It is common to observe China with a Western point of view. Sometimes, the simplicity misleads and one watches the train pass by without getting inside. Various economists have been going in circles about the Chinese catastrophism for 30 years, without any disaster actually happening. We will not be quoting these analyses.
Evidence
Evidence must be remembered because it often changes the game:
1. The weight of the population; it is concentrated in Eastern China, which includes 80% of the 1.4 billion inhabitants, while the two westernmost provinces, Tibet and Xinjiang occupy 2.9 million km2 (30% of Chinese territory or more than 19 times the surface area of England) with 25 million people. Shandong, for example, a province, smaller than England, has more than 100 million people.
2. The government without any real counter-power can take quick, energetic and effective measures and steer the economy with ease. I wouldn’t remind you of the difficulties that a Western government (especially France) has in getting reforms adopted!
Restrictive measures as early as 2010, a characteristic
The automotive and real estate sectors, which often reflect the state of the economy, are good examples for our purposes.
While it was very easy to buy an apartment in China in the first decade of the 21st century – even for foreigners with a simple passport – restrictions were introduced on apartment purchases to curb speculation and the price boom from 2010.
The explosion of prices in real estate
Let us take the example of Beijing. The price per m2 was multiplied on average by 20 between 2003 and 2020. Today, it is around 60,000 yuan, or nearly 8,500 USD. An average (as is often the case in China) is not very relevant. For the centre of Beijing, the average per m2 is over 100,000 yuan (14,100 usd), while the suburban neighbourhoods register prices around 3,500 USD. Common areas are included. An apartment of 100 m2 in China may correspond to 88 m2 in Europe, or even much less in large housing estates. You can go down to 72. The term “efficient housing rate” is therefore used, 得房率. Thus, the habitable square meter is much more expensive. The average wealth of a household in Beijing is 8.97 million yuan (nearly 1.27 million euros) and 70% of it is real estate, see here.
The crazy explosion of prices has seen some quite hallucinating scenes, like hundreds of people queuing at night – some sleeping in tents – to make sure they could buy an apartment in a residence when the office would open in the early morning of the first day. Wealthier wallets could pay a person to stand in line all night and get a number for astronomical amounts of over 28,000 USD. Yeah, that sounds incredible. I know more than one businessman who, in the early 2000s, paid such an amount and they don’t regret it.
Groups of speculators, often from Wenzhou, 温州炒房团, came to buy quarter by quarter in many Chinese cities.
Reaction and concrete measures
Even though municipalities were reaping a large part of their revenues from the real estate sector, the government had to react shortly after the stimulus package in the wake of the subprime crisis. The wide opening of the credit floodgates had allowed a further price hike and as early as May 2010 a law on limiting purchases was issued 限购, which is still applied in many cities with some local variations.
Limitation of purchases in China
In the capital at present (with the exception of the Tongzhou district), for Beijingers, singles can buy an apartment, a couple two. For non-Pekinese, an apartment is allowed but you must first have paid 5 years of social security contributions in Beijing or have paid taxes for 5 years while having a residence permit. Foreigners have the same treatment, but the property must be residential and it cannot be let – in theory. In practice, there are contradictory administrative practices that “allow” a foreigner to be a landlord.
Effective restriction
There are some small local techniques to circumvent the regulations even to the point of “officially” divorcing in order to buy an additional apartment. In a country, accustomed to many upheavals in history, stone remains the safest value, which does not prevent you from playing sports on the stock market. These restrictive measures have not prevented prices from being multiplied by 2.5 between 2011 and 2019.
One can therefore imagine the price increase if these restrictions had not been in place. Moreover, every time there are rumours that restrictions are being lifted, professionals and investors are in the starting blocks to take advantage of new opportunities.
Leverages
For the past 20 years, I’ve been constantly asked when the Chinese real estate bubble will burst. Of course, I know all the ratios that show the crazy gap between housing prices and average incomes, but the specificities of China prevent me from thinking in French and predicting the market’s explosion every other day. It is too important for the Chinese economy and the government would react quickly if it had to. The authorities still have levers. It would be enough to ease the restrictions for the market to regain some discipline, not to mention lowering borrowing rates, which are currently between 4.1 and 5.6%.
Restrictions on cars
As for the automotive sector, the authorities were obliged to take restrictive measures on purchases as of 2010 also in several Chinese cities in order not to worsen traffic congestion. The Beijing municipality has adopted a system of limited allocation of license plates by drawing lots. Shanghai has opted for an auction system. In the wake of the epidemic, newspapers were talking about quotas of 100,000 additional plates in Beijing for the year 2020 to stimulate the sector. The city’s trade bureau had to deny the news caused by a “misinterpretation” of the debates. The opening of the credit floodgates has apparently been enough to give the car market a new lease on life. Once again, the government has an additional weapon to help the auto sector when needed: easing restrictions.
I have taken two examples that show that it is absolutely necessary to try to understand China from the inside before having an opinion, which is the case for many other sectors and even for the whole understanding of China. We need to be more open when we approach very different lands.