A crisis in developing markets means there is some serious money on the move around the world. And despite the falling Canadian dollar, there are good reasons to think some of it is on its way here.
So far, new data shows house prices in Vancouver and Toronto are still hot, at least partly due to the interest of overseas buyers. Increasingly that money may be moving into things other than real estate.
At first glance, putting your money into loonies might seem like a bad idea.
For more than a decade the Canadian dollar has been identified as a petro-currency, and as the price of oil tumbled toward $30 US this week, the loonie has been falling too.
Floods of cash
But neither that nor threats of rising interest rates and tighter mortgage rules seem to be slowing the flood of new cash into Vancouver and Toronto property.
One of the reasons could well have to do with something happening on the other side of the world. If so, expect more of it.
Chinese investors' global hunt for prime real estate has helped to drive Vancouver home prices to record highs. With China, Brazil and Russia facing bleak economic prospects there is a new flood of international money looking for a home. (Julie Gordon/Reuters)
On the first trading day of the year there were new signs that all was not well in China's giant economy. Stocks plunged seven per cent in a single day. Far more significantly, the Chinese currency also fell sharply.
In the days following, the Chinese government moved in to slow the decline in both the market and the currency. And while China's central bank does not reveal its activities, there were clear indications China was dumping money into the market to stem the plunge in its currency, the renminbi.
Rush to sell
"In the foreign exchange market, traders saw signs that the People's Bank of China was selling dollars from its foreign exchange reserves to support the renminbi," reported the Financial Times on Tuesday.
In other words, China was using its trillions of U.S. dollar reserves, accumulated when the renminbi was rising, to counteract the effects of a rush by people inside and outside the country to sell renminbi and buy some other currency.
China is not alone in facing an exit of cash. That's partly because moving money around the globe may never have been so easy. And before last year's commodities crash, that seemed like a good thing.
When emerging markets like Brazil, Russia, India and China, the so-called BRIC countries, were booming, money rushed in, putting people to work and increasing living standards. And there was plenty of money around.
Central banks in the United States, Europe, China and Japan had created floods of cash to recharge their weakened economies. A spirit of globalism and free market capitalism meant that money sloshed across borders all around the world.
Hot money: A woman burns joss paper money during the Chinese Hungry Ghost Festival. Foreign exchange traders say there are signs real money is flooding out of China as people worry about the economy's future. (Reuters)
Strong emerging market currencies and low U.S. interest rates meant countries could borrow freely in U.S. dollars. Hot money — cash with no national loyalty that moves quickly around the world to find its best return — poured into developing economies in search of higher interest rates.
But suddenly that flow of money has changed direction.
Without China to suck up the world's excess of commodities, Brazil, Russia and other emerging markets are in serious trouble.
Experts say the Brazilian economy is in something closer to a depression, not a recession, as growth is expected to shrink by some eight per cent over three years. There are serious worries that even government-backed companies could default on bonds.
Suddenly Canada looks good
In such a climate Canada suddenly seems like a pretty great place to keep your money. Unlike precarious spots like Brazil and Russia, Canada has diversified wealth and stable institutions. Its population is highly educated and resourceful.
While the plunge in resources will continue over the next year as oil prices bottom, Canada is not just a resource economy. The loonie is not just a petro-currency.
Certainly in our oil-producing regions, the pain is not over. But already there are signs that the non-resource economy is on the way back, ready to serve a stirring U.S. industrial and consumer economy.
The U.S. private sector is creating jobs. Car sales on both sides of the border have hit new highs.
An acquaintance in Hong Kong who used to invest money for people he described as "seriously rich" taught me one of the most important rules of international investing. Yes, you must look at whether the stock will increase in value. But when a stock goes up 25 per cent there is no profit to be had if the currency falls by half.
The loonie is just now sliding to the bottom of its historic range.
Compared to developing countries where economies may be nearing the point of serious disorder, Canada is safe and boring. And in a frightened world, that's a good thing.
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