The Evolving Flow of Capital between the U.S. and China

At a recent event hosted by ULI Washington, panelists discussed how U.S. and Chinese companies are continuing to work together. After record levels of U.S. investment from China in 2016, new controls on capital outflow and investors’ changing attitudes have slowed inflows, while domestic development in China has also shifted. Cushman & Wakefield has estimated that inbound investments were down 55 percent from 2016 to 2017.

David Varner, director of SmithGroupJRR’s Washington, D.C., office, kicked off the event by introducing Stephany Yu, founder and chairman of Greencourt Group and a ULI sustaining member, which has developed more than 30 million square feet (2.8 million sq m) of mixed-use property in the greater Shanghai region. Greencourt’s investment portfolio includes a controlling interest of Shanghai Greencourt Investment Group Co., which is listed on the Shanghai Stock Exchange. Yu was joined on the panel by international economist Ted Chu and Jennifer Trezza, SmithGroupJRR’s corporate practice manager for China. The session was hosted at Greencourt Capital’s new 103,000-square-foot (9,600 sq m) Innovation Center in Rockville, Maryland, a D.C. suburb, which the company developed by radically repositioning three warehouse structures in anticipation of submarket growth.

The panelists agreed that while the Chinese and U.S. real estate markets differ tremendously, each side has a lot to learn from the other. For instance, said Yu, “Land ownership is very different. In China, the government is the key decision maker. In the U.S., it is the landowner and the entrepreneur.

“In China, local government income comes from development, and developers get all the resources and entitlements they need from consultations and negotiations with local government,” Yu continued. And once development decisions have been made, there are few restrictions—such as the type of zoning regulations that U.S. developers face—to stand in the way of progress.

Of course, China’s way has its own challenges. Top-down development decisions, implemented toward the goal of moving some 300 million rural-dwelling citizens into urban centers, have led to the creation of hundreds of fully built but almost completely empty “ghost cities.” Much of this vacant property may be overvalued, because the local governments and the national economy are dependent on it, panelists explained. Due to potentially skewed valuations, “we may not be able to tell if we’re in a bubble until it bursts,” said Chu.

But China takes a long view of its bold urban development programs—one that just may be working, with some former ghost cities slowly coming to life. Chu, who has studied five rapidly developing cities, said: “I think the future of these ghost cities depends on income. Xi’an, for example, is a regional hub with a strong aerospace industry. They hope to expand tourism and create a nice environment for retirement. If you have a one-bedroom apartment in Shanghai, for example, you can afford a five-bedroom apartment in Xian.”

The two countries not only have different approaches to development, but also diverge when it comes to innovation. “In China, talented architects and designers have a lot of flexibility, even with crazy ideas,” commented Yu. Added Trezza: “In the U.S., we are more cost-sensitive; we often wait for other countries to test the market before we adopt new technologies.”

Furthermore, unique cultures affect the ways that companies do business. “In China, cold calls don’t work,” said Trezza. “It’s all about face-to-face relationships. If you share meals, it proves you are willing to go beyond working hours. They want to know if you’re in China for the long haul.” Added Chu: “People value trust, and there is a huge trust deficit in China.”

The pace of economic growth is perhaps the major factor driving the two nations’ real estate markets and practices. “China has grown 10 percent a year, with income doubling every seven years, over the last 40 years,” remarked Chu. “This is a rate of growth that is unprecedented in global history. In fact, China is growing so fast that it is difficult for markets to adjust.

“China is in a state of growth comparable to that of a young man,” Chu went on, “while the U.S. is showing signs of aging. The U.S. reached economic maturity after World War II; can it experience another round of renewal and revival?”

But while the two nations are growing at very different rates now, this situation will not last forever, Chu predicted. “In 20 years, the two societies will start to emerge into similar patterns.”