Make no Little Plans
I was in a meeting not long ago with local officials in a county-level city in Chongqing municipality. Chongqing is moving fast – according to official numbers its economy has grown 14% this year, approximately twice the national average. There are natural reasons for this: Growth has been moving inland from the coasts, while at the same time the city has been fairly insulated from the international recession. But the main reason for the boom, as everyone there cheerfully admits, is government support. The central government is very anxious to even out the huge development gap between the coasts and the interior, and Chongqing has been designated a “growth pole” for western China. It has been a recipient of favorable policies and public investment at least since it was split off from Sichuan province and made a provincial level municipality twelve years ago. Most recently, Bo Xilai, formerly head of the Ministry of Commerce, son of former Politburo member Bo Yibo and a high profile official, was made party secretary of Chongqing, and it’s understood that his brief for the job is to open the throttle on economic growth.
In Chongqing city itself the boom is most apparent in the new downtown taking shape across from the historic center, on the north bank of the Jiading river, and in the new high class towers and hotels shooting up on the other side in the Nan’an district. As with much new construction in China, the scale of development is overpowering. As you drive down the immense boulevards between one half finished patch of towers after another, the unavoidable question is, “Who is going to use all this?” But for all its Brobdingnagian scale, it’s not Chongqing’s new downtown that gives me pause. I worry instead about the new downtowns of the small city where I was, an hour’s drive away through the rugged hills, and its cousins all across China. It seems nearly every city in the country has a “new city” or “new district,” often at least as large as what’s already there. I don’t know how to estimate the amount of planned space in all the new districts across the country, but I guess it would give economists and government planners a cold sweat.
Of course, planned is not the same as built. But a significant amount of space in these new districts is in fact under construction. Some of it is government offices, some is public facilities, some is relocation housing for people whose former homes are becoming reservoirs, highways, railroads, or denser and more expensive housing. And a lot is market rate housing. Chinese demographics can support an immense amount of housing development. The population is simultaneously growing and urbanizing, and the average living space per person is still quite low. Sure enough, there is an immense amount of housing being built – but there is reasonable doubt whether it matches the demand. Despite the dizzying amount of construction, China’s major cities have a housing affordability problem, and during the recent downturn developers showed they were generally more willing to sit on empty units than to lower prices. In vacation markets (existing, planned and hopeful) luxury villas and second home condominiums are everywhere.
Still, all this new housing is finding buyers. After a bumpy couple of years, the housing market is sharply up this year. But how many of the units sold are just speculative investments, subject to a western-style price collapse? The Chinese public has a high savings rate and is simultaneously facing very low interest rates and fears of inflation. With almost the only alternative investment vehicle available the notoriously fickle and opaque domestic stock markets – and with the government determined to support the housing industry as a bulwark against recession – intense speculation in the housing market is hardly to be wondered at. As previously noted here, a lot of the tremendous bank loaning in the first part of the year has leaked into property markets as well. Anecdotally, it’s clear as you travel around China that a lot of new housing sits empty, waiting for appreciation – the investors have not even bothered to rent it out.
If there is a housing bubble, the question is how big it is, and whether it can be safely deflated once the immediate danger of recession is past. Central economic planners are watching this carefully, and while the official line is that the economy is still weak and that a moderately loose policy will be maintained through the end of the year, I guess that once it’s decided that it’s safe to pull back that more restrictive housing policies will be among the first out the door.
- Don Johnson
Guest contributor, Infrastructure, Investment, Property, Regional