China’s brave new world

April 3, 2013 / By  

March was an eventful month for China’s property sector. It started with a policy announcement before the start of the National People’s Congress and was followed very closely by two very one-sided stories on the American television program 60 Minutes.

The policy announcement was something of a surprise in terms of its timing and content and raised a huge amount of interest among the local and international media. While basically aligned with the existing policy regime, it focused on several loopholes in how these policies have been implemented which have allowed for investors to get more active in the market in the several prior months. The immediate response in the market was for existing owners of investment properties who were thinking about selling, to try to front-run a change in how the capital gains tax was to be implemented.

However, by the end of the month, announcements by local governments about how they plan to implement these ‘5 new measures’ were pretty underwhelming. Other than the city of Beijing, most have simply reiterated their existing policies and few have made any mention of the capital gains tax. For now it seems like it’s back to business in the residential sector. But I would expect China’s new leaders to crack the whip, so to speak, if the government’s monthly price index shows continued increases in the majority of cities. The ‘5 new measures’ if fully implemented, could have a dramatic impact on the market, but only time will tell if policymakers have a stomach for the degree to which that could slow the broader economy.

The 60 Minutes story on the other hand raised a lot of interest from friends and family back home who were suddenly worried about what a ‘bubble’ in China could mean for them. As a long time viewer of 60 Minutes, a show that I have often called the best program on television, I was disappointed by their near complete lack of balance in presenting the story. Their ‘expert’ analyst was someone who has long made his name (and livelihood) from the ‘China Bear’ story and they fell for the easiest trap when it comes to reporting on China – is this particular anecdote indicative of a larger problem – basically is what we are seeing here happening all over China. Their ‘expert’, of course, said ‘yes, we do see these empty malls and ‘ghost cities’ all over China’.

We beg to differ.

China is a big place. It is possible to find anecdotal evidence of virtually any point you want to make. Every quarter I send over 40 research analysts into the field to track the office, retail and residential property markets in 20 large cities in China. We have arguably the most comprehensive database of commercial properties in the country. Are there bad malls in China? Sure. Have ghost cities been built? Undoubtedly. Do they represent the majority of construction activity? Or even a meaningful minority? No chance.

China’s golden age of investment led growth will come to an end, and probably sooner than most people think, but the country’s leaders are pragmatists, not ideologues. They do not have their heads buried in the sand the way I fear the leader of most Western democracies do. The top priority of the new generation of leaders is to transition the economy toward consumption led growth. They will introduce market mechanisms for interest rates and the allocation of resources in the economy; they will promote private enterprise; and they will reform the sclerotic state owned enterprises that predominate the economy. These reforms will be painful; they will necessarily mean China’s economy will grow more slowly than we’ve seen in the past; and there is no guarantee that China’s leaders will get it right. But the rest of the world has a lot riding on the outcome, whether we like it or not. So we should pay attention and try to get the facts right, to the extent that is possible.

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