK, Europe and Japan.
In fact many of our economic commentators seem ignorant of the distinction. Scott Morrison certainly is clueless.
Unproductive capital inflows are easy to stop.
The basic point is that capital inflows cannot happen unless local law permits a foreigner to buy something.
- Government bonds
- Bank Deposits
Would you buy any of those if the local government restricted or did not recognise your ownership?
All of them are currently or could easily be made the subject of registered ownership.
Which means finding out if some foreigner has acquired ownership is easy.
Who would risk ownership of an asset in breach of local law?
Would you buy a Chinese asset if the Chinese government made that ownership illegal by a foreigner – they actually do this for many many classes of assets. They are not as stupid as we are and know the difference between productive and unproductive capital flows and do not fawn foreign ownership.
Restricting capital inflows that are clearly unproductive is not difficult and means that we are not hostage to what the Chinese government does or does not do.
At some point we need to take some responsibility for our own economy.
Hiding behind neoliberal mantras about “free capital flows” is not much of an excuse.
And let’s face it this is what the problem is all about.
Australia’s political and economic class are in the grip of a treacherous economic ideology that insists that capital should be allowed to slosh around the world regardless of whether it is productive or in the interests of the general Australian public.
To avoid giving a justification for their treachery they try to make out that unrestricted capital flows are some natural law discovered by Adam Smith and thus is self evident. Don’t buy this line it is complete nonsense.
The “free capital flows” crowd are ideological extremists pushing something close to a religious belief. They and their ticket clipping mates just happen to make profits rather than secure an express ticket to paradise.
The cost of unproductive capital inflows is that they do not involve any direct expansion of the productive capacity of the Australian economy but they do push up the AUD and that kills local jobs and local businesses.
If you want to know why Australian business struggles to compete look no further.
Interest rates at emergency levels are also extremely unproductive.
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Especially when ‘delivering’ low market rates to local asset price speculators requires our banking sector to incur hundreds of billions of external liabilities.
Then we get the double whammy.
An inflated AUD driven up by the capital inflows.
And bloated asset prices as speculators use the cheap credit to bet on asset prices.
A tax effective capital gains discount regime just makes the situation even worse.
Oddly people think that Howard was a good economic manager for creating this mess but that is what happens when few understand unproductive capital inflows and unproductive #FakeInvestment.