Seen from afar, the city of Ordos, in China’s
Inner Mongolia, isn’t all that remarkable. A bit artificial-looking, sure — with its
blue Mongolian yurt-inspired homes protruding from the desert. Some might liken its Genghis Khan Mausoleum,
its public light show, and giant prancing horse statues to Disneyland. It seems designed more to be looked at than
lived in. As you move closer, however, the moment buildings
become more than mere shapes, you will undoubtedly feel a certain eeriness consume you. Something seems… off. Your eyes feel lied to. Because no amount of elaborate museums, extravagant
stadiums, malls, or even horse statues can make up for what Ordos is missing: People! Now, in fairness, it’s not, strictly speaking,
empty. Low-density planning may conceal them, but
a few people do work, study, shop, and live here — about 150,000, according to the government. But nowhere near the one million it originally
planned for in the early 2000s. Then, newly rich after 1/3rd of the country’s
natural gas and 1/6th of its coal reserves were found here, local officials had grand
ambitions to build a newer, modern, showpiece district. Here, it built all the best schools, hospitals,
and, yes, Genghis Khan mausoleums. What it forgot were supermarkets, department
stores, and bars. And so, for its first few years, just 30,000
people lived in a city designed for 30 times more. Ordos is far from the crowded, vibrant, modern
China you’ve come to expect. Which makes it a perfect Rorschach test. When news of this weird “ghost city” first
emerged in 2011, provocative photos of empty and half-finished buildings fit all too neatly
into the story of China the world was eager to hear. The picture was one of comic-book-level, growth-at-all-costs,
bridge-to-nowhere inefficiencies. It seemed to validate the most extreme skeptics
— that the whole of China, 1.4 billion people and all, might one day be revealed as one
giant, elaborate cardboard façade. Others argued this was, most charitably, a
misunderstanding! As so often happens with this opaque country,
the language barrier, a lack of context, or just plain sensationalism conspired to tell
the wrong story. China plans years ahead, they said, and this
was just an example of especially early planning for millions of incoming migrants. In hindsight, both reactions contain some
truth. Ordos does have an interesting story to tell. Just, not the one you might expect. The missing context, at the time, was far
stranger than what the unimaginative pessimists concocted: Nearly all of these half-finished homes have
owners — the vast majority of which have no intention of ever moving in. Ordos is not unique. All over China are millions of empty, some
unfinished, but almost universally sold homes — not just in far-flung corners but also
in Beijing, Shanghai, and Shenzhen. Over one-fifth of all urban homes — 65 million
in all — sit vacant. Housing is the second of China’s chronically-ill
internal organs — the symptoms of which it feels quite acutely in the form of impossibly
unaffordable real estate. Acknowledging the severity of the problem,
however, admits of weakness, suggests poor governance, and stands in stark contrast to
the mighty, robust, superpower image China is desperate to project. It’s time to look past China’s bold, aggressive
exterior, peak inside at the true state of its health, and make a diagnosis. Sponsored by Audible. Listen to “China: The Bubble That Never
Pops”, or one of thousands of other great audiobooks for free with the link in the description. Anyone who's taken Macroeconomics 101 is familiar
with the letters C, I, G, and NX. * C is Consumption — the phones, toys, and
macroeconomics textbooks we don’t illegally download. * Investment is anything bought but not consumed
— think factories, machines, and homes. * G stands for government spending, * And finally, Net Exports are what is sold
overseas. Add these handy little numbers up and you
have a country’s GDP. The great thing about this formula is that
it turns abstract terms like “growth” into concrete buckets. What it means that there are really only four
ways for a country to grow its economy. And while a dollar is a dollar, regardless
of which bucket it comes from, not all buckets are created equal — something China knows
well. Its early growth famously relied on exports. It became the “world’s factory” and
gained a reputation for cheap, mass production. The problem is that exports are a double-edged
sword. They rely on a surplus of cheap labor, which
means, by definition, wages are low. You can only compete with the entire rest
of the world for so long — and neither do you want to. Low-value manufacturing has long since moved
South, to places like Vietnam, Laos, and Bangladesh. Next, came investment, which peaked at nearly
half of China’s GDP in 2011, and is reflected in its shiny new airports, train stations,
and office buildings. But there are natural limits on investment,
too. In the beginning, basic infrastructure like
