Are Chinese savers coerced into supporting a real estate Ponzi scheme?
By eliminating other alternatives for investing saving and encouraging real estate speculation, the Chinese government compels its citizens to sustain a Ponzi scheme, allocating resources where they are not needed.
People fuel financial manias with greed and foolish optimism. Generally, prices go up because prices were going up, and seeing that prices were going up, excited investors buy more, so prices keep going up. Once started, financial manias are self-fueling until the pool of great fools is exhausted and the entire edifice implodes under its own weight–at least that’s how it usually works.
The Chinese real estate market is an obvious bubble. Valuations are not justifiable by any standard metric, yet through a variety of government policies, the Ponzi scheme has inflated far beyond any rational level, and it shows no signs of popping. So how does the government do it? How is an unsustainable bubble sustained?
The government doesn’t give savers any other viable alternatives for storing their wealth.
Wade Shepard, Mar 29, 2016
China’s real estate market sometimes seems more akin to a tourist trap than a bubble. Tourist towns tend to be overpriced because vendors know they have a captive audience who can’t easily take their money elsewhere, and the same goes for how China funnels investors into its housing market.
The fact of the matter is that if you’re not living hand to mouth you need to make a decision about how to store your excess wealth. Do you keep it in the bank? In equities? Real estate? Options, futures, FOREX, gold? In the West, we have an array of places that we can relatively securely put our money which could potentially provide satisfactory returns, but in China, where economically viable options for investment are severely stunted, this just isn’t the case.
The allocation of household wealth in China looks a little like this: 46% bank deposits, 39% housing, and just 10-15% in financial assets, including stocks. Chinese investors tend to have a strong preference for putting their money in housing, coupled by a far weaker interest in other forms of investing. According to China’s National Bureau of Statistics, 90% of families in the country own their own home, while Nomura estimates that roughly 21% of China’s urban households now own more than one house, with some cities supposedly boasting 200% home ownership rates.
This is clearly the sign of a mania, but yet the mania is based on a structurally reinforced house of cards. The Chinese government created the circumstances where money must flow into real estate, then as the Ponzi scheme enriched early investors, a cultural bias developed that further reinforced participation in the Ponzi scheme.
China’s relatively high rate of multiple home ownership and desire to invest in real estate is partially made possible because of the fact that owning property there isn’t a continuous financial drain. There are no yearly property taxes — or they’re so low as to be virtually negligible, as is the case in Shanghai. Generally speaking, you pay all the taxes upon the initial purchase of a home and then don’t have to pay anything significant again until your freehold lease runs out (which is up to 70 years away). So this has created a very friendly environment for the people of China to park their long term savings in the concrete vaults which are better known as apartments.
You can imagine Chinese apartments as the world’s largest safe deposit boxes. In the United States, we don’t waste so many resources on the construction of places to store our wealth. The average safe deposit box is perhaps 3″ x 5″ whereas the average Chinese safe deposit box is 1,000 SF. But I suppose you could theoretically live in a Chinese safe deposit box–not that any of them do.
It is well known that Chinese banks pay interest rates that are much lower than inflation, so even though nearly half of household wealth in the country is kept in bank deposits this still isn’t seen as a particularly attractive option. Keeping money in the bank there is just a way to keep it liquid and easily accessible, and cannot be thought of as a viable investment option, as everybody knows that the longer their money is kept in there the more value it will lose.
Fueling this sentiment further is the fact that China’s currency, the yuan, has recently been stricken with a sudden and atypical amount of volatility due to capital controls being loosened in August of 2015. This strategic, though often misunderstood, move at liberalizing the currency lead to a drop from 6.2 to around 6.5 to the US dollar, making bank deposits seem even less attractive of a place for long term savings. …
So wealthy Chinese investors are still left with the old default option — the domestic housing market — as China’s core fiscal quagmire continues: too much money and not enough places to put it.
Notwithstanding the considerable media attention being paid to the potential reassurance of a housing bubble, China’s faith in real estate remains remarkably strong. But this is less because of a lack of awareness that the bottom could fall out the market than because there simply are no better options available. …
“As long as you have the money for the real estate, that is THE option,” Cody Chao, a medical student from Suzhou, asserted his country’s dominant financial sentiment with finality.Even if the entire Chinese economy was to collapse overnight, in a country of 1.3 billion people housing will always hold some kind of value. If you own your properties outright — as 80% of home owners in China do — then at the end of the day you are going to be left something that can at least be lived in.
Well, China has plenty of unused houses people can live in. In fact, they have 450,000,000 square meters of unsold housing. There is so much unused housing in China that some developers are tearing down houses that haven’t been used in the 10 years they existed. While building houses and then tearing them down 10 years later may boost the economy, it isn’t a very efficient use of scarce resources.
But like other totalitarian regimes, China isn’t particularly worried about efficiency. A lack of economic efficiency is often credited with the downfall of the Soviet Union. Chinese officials are more concerned with self-preservation, and even an inefficient economy is better than a contracting economy for keeping the elites in power.