November 3, 2012
Topics: Economics, China
There has been a lot of discussion about the state of the economic growth in China. There is no dispute about the phenomenal three decade long economic boom, which has transformed the country from widespread poverty in the second richest country in the world, with modern metropolises rivaling that of any other nation. Nevertheless, there has been mixed reports of the Chinese economy after the slowdown in 2008.
After a recent trip, traveling across the country from Shanghai to Shenyang, I decided to share some observations from China that are not reported in the mainstream news.
Reports about a widespread property bubble seem to be accurate. New apartments in Shenyang run about ¥6000 Yuan per square meter. This comes out to about $100,000 for a 900 square feet apartment. This is very high if you compare it to local incomes. Price to income Ratio is about 1:15 in Shenyang and as high 1:30 in Shanghai and Beijing.
I spoke to a real estate developer in Shenyang who is constructing one of the many new high-rise apartment buildings in the city. His buildings were sold out with many months left of constructions, and nearly all buyers paid cash in full. This appeared to be typical in China. The financial system lack the sophistication of the west, credit is not readily available and interest rates for home loans are many times higher than in the United States. As a result most buyers pay cash in full.
So who are buying these apartments? According to Peng Ming Ming, a local real estate entrepreneur, the buyers are mainly made up of investors and Newlywed couples. (Newlyweds, whose combined income is less than $6,000 a year). The money comes from their newly rich parents and grandparents.
There has been massive building of apartment and condos all over western China. These real estate projects have been funded by central bank lending, which has funneled money into politically favored developers at low rates.
The municipalities have been selling land at high prices to developers. Inflation generated by the central bank results to commercial bank lending to fund uneconomic projects. This has created a bubble. Low interest rates lure in entrepreneurs to invest capital and perpetuate the bubble.
When the central bank finally puts a break on lending, or when prices become too unaffordable, the boom will turn into a bust. The fact that the buyers do not borrow money from banks is irrelevant. What matters is that developers borrow to build them.
Investors and entrepreneurs are buying multiple apartments, and taking them off the market in anticipation that new condos will appreciate faster. They are purchased as pure speculations and not based on their ability to produce a stream of long-term revenue. This is a classic sign of the final stage of a real estate bubble. The outcome is predictable but the timing still remains to be determined.
Despite misallocation of capital in uneconomical real estate projects, the economy seems to steaming ahead. People are driven and ambitious. They want to get ahead and enjoy a better life.
China is also transforming itself from an economy mainly driven by exports to an economy that is relaying more and more on internal consumption. Western brand name clothing products, electronics, and German engineered cars are in high demand. New high-end malls are being built and consumption is ramped despite prices of 30-50% higher than in the Unites States.
China is also transforming into a nation full with automobiles, and it is now the number one buyer of news cars, surpassing America. The streets do not look much different from any western city. Audi, BWM, and Mercedes dealerships are popping up everywhere and performance cars are common on the road.
It is a fascinating country mixed with rich culture, old temples, and new metropolises with skylines rivaling any western city. It is really amazing how much the country has transformed in just a few short decades. I recommend anyone going there to experience the next great country in the making.
Picture, sky lineBuddhist temple and statue outside Wuxi
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