China’s real estate market is one of many burgeoning sectors of the economy, but some are asking if it’s a bubble ready to burst.
China’s real estate market is hot. For almost a decade, this sizzling sector of the country’s already rapidly booming economy has seen staggering rates of annual growth. In a National Public Radio broadcast, Shanghai property consultant, Sam Crispin, noted that “the Shanghai property market is developing even faster than the post-war property boom in the West.” Crispin described this development as “the most amazing real estate boom the world has ever seen. In global terms, what we’re seeing in Shanghai is the equivalent to the 50 years it took for the United Kingdom to achieve… being compressed into five years in Shanghai; and we’re just at the start.”
According to University of Southern California real estate expert Yongheng Deng, the total amount of real estate investments in China reached 1.9 trillion yuan (approximately US $254.8 billion) in 2006, a 21.8% annual increase.
Since 1998, when China opened up its real estate market, skyscrapers, luxury apartments, and Western-style villas have been popping up in and around major cities throughout the country. Both foreign and domestic investors have funneled money into the market. Furthermore, combined with the benefits of the country’s rising property values and an appreciating currency, domestic entrepreneurs are leading the emergence of China’s “New Rich” class. For example, China’s richest person, Yang Huiyan, has a US $17 billion controlling stake in Country Garden, a property development corporation.
The market is hot, but some worry that it might be overheating. Despite the positive impact rising values have had on the national economy, the Chinese government is seeking to find a more sustainable pace of development.
In an attempt to bring greater legal stability to the market, the government has enacted several moderating policies—the most recent and significant of which is the New Property Law.
This law, promulgated on March 16, 2007 and taking effect October 1, 2007, provides for equal guarantees for private property and public assets and is aimed at “safeguarding the fundamental interests of the people” according to a statement by Vice Chairman of the National People’s Congress, Wang Zhaoguo.
Although the protection of private property and assets is so common in developed countries that it is often taken for granted, “In China, it would mark a very important step in the country’s belated march to a real market economy,” said Songyan Sui of the BBC Chinese Service.
However, though the new law promotes transparency and consistency, it remains ambiguous in several areas including rights renewal, defining “public interest,” and, according to USC’s Deng, provides “no clear direction” for long term investments.
Deng asserts that, in fact, most government policies have been “useless” in controlling soaring property prices. These values continue to rise despite numerous state-imposed curbs—such as increases in mortgage rates, down-payment requirements, and tax burdens—demonstrating impressive market resilience, Deng notes.
The property market, however, is not limited to individual buyers. According to a recent report from private equity service provider, Zero2IPO, there has been an increase in foreign private equity funds investing in Chinese real estate.
This form of large capital inflow is due, in part, to the enhanced investment fever as people and firms anticipate the 2008 Beijing Olympics as well as the 2010 Shanghai World Expo.
“The [property market’s] impact in the next four or five years will be very significant,” Deng predicted.
Last year, a total of US $8.23 billion (approximately 61.4 billion RMB) of foreign investment was injected into China’s property market, a 51.9% increase from the previous year. Aetos Capital, JPMorgan, and Morgan Stanley are among some of the key players furthering this economic trend. Morgan Stanley, in particular, is currently in talks for a multibillion RMB redevelopment project in Shanghai’s central Luwan district estimated for completion by 2010.
This expansion has spurred tremendous growth in China’s gross domestic product, but is not without drawbacks. Growing wealth and income inequality as well as rising environmental problems have stimulated civil unrest. Over sixty thousand of violent demonstrations, many over property issues were recorded in 2006 (in 1993 there were 8,700 such demonstrations). Often times these protests resulted from real or perceived corrupt deals engineered by developers and local officials, at the expense of now displaced farmers. Top Communist Party leaders, however, have demonstrated concern toward this matter and recently met in Beijing to formally adopt “creating a more harmonious society” as a national priority.
Many members of the government fear that recent trends contradict the principles of “Socialism with Chinese characteristics.” Despite numerous declarations from conservative party doctrines dictating China’s commitment to socialism and aversion to capitalism, economic expansion has led to institutions resembling the West more than ever before.
Though the economic expansion has aided many in escaping poverty and enabled the affluent individuals to further enhance their wealth, property development has cost many others their homes and livelihood. Many of China’s poor are more vulnerable now than they were a generation ago. Subsidies in housing, health care, and education have all declined since the introduction of Deng Xiaoping’s “Reform and Opening” (gaige kaifang) policy in 1979.
Ambitious real estate projects in the past decade have caused the destruction and forced relocation of millions of Chinese households. Traditional neighborhoods throughout major cities such as Beijing and Shanghai are being leveled to make room for the new buildings of wealthy property developers. Most recently, controversy has spread over uncompensated relocations in preparation for the Beijing Olympics.
Increasing urbanization and migrant worker populations also disrupt the social landscape in China. According to a 2005 New York Times article, “China expects 75 million more farmers to move to cities over the next five years, amounting to one of the biggest mass migrations in history.” In 2006, migrant workers made up a whopping 15% of China’s workforce, but their position in society continues to bear a great social stigma. In the cities, they live as second class citizens as they receive limited access to housing, education, medical care, and legal protection. Banned from forming unions, these workers make up the majority of exploited sources of cheap labor in urban construction projects.
In addition, building projects have greatly increased China’s appetite for energy and natural resources, taking a toll on the environment. According to a 2006 publication from Center for Strategic and International Studies and the Institute for International Economics, sixteen out of twenty of the world’s most polluted cities are located in China. A press release earlier this year by the Netherlands Environmental Assessment Agency, indicated that in 2006, China’s carbon dioxide emissions surpassed those of the United States by 8%.
Despite the negative consequences of real estate development, demand in the property market has continued to soar. With increasing property market speculation, numerous economists have come to fear that, much like the dot-com boom in the 1990s, it is a bubble about to burst.
“China’s asset bubble may burst next week or next year,” economist Andy Xie said recently in the Financial Times. “Your guess is as good as mine. The economic impact, however, will be limited.”
However, Deng contends that “housing is much more complicated than the stock market” and therefore a direct comparison of the two is inaccurate. For instance, the housing market, unlike the stock market, operates in a multi-tiered structure that limits the ability for speculation that may occur in one tier to bring down the entire sector.
Moreover, despite increases in both borrowing by domestic entrepreneurs and investment by foreign institutions, China’s domestic savings rate is still relatively high—currently around 40%—due, in part, to a cultural preference to buy with as much cash as possible so as to lower loan obligations.
Though the Chinese government must still find ways to address the social and environmental challenges of the country’s uneven yet tremendous growth, Deng believes fears of the housing bubble and its imminent implosion are severely overblown and mostly “media talk.”
Jonathan Chow is a sophomore majoring in International Relations at the University of Southern California.