Recent headlines from the financial sector have been directly tied to the real estate market in New York. Early last week, the Chinese government made a shocking move of devaluing their currency by 1.9 percent against the US dollar. This move marks the most significant single-day reduction in value in over twenty years. 1994 was the last time that China underwent a comparable markdown. The intention behind this devaluation of the renminbi appears to be to reduce capital outflows from China and essentially encourage Chinese investors to keep their resources exclusively in the Chinese markets.
Over the past year or so, China’s economy has slowed somewhat and the central Chinese bank responded by cutting interest rates to help lending and in turn ignite some positive movement in a floundering economic atmosphere. However, this move decreased ROI on domestic bonds so investors focused their energy and allocated more resources in other countries.
The New York real estate market proved to be one of the sectors abroad that benefitted tremendously from the influx of attention from Chinese investors. Although the devaluation of the Chinese currency does nothing to change the ROI for Chinese investors investing within China, it does mean that New York real estate just got more expensive for these Chinese investors.
It is important to keep in mind however, that while this devaluation of the Chinese currency will impact individual investors, major Chinese companies will likely be shielded from the repercussions of this action. For example, Greenland Holdings and Xinyuan Real Estate (both listed on Hong Kong and New York stock exchanges) earn a sizable portion of their monetary resources through selling stocks and bonds that are dollar denominated outside of China, meaning there is no conversion from Yuan to USD necessary. This is a major boon for larger Chinese corporations and for the New York real estate market dependent on resources from these foreign investors.
However, it remains to be seen how independent investors from China will proceed in the New York market if they don’t have any assets to leverage that don’t require currency conversions. On face-value, the outlook may not be great, but there are some who believe otherwise. According to economist at the Brookings Institution, David Dollar, this devaluation won’t have a huge effect on Chinese investment in the U.S. He instead believes that, “The question is where the currency goes from here.” While he acknowledges that, “There could start to be a devaluation trend,” Dollar does, “… not think that is likely.” Only time will tell!