Chinese Trade War And US CRE

In order to fully understand where Chinese investment in CRE might go over the next few years, it is important to understand what the real war that is going on. China has been cheating the whole world for well over a decade. It steals technology, ignores court rulings, forces foreign companies to comply with rules that protect Chinese companies, and are engaged in the most massive espionage program in history. Their goal is world domination in 10-20 years. They were invited into WTO in the silly belief that they would behave once a member, and join the rules based western world. That was a false hope by naïve western governments.

Xi has been able to set forth a series of vast programs that will lead to domination unless the US stops them. They have a very extensive espionage program to steal every secret they can. Either through hacking or sending scientists or students to the US to work in companies, or to study in university labs and then return home with secrets purloined. They buy the technology where they can invest. They force all companies to divulge trade and technology secrets as the price of entry to the Chinese markets. They have manipulated their currency to price their goods at a low enough cost to take over whole world markets like solar or rare earths, or steel. Their Belt and Road program is designed to entrap countries throughout Asia into accepting massive infrastructure projects with  Chinese debt which can then be used to pressure these nations to adhere to Chinese policies against US influence. Now they are even in Africa with money and military advisors to begin the process of gaining influence in that continent.

The funding for these massive expenditures is generated by trade surpluses. The surplus is the net cash flow China has saved up to now use to buy the influence in Asia and Africa.  It also is the capital to create a world class army and navy, to dominate the Asian seas and deny access to the US Navy.  They now can control the South China Sea and their new base in Djabouti  provides a foothold to try to control the Indian Ocean area. Trade is the key to all of the funding for all of this activity and investment.

This is the real reason Trump is waging the battle with China. It is not just over balance of trade.  It is existential. During the Obama administration, no meaningful steps were taken to stop or slow the Chinese thrust to prepare and start these programs to build toward domination in the long term. They talked, and complained to the WTO, but nothing meaningful was done, so the Chinese knew Obama would never do anything, and they bet on Hilary to do the same.  Trump was left this problem and there was nothing left to do but act forceably.  Thus the tariffs and the new proposed limits on investment in tech companies. The US is basically on its own since no other nation has the strength or financial power to deal with China today. It was the same story with N Korea.

This is an existential battle. Xi is now the complete dictator for life. He is smart and tough. He has his plans underway and determination to carry them out. Trump, Pompeo, Bolton and Mattis are determined to stop it, or mitigate it without a real war. So tariffs is what you see, but there is the next 20 years or more of world history being played out now. This is one of those moments in history where were we not to act, then in 20 years everyone would say, Trump should have acted.

For US CRE, it means a very uncertain, and very limited situation with Chinese investment in US assets. There is minimal leverage available now for Chinese investors from their own banks, and there are capital controls capital controls. Wanda and Anbang ruined it for everyone. The Yuan is losing value. The Chinese economy is slowing due to the effort by the government to delever the economy before it explodes. EB 5 may at some point cease. There is no way to know. What is the one thing for sure is this is not ending next week, and not going to go smoothly. For Xi, this is everything, and for Trump it is existential for the US. For US CRE, it is the end for now of the flood of Chinese investment. Starting to work on an EB 5 deal now would be very risky and likely fail.

The views expressed here are the author’s own and not that of ALM’s Real Estate Media Group.