Bank of International Settlements Flags Canada For Financial Crisis Next Year

Bank of International Settlements Flags Canada For Financial Crisis Next Year

More bad news for the Canadian economy. The Bank of International Settlements (BIS), an international financial watchdog, released its fall quarterly report this week. In it, they expressed concern about Canada’s debt-to-GDP gap, which is used to measure the stability of the local banking system. The organization has flagged Canada for a financial crisis as early as next year. Yikes.

Advanced Indicator of A Financial Crisis

The credit-to-GDP gap is a scary accurate indicator that’s used by the BIS to monitor where the next financial risks will occur in the world. It’s accurately predicted the relatively recent and financial turmoil in England, the United States, as well as a few other economies. Generally speaking, any time a country’s credit-to-GDP gap is higher than 10% for three years, a banking crisis follows (along with a recession). Canada has now been in that territory since 2015, and there’s no sign that Canadians are going to have a sudden windfall to correct it.

Credit-to-GDP Gap

Canada approached a dangerously high credit-to-GDP gap, then kept going. The BIS’ latest quarterly shows that Canada’s credit-to-GDP gap is now at 17.4%, which is way above the 10% warning threshold. China is the only other major economy with a higher ratio, although their GDP is growing at three times the rate of Canada’s. As a result, China’s planned economy might be better equipped to manage a downturn. Canada? Not so much.

 

Canada’s Credit-To-GDP Gap Vs. Major Trade Partners

Credit-to-GDP gap for Canada, compared to its largest trade partners. Note that the BIS breaks down 2016 into quarters for comparison, to highlight developments. Source: BIS.

Canadian Debt

Canada’s addiction to real estate speculation has driven Canadian consumers to record amounts of debt. As of December, discretely released numbers from the Bank of Canada (BoC) show that Canadians have $2 trillion dollars in consumer debt. A whopping 71.6% of the debt was mortgages, which Canadians have been piling into as they aggressively chased soaring real estate prices. BIS’ credit-to-GDP analysis shows that typically large binges of debt like this are followed by proportionally large recessions.

Now that Canada has been flagged for a recession next year, it’ll be interesting to see how Canadians respond. Will they abstain from further binging, or are they too busy shopping for new homes to hear the warnings.


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  • Justin Thyme 8 years ago

    Since China has been in this zone since 2012, it is not an absolute predictor. There has to be something else, as well.

    And the US figures are suspect. America’s GDP should be named GWGDP, or Gross World Generated Domestic Product. With over half of the physical greenbacks outside of America, and most American multi-nationals are more productive outside of the US, the US figures are skewed. For American multinationals, profits, sales, and production outside of the US are included in the American GDP, as the bottom lines of these companies are not split between foreign and domestic. But because of US tax laws, most foreign profit is locked out of being repatriated. Since the US domestic manufacturing index has decreased, while the American GDP has continued to increase, it is evident that this skewing is occurring.

  • the_oracle 8 years ago

    There are far worse cases, for example Israel. GDP=~300 Billion USD, Consumer Debt=~490 Billion USD (68% out of which is RE). Not sure this ratio indicates an upcoming crisis in the case of Canada.

  • Bank of International Settlements Flags Canada For Financial Crisis Next Year | Better Dwelling | News links 8 years ago

    […] Source: Bank of International Settlements Flags Canada For Financial Crisis Next Year | Better Dwelling […]

  • B.I.S. Flags Canada for a Financial Crisis Next Year - Here's Why - munKNEE dot.com 8 years ago

    […] comments above & below are edited ([ ]) and abridged (…) excerpts from the original article by Daniel Wong […]

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China | Global

China’s Capital Outflows Just Reversed, Bad News For Global Real Estate

China’s Capital Outflows Just Reversed, Bad News For Global Real Estate

The world’s greatest overseas real estate binge might finally be over. According to the People’s Bank of China (PBoC), China saw its foreign exchange reserves rise to over US$3 trillion. The unexpected rise is the first in 8 months, and may indicate that the new regulatory crackdown on capital outflows is actually working. This is bad for real estate markets that have seen a sudden surge of buying activity from Mainland Chinese buyers.

China’s Capital Outflows

China’s capital outflows turned into inflows, meaning more foreign currency went into the country than left. The PBoC found itself with US$6.9 billion more than the month before, a 0.25% increase. This comes after US$220 billion in outflows in 2016, and another $12 billion in January. While it doesn’t seem like a lot in contrast, analysts polled by Reuters expected a drop of more than US$25 billion. Analysts are now adjusting projections since this means China’s foreign reserves are a full US$31.9 billion higher than they anticipated. This could mean that China’s new capital controls are much more effective than analysts had previously anticipated.

China’s Foreign Exchange Reserves

The Chinese government is worked very hard to get that last uptick. Data Source: People’s Bank of China.

China’s Capital Controls

We’ve talked about China’s capital controls quite a few times, but in case you missed it here’s a brief intro. Chinese citizens are limited to exporting US$50,000 per person, per year. Not even enough to make a down payment on a house in Vancouver. So friends, family, strangers for money would lend their quotas to other people, so they could do a form of “soft” money laundering called smurfing.

Smurfing is a process where a large amount of money is broken down into smaller numbers to evade regulatory flags. The money is then wired by a number of people, then assembled by an overseas bank as a single account. Before you get the misconception that Chinese homebuyers are criminals, this is a fully legal process in countries like Canada, and the US where banks are even happy to help. This process plays a very important part in buying a home, and even paying the mortgage.

This all changed this year, when the PBoC and the State Administration of Foreign Exchange (SAFE) created additional rules to stop the outflow. The US$50,000 limit is still the same, but now banks are required to report transfers over ¥200,000 (US$29,000), and you’re no longer allowed to “lend” your allowance. Oh yeah, and the new rules strictly prohibit export of capital for buying bonds, “insurance-type” products, and real estate.

Companies now require government approval to purchase property abroad, and they can’t easily obtain it unless buying property has always been their primary business. Break the rules, you get a three year ban on exporting capital, and are investigated for money laundering. Being subject to a money laundering investigation in China is not fun from what I’ve been told.

Impact on Global Real Estate

Mainland Chinese investors are now the world’s largest buyers of overseas real estate. It’s actually sprung up multi-billion dollar businesses like Caimeiju, and Juwai that sell billions in overseas property, often sight unseen. These buyers added fuel to the fire created by over enthusiastic domestic buyers with massive mortgages, sending property rates soaring in Canada, Australia, England, France, Hong Kong…actually, pretty much everywhere.

Canada Fails To Commit To New Anti-Corruption Measures, Real Estate Soars
Totally normal sign advertising “no income verification” for international students at a CIBC branch, Canada’s fifth largest bank.

Now that the capital controls expressly prohibit real estate purchases, it’s kind of tricky for Chinese buyers to continue to drive the market. Actually, it’s likely pretty hard to even get the money to pay the mortgage on current purchases. Vancouver, Canada – a hotspot for Chinese buyers, saw a sales decline of 78% during this Chinese New Year, one of the most popular times to buy. Bloomberg also reported that Chinese real estate buyers were suddenly short on cash after the change in rules. February’s inflow of foreign exchange might be the first official data point to show that China’s buyers can’t continue to drive international real estate markets.

Mainland Chinese buyers aren’t the only driver of soaring real estate prices in global capitals. However, many markets saw locals taking out record amounts of debt to compete with well funded foreign investors. It’ll be interesting to see if the narrative continues to be told that Chinese buyers are driving markets, or if locals will realize they’re now providing liquidity for those same well-funded investors that need to get out.


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