How understanding the roots of China’s property bubble can prevent a repeat of past mistakes
Josef Gregory Mahoney*
Beijing must ensure it avoids repeating past missteps as it advances new monetary and fiscal policies to stimulate growth and recovery. Otherwise, it risks creating a tech bubble that could hamstring its long-term ability to compete globally.
The property bubble in China is a hot topic in domestic and international media, but it is often presented in simplistic ways that obscure its historical causes.
Let’s review the historical developments that brought us to this point and hopefully draw lessons to avoid repeating past mistakes.
First, the various property market reforms that were brought in rather quickly, starting in the 1980s and early 1990s, introduced a massive new sector to China’s economic landscape. The growth of this market was desired and perhaps unavoidable.
In fact, while rising values were associated with high economic growth, they were also supported by restrictive policies that left few good investment alternatives for those seeking comparably high returns and growth potential but relatively low risks.
These developments correlated with the rise of many property developers which became powerful owners and economic players – including both private and state-owned enterprises (SOEs) – on the front lines of most of China’s development projects at the nexus of power and wealth creation.
The emergent big players became extraordinarily wealthy, but even the smaller ones, including families well positioned to take advantage of the reforms from the start, managed to acquire assets that rose astronomically in value. This created a new middle class that would be considered quite wealthy by standards elsewhere.
Second, by some estimates, those associated with the third generation of China’s leadership benefited disproportionately from the new property market and entrenched their financial and political interests there.
When they failed to cede power fully to the fourth generation and gridlocked reforms, the property sector continued to grow as a powerful special interest group capable of strong-arming its position in domestic affairs. Along the way, they resisted property taxes and any other carrying costs. This led to the strange phenomenon of buying residential properties but letting them stand empty.
Third, when the global financial crisis hit in 2008, many national governments looked for ways to pump money into their economies to promote liquidity. In China, this was accomplished by pumping money into the property sector and SOEs because these were the vehicles available for massive cash infusions.
This is why some argue that the current crisis can be traced back to the trillions of yuan Beijing pumped into real estate to stave off the recessions that devastated so many other countries around that time.
Fourth, after taking power in 2012, the fifth generation of leadership initiated several reforms aimed at the growing real estate problem.
On the one hand, leaders disciplined the third and fourth generations through the anti-corruption campaign, breaking the gridlock and opening the way for new reforms.
It pursued new policies such as the Beijing–Tianjin–Hebei (Jing-Jin-Ji) integration project, including transforming large holdings connected to powerful interests who resisted reforms.
Zoning laws were strictly enforced, pushing back against businesses renting residential units to exploit low utility rates, and residential renters were restricted from living in commercial properties to exploit comparably low property prices.
Leaders also legalised new investment alternatives to attract capital away from real estate and into other parts of the economy needing money for growth.
These measure produced mixed results, in part because of new headwinds preventing tougher measures. These included declines in export-led growth, the US trade war, challenges related to the Covid-19 pandemic and disruptions associated with climate change.
Fifth, however, China has reached a junction with three intersections. There is the economic necessity of dealing with the crisis, the political opportunity of “letting” the crisis happen, and an institutional capacity to manage it.
With regard to political opportunism, two possible theories deserve special mention. The first is a fifth-generation desire to regulate once and for all one of the last economic strongholds of the third generation, especially in tandem with upcoming political meetings.
The second is to do so in ways that benefit some regions, such as the Greater Bay Area, at the expense of others, such as Shanghai – arguably with the aim of creating more equity between key economic regions.
As far as institutional capacity, we keep hearing of impending doom, but the crisis has been relatively well-managed so far, and for several years by some counts. Consequently, perhaps as we have seen with other problems in China that sometimes become focal points, this crisis is being allowed to happen now.
Given the historical causes of the property bubble, it is vital that the Chinese government avoids repeating mistakes as it advances new monetary and fiscal policies to stimulate growth and recovery.
We can point here to new policies such as those highlighted during Premier Li Keqiang’s recent visit to Shenzhen. They require governments in key economic regions to invest in local development projects, for example, helping large economic players upgrade smaller ones in tune with national goals such as “Made in China 2025”.
Massive budgets are planned to achieve these goals and others like them, and they are likely to boost local GDP growth in the short term.
However, if no lessons are learned from the property bubble, China might end up creating a tech bubble that could hamstring its long-term ability to compete globally in technology and innovation. What is needed above all is a better understanding of the current crisis to avoid repeating mistakes that could haunt generations to come.
Josef Gregory Mahoney is professor of politics and international relations at East China Normal University in Shanghai and senior research fellow with the Institute for the Development of Socialism with Chinese Characteristics at Southeast University in Nanjing.sc
*Josef Gregory Mahoney is professor of politics at East China Normal University in Shanghai, where he also directs the International Centre for Advanced Political Studies and the international graduate programme in politics. He was previously with the Central Compilation and Translation Bureau in Beijing, then China’s leading think tank.