The financial world’s attention has been absorbed for weeks by the meltdown of the Chinese real estate developer Evergrande. For the sorry tale of that company and its role in China’s economy, start with the excellent Big Read by my colleagues James Kynge and Sun Yu (and see the FT’s entire coverage of developments here).
There is much debate around the “Is this another Lehman?” question — the implications for the Chinese (and global) financial system of an Evergrande restructuring. I personally side with those who think the Chinese government has deep enough pockets to bail out whoever it wants, and can therefore contain the wider repercussions of real estate losses that lie behind failures such as Evergrande. Whether it will is another question.
But besides finance, what about the real side of the economy? My colleagues’ coverage of Evergrande has brought out a number that, to me, was new, and shocking: 29 per cent of China’s gross domestic product is made up of real estate activities (construction and related services). That number comes from new research by Kenneth Rogoff and Yuanchen Yang. Their paper is worth reading in full (but Rogoff has written a short version here) because it contains some really frightening statistics.
As the chart above shows, China’s dependence on real estate is historically unprecedented — only Spain in 2006 came near. It is not just the share of output, but employment too: real estate and construction employ nearly 20 per cent of China’s urban workforce. Land sales account for one-third of local government revenue.
And there are plenty of signs that this is not all useful economic activity for a fast-growing economy lifting people from poverty into the middle class. China has one of the world’s highest housing vacancy rates, at more than 20 per cent. More than 90 per cent of urban households already own their home. In the researchers’ latest year of data (2018), 87 per cent of new home sales went to buyers who already owned a dwelling. Nationally, it would take about two years for all unsold housing to be sold at current sale rates.
These are stunning numbers. They give plenty of ammunition to those who, like President Xi Jinping, worry that real estate is driven by speculation and those who fear that a real estate crash could be on the way. Maybe, maybe not. But what is clear is that this is not a sustainable source of growth. Chinese authorities seem to think the same — presumably, that is behind the tightening of real estate finance rules that exposed Evergrande in the first place.
That leads to a couple of observations about the real Chinese economy — none of them reassuring, even if the purely financial fallout is contained.
The first is that China’s past growth may not be all that it seemed. On Rogoff and Yang’s numbers, real estate’s share of GDP increased by almost 10 percentage points (or about half the starting share) in the five years following the global financial crisis, and then stayed flat near 30. On a rough approximation, that means these activities contributed nearly half of China’s strong GDP growth in those years, and a continuing near-30 per cent or so of growth in the ensuing years.
Given the signs of oversupply, one has to wonder about the actual economic value of those contributions to GDP. Did all this activity really added value — something that constitutes Chinese prosperity? Or was some of it more what we may call “pseudo-income”, which shows up in the numbers but does not reflect anything that is actually valuable so to speak on the ground? The stories about Chinese “ghost cities” that have circulated for more than a decade — and more recently, reports of demolition of never-occupied buildings — suggest the answer is no. And given the sheer size of real estate’s importance, China’s real prosperity may be much lower than what growth rates and GDP levels have measured.
Second, it should not have been impossible for all this investment to benefit more ordinary Chinese people. The country is still relatively poor on average; hundreds of millions of Chinese live in much worse housing conditions than they need given the number of dwellings standing empty or being demolished. Quite aside from aggregate GDP numbers, there has clearly been a gross misallocation of capital and economic activity, which has created little or no economic value while there are great unmet needs. But fixing this — essentially ensuring better conditions for the rural poor — would have required the kinds of interventions in the economy, implying radical levelling of status and power differences, that most nominally communist dictatorships have been far too conservative to contemplate.
Third, what happens next? It is very hard to fill the gap in economic activity that even a slight contraction in the real estate sector will leave if it shrinks permanently. Rogoff and Yang estimate that a “20 per cent fall in the housing sector and related activities (if one did occur), could lead to a roughly 5-10 per cent decline in the level of output”.
Chinese rulers have long wanted to “rebalance” their economy. But towards what? Consumption is difficult to boost with extreme inequality and a large population in poverty — unless, again, the government is willing to be radical in overturning current social and economic hierarchies. Export-led growth of the size needed is China’s past but unrealistic as its future. So perhaps investment is still the right horse to back. If so, Beijing must find policies to promote the quality and not just the quantity of investment.
Other readables
It is judgment day for two key components of President Joe Biden’s economic agenda.
It seems like Montesquieu was right about his “doux commerce” thesis: new research by economists Giacomo Magistretti and Marco Tabellini finds that democratic values spread through trade.
The new US-EU Trade and Technology Council has issued its first statement. Before the summer I explained why a more tight-knit transatlantic approach could be a game-changer for globalisation.
Numbers news
Russian statistical researcher Sergey Shpilkin has highlighted statistical anomalies in the country’s parliamentary elections that suggest not just falsification (possibly through tampering with electronic votes) in favour of President Vladimir Putin’s party, but also that the party’s real support fell drastically from 2016 to 2021.
The UK’s second-quarter growth was better than previously estimated.
Source: Economy - ft.com