roads, bridges, and ports see quick and substantial returns. These are the easy targets. Eventually, a nation simply runs out of them,
forcing it to take on riskier and less profitable projects. Government spending, meanwhile, is constrained
by tax revenues and debt. That leaves only: C — Consumption. Consumption-led growth is the final stage
on the road to economic development. It means workers are educated, productive,
and have enough confidence to let go of their hard-earned cash. If China is ever to become the rich nation
it dreams of, it will first need to stop saving and get shopping. This may come as a surprise. We’ve all been bombarded with reminders
of China’s “rising middle class” and immense purchasing power. But consumption is the product of population
size times individual spending. When multiplied together, China, the country,
may be a force to be reckoned with — but, it’s important to remember, the former — its
massive population size — is doing most of the work. Individually, Chinese consumers really don’t
spend very much — just 32% of GDP — less than half that of the US, and far below countries
like Japan and Germany. Worse, this number has actually been decreasing
over time. There are a few reasons why. First, China has a weak social security system,
forcing workers to save for themselves and spend with greater caution. Second, income tax, in all its various forms,
can be as high as 40%. But there’s another reason: Chinese consumers
are spending, but only on one thing, something not considered ‘consumption’: houses! Now, there is, of course, no one “Chinese
consumer” or “Chinese mind” any more than there is a singular “American” or
“European” one. But that need not stop us from observing what
cannot adequately be described as a mere tendency or trend: China is absolutely obsessed with real estate. For starters, its homeownership rate is among
the highest in the world — 90% — to much of the developed world’s mid-60s. It gets much weirder, still. If you can believe it, the majority of recent
purchases have been 2nd and 3rd homes. In 2018, for instance, 87% of new home buyers
already owned at least one. Needless to say, these numbers are… peculiar. If everyone owns two or three homes, who is
left to live in all of them? The answer is absolutely no one. Vacancy rates vary considerably by city size,
but remain high, in absolute terms, across the board. Once again, China ranks near the top in what
may look like a lazy repurposing of earlier graphs. Clearly, all these homes are intended as investments. But that only answers one question by raising
another. Again, why? China’s passion for real estate began in
the late 90s, when it teased privatization by offering state employees the right to buy
their homes at a steep discount, in what was intended as a form of welfare. Then, in the aftermath of the Asian Financial
Crisis, China opened the floodgates to everyone, supported by generously low interest rates. Having taken off at the right time in the
country’s development, housing prices would fall only once in the two decades that followed. But while housing gained a reputation as a
safe and profitable investment, China’s stock market became synonymous with volatility
and risk. Because the government tightly controls how
much cash is allowed to leave the country, Chinese people simply don’t have a lot of
options, and of them, housing is seen as the only sure thing. In addition to these financial considerations,
there are simple, practical ones. The reality in 21st Century China is that,
for men, homeownership = marriage. Decades of the One Child Policy have resulted
in millions more men than women, unintentionally tipping the scale in favor of the latter. Young women and their families have become
awfully picky, and that means luxury cars, watches, and, yes, homes are now mere prerequisites. This study, for example, found that home prices
are higher in cities with more unbalanced male-to-female ratios. An estimated 30% of all new home sales are
attributed to this purpose. For all of these reasons, prices have risen
to extreme levels. In Shenzhen, Beijing, and Shanghai, it takes
40 years of the average income to afford a home. Today, the vast majority are bought before
construction has even started — sometimes years in advance. It’s common for developers to sell batches
of property in glitzy online ‘events’, sometimes hosted by a celebrity. Thousands of apartments often sell out within
minutes. In other cities, the right to buy new homes
is raffled-off in lotteries, giving the winners mere hours to submit their down payments or
else lose their opportunity. What all of these insane numbers and facts
have in common is that they’re classic signs of a speculative market. The underlying assumption is that prices will
only ever go up. There’s just one problem: Simple demographics
suggest otherwise. In the next 10 years, China’s over-55 age
cohort will increase in size by 120 million — the entire population of Japan. By the end of this century, its overall population
