The Global Eye meets Henry Storey. He is an Asia-focused political risk analyst working in Melbourne. He writes regularly for the Lowy Institute and was formerly an Editor at Young Australians in International Affairs and Foreign Brief.
- What are the main risks of the Chinese real estate market and what are the main repercussions on the economic system, in particular on the finances of local governments?
The Chinese real estate market appears very much to have bubble-like characteristics, with over 90 million homes standing uninhabited. Houses have been built purely to satisfy speculative demand and to meet growth targets and the debt of real estate companies has risen exponentially. Chinese banks, local governments, households and local governments are all heavily invested. Beijing has set itself the unenviable task of deleveraging the sector without causing a broader financial, economic or social crisis.
Local governments, for example, rely on real-estate related income for on average approx. one third of revenue, though the picture is much more acute in certain provinces. To make up for the financial shortfall, local governments have been forced into cutting wages, and in some extreme cases, imposing arbitrary fines on local businesses. Though the picture varies, with high levels of debt and worsening demographics, many local government finances were already in a fairly parlous state before the real-estate slowdown.
Whilst some defaults may occur, Beijing will not let local governments implode. The pre-existing trend of local government’s increasingly relying on central government transfers will deepen. Local governments will be hard pressed to meet the objectives of Xi’s common prosperity agenda, which because of China’s fiscal structure, will primarily be their responsibility.
- How is the issue of the Chinese real estate market linked to the demographic crisis and the need to support upward social mobility by improving the social assistance network?
Whereas China once enjoyed a demographic dividend which help fuelled its export and construction-led boom, its demographic profile is increasingly grave. In 2020, at 1.3, China’s birth rate was actually lower than Japan’s (1.34). Of course, the difference is that China is far poorer than Japan, whilst also having no appetite for Tokyo’s limited immigration intake. Beijing recognises that housing unaffordability (with housing costing over 50 times annual wages in some major cities), is inextricably linked to declining birth rates. Other challenges include the cost of education and that is why the Chinese government last year moved to ban private after-school tuition. So, the broader common prosperity campaign also has a demographic objective, with the idea being that better and more affordable housing and services will raise fertility rates.
The challenge though, is that it is politically very difficult (and financially risky) for Beijing to allow house prices to fall to the extent that they actually become affordable for the average person. This is because up to 70% of Chinese household wealth is tied up in real estate. If households feel far poorer, that is unlikely to encourage them to have more kids either!
I think this is why we are starting to see more of an emphasis on subsidised rental housing, such as the recent plan to build more than 6.5 million subsidized rental homes during the 14th Five Year Plan (2021-2025 period). This is probably going to do little to change the housing affordability picture in a country the size of China.
- Your reflection (China’s “common prosperity” is a Catch-22, The Interpreter) raises the complex problem of the overall security of the Chinese system. How much will this “weigh” on Xi’s long-term policy?
I’ve heard it said by China experts with decades of experience that China has no idea how to achieve common prosperity. When you look at the contradictions within the economic structure, it is difficult to argue with this notion.
More broadly, I think the whole common prosperity agenda highlights severe challenges that China (like many countries) does not have clear answers for: housing unaffordability, demographic decline, inequality, human capital deficiencies etc. However, eements of these problems are obviously more difficult and pressing in a country where GDP per capita is still far below Western, Japanese, Korean and Taiwanese levels. This really belies the popular but frankly misguided image of China as a tech superpower on the cusp of world domination.
With many experts suggesting that China’s growth will slow to no more than about 3% by the end of the decade, there is of course, the possibility of instability within China. However, the CCP has shown itself time and time again to very adaptable and quite pragmatic. I think you’d have to be very brave to be making any predictions that the whole system is going to somehow collapse.
Nonetheless, I think these internal issues will inevitability constrain Xi’s broader geopolitical ambitions. Whilst by the end of the decade (if not sooner) China might be militarily in a position to invade Taiwan, would it really risk the sort of blowback that this would entail if the situation at home is still so challenging? The Party’s objective above all else is to stay in power.
- The risks that China is facing cannot, in the global interrelation, not concern Asia and, more generally, the planet. Are we on the eve of a new bubble bursting (this time due to China’s difficult systemic sustainability)?
It’s pretty clear that China’s traditional growth model built on exports, construction and urbanisation is running out of steam. With some evident success, China is trying to move up the value chain towards higher-tech industries whilst also promoting domestic consumption. There are nonetheless significant challenges in terms of skills deficits, self-inflicted regulatory uncertainty, demographic profile, inequality and geopolitical tensions (manifesting for example, in more stringent technology transfer restrictions). These headwinds mean that though China is not a bubble about to burst, it will grow at a significantly slower rate. Interestingly, the Japan Center for Economic Research – whilst forecasting that China will overtake the US in 2033 (a delay of four years from 2020’s forecast), the US is expected to regain the top spot by 2056. Slower growth in China will inevitably have negative implications for Asian and indeed most economies.
The opinions here expressed by the author are purely personal
