One of my favourite podcasts is EconTalk hosted by Russ Roberts of the Hoover Institution at Stanford University. Most of the topics covered have to do with the US, but I find that many of the ideas discussed are applicable to the economic environment in China, and have helped to shape my views on the country’s real estate development.
In a May episode about how city planning in the US after the Second World War led to cities experiencing high levels of debt and wasteful infrastructure investment, I could not help thinking of China’s current economic development strategy and its overarching plan to integrate the municipalities of Beijing, Tianjin and Hebei Province into the Capital Economic Circle. In fact, the podcast is the basis for some of the key ideas incorporated in our recently released white paper, Strengthening China’s Next Economic Mega-region.
One podcast guest noted, “There’s a seductiveness to go in and have the big flashy thing that you believe created the success in the neighbouring city. Historically – I like to point out that Rome didn’t get the Colosseum and then build Rome. The Colosseum was the by-product of centuries of success.” This comment elucidates one of the major problems with the Chinese government’s current approach to economic and real estate development, and a key reason why the integration of Beijing, Tianjin and Hebei Province is important. Local governments can no longer copy each other’s “if you build it, they will come” strategies or build unneeded iconic structures and expect successful outcomes. By adopting duplicative development strategies, each local government is creating excess capacity and space based on demand that has yet to materialise.
The Colosseum in Rome
In our white paper, like the guest on the show suggested, we recommend that local governments shift their strategies away from taking active roles in real estate development and instead let the private sector take the lead. The private sector is better at allocating resources and ensuring that any new projects that are built are financially viable. In essence, the private sector tends not to construct a Colosseum before there is a Rome.
To find out more about our suggestions to the government and information on how real estate investors can benefit from China’s next economic mega-region, read JLL’s latest white paper, Strengthening China’s Next Economic Mega-region.
