Australia: Foreign capital not creating new capital for the country - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, notes that the RBA Governor Stevens just stated that “For 200 plus years, we’ve imported other people’s capital and we’ve grown rich by doing that.” (Presumably meaning FDI not borrowing.)

Key Quotes

“However, he qualified that “…foreign capital that builds new assets, like some of the capital that funded the mining boom. That’s one thing. Foreign capital that buys up the existing assets, I’m not saying we should be closed to that, but that’s not creating new capital for the country.” Besides the usual economic confusion over “capital” meaning both ‘money’ and ‘the stock of business infrastructure’, the message was that Aussie returns of 5-6% (in commercial property, for instance) are low by local historical standards but very high by current international ones, so inflows just won’t stop.

But does that imply throwing in the towel on the monetary policy front? Or is it instead suggesting locals shouldn’t sell existing assets to foreign bidders? After all, if you sell an AUD asset yielding 6% and receive cash you join a long queue of investors looking for projects that generate half that yield: so why not just hold it? We’re already seeing increasingly-reluctant sellers of government bonds in some markets: perhaps that malaise going to spread even further as rates stay ultra-low.”