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Doom sayers of property slump proved wrong
By Dan Steinbock |
March 29, 2012, Thursday
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Print Edition
Print Edition
FOR a year or two now, many observers in the West have been betting that China is about to suffer a "hard landing." Like James Chanos, the famous hedge fund wizard, they predict a severe Chinese property slump.
It may be useful to recall that when the world economy was in free fall in late 2008, same observers were confident that China faced imminent downfall.
Four years ago, these observers saw world trade collapse. They thought that China's growth was driven by exports. As a result, they expected China to collapse as well. In reality, net exports do play a role in economic growth, but in the case of China they account for only 4 percent of GDP.
However, since China's investment rate is almost 50 percent and much of it focuses on urban property markets, does it follow that the doom sayers are right this time? In reality, China remains well-positioned to enjoy urban growth for another 15-20 years, as long as internal cohesion prevails and international environment remains peaceful. That's the good news.
Soaring prices
The bad news is that, in such circumstances, it is difficult to avoid occasional overheating.
In the past, first-tier cities have attracted wealthy investors from across China and East Asia, and multinational property developers. Consequently, soaring prices have been driven by speculation. If the government had not intervened in the overheated property markets, there would have been real concerns over the future.
Residential property markets are still geared to high-margin, high-end properties; especially luxury housing. That made sense during the two early decades of reforms, when Chinese buyers were still rare and few. Today, far more Chinese - middle-class, working class, and rural migrants - are able and willing to acquire a home. A new era requires a new policy model; one that stresses low-margin, medium-value properties; that is, affordable housing.
China's urban bubbles have been largely restricted to first-tier cities. Growth in third- and fourth-tier cities, even in the second-tier urban centers has been relatively healthy. Additionally, retail, logistics and industrial property markets have done relatively well. If that's the case, why is it that, in the West, some observers remain convinced that China is heading toward or is amidst a "hard landing?"
Typically, we seek to understand what is foreign to us by drawing from our past experiences and present knowledge. That is why foreign observers often get things wrong as they try to get things right - in two ways.
Coming from smaller economies, they simply do not understand the magnitude of China's size. Second, most have only been exposed to the first-tier cities in China. But just as New York City is not America, Shanghai is not all of China.
In China, the first-tier cities are great barometers of the future. But the economic potential of the mainland as a whole is far greater than that of the first-tier cities alone. In China, one of every two people lives in cities. In the established Western metropolises, this urbanization rate is far higher - often more than 80 percent.
Today, China has close to 650 million urban residents. In the next four decades, this figure will climb to almost 1,050 million. What China is trying to achieve is without comparison in history.
China seeks to create urban space for more than 400 million people - within one generation. In the leading advanced economies, the gains of urbanization were largely exhausted by the 1980s. China still has a long way to go.
Dr Dan Steinbock is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China).
It may be useful to recall that when the world economy was in free fall in late 2008, same observers were confident that China faced imminent downfall.
Four years ago, these observers saw world trade collapse. They thought that China's growth was driven by exports. As a result, they expected China to collapse as well. In reality, net exports do play a role in economic growth, but in the case of China they account for only 4 percent of GDP.
However, since China's investment rate is almost 50 percent and much of it focuses on urban property markets, does it follow that the doom sayers are right this time? In reality, China remains well-positioned to enjoy urban growth for another 15-20 years, as long as internal cohesion prevails and international environment remains peaceful. That's the good news.
Soaring prices
The bad news is that, in such circumstances, it is difficult to avoid occasional overheating.
In the past, first-tier cities have attracted wealthy investors from across China and East Asia, and multinational property developers. Consequently, soaring prices have been driven by speculation. If the government had not intervened in the overheated property markets, there would have been real concerns over the future.
Residential property markets are still geared to high-margin, high-end properties; especially luxury housing. That made sense during the two early decades of reforms, when Chinese buyers were still rare and few. Today, far more Chinese - middle-class, working class, and rural migrants - are able and willing to acquire a home. A new era requires a new policy model; one that stresses low-margin, medium-value properties; that is, affordable housing.
China's urban bubbles have been largely restricted to first-tier cities. Growth in third- and fourth-tier cities, even in the second-tier urban centers has been relatively healthy. Additionally, retail, logistics and industrial property markets have done relatively well. If that's the case, why is it that, in the West, some observers remain convinced that China is heading toward or is amidst a "hard landing?"
Typically, we seek to understand what is foreign to us by drawing from our past experiences and present knowledge. That is why foreign observers often get things wrong as they try to get things right - in two ways.
Coming from smaller economies, they simply do not understand the magnitude of China's size. Second, most have only been exposed to the first-tier cities in China. But just as New York City is not America, Shanghai is not all of China.
In China, the first-tier cities are great barometers of the future. But the economic potential of the mainland as a whole is far greater than that of the first-tier cities alone. In China, one of every two people lives in cities. In the established Western metropolises, this urbanization rate is far higher - often more than 80 percent.
Today, China has close to 650 million urban residents. In the next four decades, this figure will climb to almost 1,050 million. What China is trying to achieve is without comparison in history.
China seeks to create urban space for more than 400 million people - within one generation. In the leading advanced economies, the gains of urbanization were largely exhausted by the 1980s. China still has a long way to go.
Dr Dan Steinbock is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China).
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