Once upon a time an emperor was tasked with moving half a billion poor farm peasants from their impoverished agrarian existence to life in the big city. In this second submission covering China's property market, once again I borrow heavily from a recent RBC report. The largest human migration in the history of the earth is now about half finished. What does it all mean?
The market is so large and varied across the country that it defies simple explanation. We are talking about the evolving living conditions of one-fifth of the world's population, so we should take a stab at it.
First of all, consider the sheer magnitude:
- China's population of 1.35 billion people is about four times that of the U.S. and nearly 40 times the population of Canada.
- There are around 100 cities with a population greater than one million people. (That's 100 Calgary's.)
- Some have populations numbering well over 10 million.
- One city (Chongqing) is home to more than 30 million people, nearly rivaling the entire population of Canada.
- The economic disparity between cities and provinces can be staggering.
Historical Context:
1949: China's mostly rural population was 540 million.
- Only 10 per cent of the population lived in urban areas.
- The Chinese Communists took power and established the People's Republic of China.
- Landlords were identified as bourgeois enemies of the people.
- The government took over all land holdings and distributed them to Communes--groups of people living together and pooling resources - all over the country.
1957: The population size grew to 650 million.
- Still, only 15 per cent of the population lived in cities. The country remained largely agrarian, rooted in communes.
1958: Chairman Mao Zedong encouraged population growth as part of an ill-fated policy called The Great Leap Forward.
1970: The population exploded to 830 million.
1976: Moa dies. His iron-fisted controls on property rights came to an end.
1980: The population had grown to slightly less than one billion.
- There were still fewer than 200 cities.
- China's new leader, Deng Xiaoping, put the country on a completely different path labeled "gaige kaifang," or the "opening up reforms." One aspect of this was to grow and modernize China's cities, an historic and highly significant move away from the previous focus on rural communes.
- In the next 20 years, the number of Chinese cities grew by over 400 to around 670.
- China's mega-cities were also developed.
1990-2013: The population grew to 1.35 billion
- Reforms allowed the emergence of private property laws.
- Industrialization, urbanization, and wealth creation occurred on a vast scale, powered by a gargantuan pool of labour, an entrepreneurial people, and a government that could effect change and development very quickly due its monopoly on power.
- Naturally, this huge populace, deprived for so long of modern cool things like cars and TV, wanted an upgrade.
- The housing market took off. The number of property developers mushroomed. The percentage of the population living in cities rose to over 52 per cent in 2012.
Ghost Towns
At the more-extreme end of things, pictures and videos of empty buildings and even entire towns bereft of residents leave distant audiences in fear of China's ghost towns. Some view such projects as either failed anomalies or works in progress. They are either the result of simply poor planning by certain local governments (perhaps even an effort to inflate local GDP figures) or traits of China's centrally planned economy. Also, empty buildings have a habit of filling up after a while (although there are notable exceptions to this). Shenzhen, in its day, had many empty towers. It's not easy building a city for 10 million people in a couple of decades. And, to be fair to provincial leaders, there are many more examples of entirely new areas being successfully planned, developed, built, and populated than there are of ghost towns.
Investment and Speculation:
The fact that speculative investment activity is wide-spread in the Chinese property market is
of much greater concern than the ghost town phenomenon, which gets more headlines as it is visible and extreme. The line between speculation and investment when it comes to property in Asia is not well defined. Investors love to buy property. Generally speaking, there is a greater distrust of paper assets than in the West and, consequently, a preference for real assets. For example, China's consumption of physical gold rose by around 300 per cent from 2003 to 2011.
With only approximately 53 per cent of the population now in cities, compared to upwards of 90 per cent in more developed nations, it seems unlikely China has reached its urbanization limit.
In short, there is a clear, long-term need for significant growth in China's housing stock.
The scale of China's urbanization is unparalleled, backed by the biggest population migration in history. On the positive side, the government recognizes the importance of controlling the property market and has been explicitly attempting to do so for years. But China needs to maintain high economic growth - a crash landing of the economy is probably the biggest single risk to the incumbent Party's hegemony - which means a continued reliance for some time yet on fixed asset investment growth, including real estate.
If there is a bubble in certain parts of the market, the government will be caught between the need to deflate it and the need for continued growth.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities, and can be reached at [email protected].
