Looking Both Forward and Backward at China’s Economic Evolution

Pragmatism and caution have defined China’s 40 years of economic reform, and this steady progress is set to continue, said Shui On Group chairman Vincent Lo speaking at the 2019 ULI Asia Pacific Summit. Lo—who has been investing in China real estate for more than 30 years—said that the nation’s approach can be summed up by the aphorism “cross the river by feeling the stones.”

This cautious approach to progress has grown China’s gross domestic product (GDP) per capita to $8,827 in 2017, from $356 in 1978. The statistics relating to China’s growth are remarkable: in 1978, it accounted for only 2.5 percent of the world’s GDP, while in 2017 it accounted for 15 percent. Exports in 1978 were $9.8 billion; by 2017, they had grown to $2.3 trillion.

Lo outlined China’s series of steps: the establishment of special economic zones in 1978, the establishment of the “socialist market economy” in 1992, China’s entry into the World Trade Organization (WTO) in 2001, banking reform that led to the floatation of China’s major banks in 2005/2006, and the “going out” program of Chinese investment overseas.

China’s transformation has been intrinsically linked with its real estate market, Lo said, which has also seen dramatic growth. Today, China boasts 30 real estate developers with annual sales of more than RMB100 billion. Citizens also have benefited from the role of the market in the real estate industry: the average Chinese home in 1998, when the state stopped allocating housing, measured just 200 square feet (18.7 sq m), but by 2018, that average was 440 square feet (40.8 sq m).

“Some of my Western friends have said over the past years that a crash will come,” said Lo, “but it has not happened.” The pragmatic and gradual approach is the reason for China’s success, he said, contrasting it with the more dramatic Russian transformation from a command to market economy, which severely damaged GDP.

Lo predicts that China’s residential market will be divided in the future between for-rental and for-sale properties, but cautioned that the government would need to support the rental market due to the low yields.

Lo identified two key themes for the next iteration of China reforms. Firstly, the nation’s focus today is on promoting innovation and encouraging budding entrepreneurs, said Lo, “as this is the only way to ensure China’s continued growth.” Shui On Group has been building space to house the nation’s innovators for 15 years, Lo said, because “I saw this was the way the nation would need to go.” To keep China’s momentum going, developers need to “create an ecosystem” for the country’s budding entrepreneurs, “not just build the hardware,” he said.

He noted that China’s now-abolished One-Child Policy did not encourage entrepreneurship. “Parents with one child do not want that child to fail,” he said. “But entrepreneurs inevitably fail on the road to success!”

The other major strand going forward is China’s Belt and Road Policy, Lo said. Launched in 2013, this initiative will see China develop infrastructure and trade links across central Asia and Africa to Europe, along the lines of the ancient Silk Road. “Belt and Road is an important part of China’s globalization and its cooperative role in the world,” he said.

Crucially for the real estate business, sustainability is high on China’s agenda, Lo said. “The Chinese government recognizes that pollution in China’s cities is not acceptable, so it is committed to lower-energy and less-polluting technologies.”

Lo could not avoid addressing the U.S.-China trade war and he joked that the China real estate industry should “be thankful for Donald Trump,” because the trade war was forcing China to relax restrictions on the residential market, thus boosting developers. However, Lo said that he was “still worried about Sino-U.S. relations going forward.”

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