Chinese President Xi Jinping’s distaste for the property sector is apparent in his catchphrase “houses are for living in, not for speculation,” and his 2020 “three red lines” policy that cracks down on developers borrowing.
During a decades-long boom, China relied on its property sector, which accounts for as much as 30 percent percent of gross domestic product (GDP). China’s attempts over the last three years to deflate its debt-ridden real estate bubble have had proportionately dire economic consequences, according to Ker Gibbs, a former president of the American Chamber of Commerce in Shanghai, during a geopolitics panel at the 2023 ULI Fall Meeting’s APAC Symposium in Los Angeles in late October.
Home prices are dropping. Sluggish sales are dashing hopes that the country’s emergence from its Zero COVID policy will offset a global economy burdened by high-interest rates in the U.S. and Europe. Whether the world’s second-biggest economy can regain momentum, Gibbs said, depends on President Xi’s next moves.
“[China’s economic future] is a question of policy and choices,” according to Gibbs, whose book Selling to China explores the relationship between the Chinese and American economies.
Alan Beebe, CEO of ULI Asia Pacific, moderated a discussion on whether China’s lowered 5 percent growth target is still excessively optimistic. Gibbs emphasized his wait-and-see approach.
“The five percent target is achievable, but Beijing could still make decisions in the next six to 18 months that could be detrimental,” Gibbs said. “Continuing to look inward and emphasizing self-sufficiency over growth, for example, will not help the economy.”
Unaffordable housing
According to James Wong, the chair of Chinney Alliance Group, and chair of ULI China GBA—in a presentation that followed Beebe’s panel—the roughly 25 million unsold units in China are unaffordable for their target buyer.
To fund initiatives not covered at the national level, local governments jacked up land prices repeatedly, Wong said. Developers, in turn, sought higher prices to make their projects pencil.
But Wong said not all empty units are unsold in “ghost cities,” urban areas where the majority of the skyscraper apartments constructed amidst China’s economy-driving property boom were never occupied. These eerily empty municipalites are symbolic to many of the overbuilding and overborrowing that led to the country’s current property crisis. Some would-be towers and infrastructure sit uncompleted because developers and local governments, burdened by debt, abandoned ship. While many of the empty units are unsold, others are owned by Chinese individuals who saw real estate as a secure form of investment in a country where the stock market is known for its volatility.
“Most of the empty units … [represent Chinese equivalents to American] middle-class bank accounts,” he said. “The jeopardy is that the real estate posture of Xi may affect the valuation of these properties.”
Wong, who served in 2018 as a delegate to the Chinese People’s Political Consultative Conference, a governmental advisory body under the leadership of the Communist Party of China (CPC), says that wealth inequality compounds the affordability issue. Wealth inequality is on the rise in China, Wong said. Youth unemployment in China hovers above 20 percent for people younger than age 25.
Scott Kronick, founder of MeiLinDe Partnership, speaking on Beebe’s panel, added some overarching perspective.“Everything in China ladders back to social stability,” he said, explaining that if Xi’s isolationist policies continue to slow the economy, dissent may materialize.“Once people are not living like they used to live, that’s when things change.”
The Great Firewall’s multinational impact
Xi’s administration has recently worked to close loopholes in the Great Firewall, the colloquial name for China’s internet censorship system that has existed in some form since the years leading up to the turn of the millennium, making it harder to move data out of China.
Gibbs said that the crackdown, alongside souring relations with the U.S., has stopped the inflow of smaller and medium-sized companies to China. Most large multinational firms aren’t leaving entirely, but they are isolating their China operations, acording to Gibbs. “A CEO recently sent a memo to employees [that stated] if you leave China, you can’t take any devices with you,” he said.
Wong noted that the net outflow of funds from China, which hit a seven-year high in September, is driven by foreign companies scaling back their operations and wealthy residents shifting funds abroad.
A superpower with an unwritten future
Speaking on an earlier panel at the same symposium, Rohan Sikri, senior partner at the Xander Group and the chair of ULI India Organizing Committee, emphasized that, despite its economic struggles—which include factory orders shrinking, according to October surveys—China’s status as a manufacturing powerhouse is not to be underestimated. “China manufactures 98 percent of [iPhones],” Sikri said. “Even if 98 becomes 90 percent, that’s … a huge number of manufacturing dollars, and [it obviously creates] real estate opportunities.”