will be cut in half. The majority of homebuyers, meanwhile, are
aged between 20-50 — precisely the segment China will soon lose. Not only will there be fewer people around,
but this mass of seniors will also have very different housing needs. Ten years ago, it was easy to argue that China’s
rapid urbanization would bring more than enough migrants to cities, effectively canceling
out the effects of aging. Today, less so. With an urbanization rate of 60%, the growth
rate of new migrants is clearly slowing. And those still arriving are getting older. Some are unable to find jobs, causing them
to return to the countryside. The uncomfortable reality is, we’ve already
seen peak migration, and it’s all downhill from here. Eventually, it would seem, supply has to catch
up with demand. It doesn't take a wild imagination to draw
parallels between China today and the U.S. pre-2008. It’s time to address the elephant in the
room: What would a popping of this bubble look like? The simplest answer is that housing directly
contributes 15% of GDP. But this significantly undersells its importance. Economists estimate that when everything related
to real estate is accounted for — construction, appliances, furniture, agents, and so on — that
number is really closer to 30%. Its largest banks are, unsurprisingly, heavily
dependent on mortgages. It’s estimated that a 20% fall in real estate
activity could lead to a 5-10% drop in GDP. The IMF, meanwhile, estimates a 1% drop in
China’s demand would decrease global GDP by .25%. Banks, families, businesses, and the nation
as a whole have a staggering number of eggs in one, questionable, basket. Now, let’s be clear: A sudden and rapid
fall in prices is the worst-case scenario. More than a few experts argue this is far
from inevitable, and there are credible reasons to think China is not about to experience
another 2008. One difference that cannot go unnoticed are
the high down payments required in China — sometimes as high as one-third of the price. For second homes, 70% is not uncommon. These buyers are not being sold bad loans
— the government has in place truly strict purchasing requirements. People are simply going to extreme lengths
to afford them — pooling together money with family, forgoing all other luxuries,
and borrowing from friends. Likewise, pessimism is far from new. Experts and non-experts alike have anticipated
a financial catastrophe for years, and they’ve been proven wrong every single time. It would be a shame, however, to let extreme
hypothetical disaster overshadow the very real consequences felt today. Forget collapse. Something truly, deeply, unhealthy is going
on already. Housing this unaffordable is a problem all
on its own and an illness need not be fatal to cause significant harm. Remember how we got here — Chinese consumers
only have so much money, and by spending it all on empty 3rd homes, they don’t spend
it on more productive alternatives. Because banks rely on property as collateral,
companies are forced to shift their spending away from innovation, manufacturing, and trade. If prices fall, yes, there would be serious
consequences, but if they don’t fall, regular people everywhere will, quite literally, pay
the price. Beyond the obvious stress this generates,
high prices constrain mobility, particularly for the same rural migrants China desperately
needs to keep the momentum going. Not to mention the millions of men left behind
with no hope of marriage. The best counter-argument goes something like
this: “Housing policy is well understood, solutions to problems like these are known,
and if any government in the world has the unilateral authority to implement reforms,
China is it”. When its stock markets experience too much
volatility, China simply bans those words from social media. The issue with this argument is that it conflates
‘can’ with ‘will’. However paramount China’s central government
may appear from the outside, the reality is much more complicated. Local and provincial governments, while subservient,
are not puppets. Politicians everywhere have their own set
of goals and interests, which may or may not align with those of the nation — just as
American states don’t always see eye-to-eye with D.C. One reason for this divergence is that local
governments are placed in an awkward position: In 1994 they were handed the responsibility
of paying for their own social services. Most taxes, meanwhile, are sent straight to
Beijing. Suddenly overwhelmed with bills and no way
to pay them, local authorities got clever. The one power they do have is control of land
— all of which is owned by the state in China. And so they created what are basically state-owned
shell companies called “Local Government Financing Vehicles”. They gave these LGFVs free valuable land,
which they then used to take out loans that local governments themselves couldn’t. The trick is that because their debt is hidden,
local governments appear far healthier than they really are, while at the same time, meeting
the quotas set by Beijing. Following the 2008 crisis, LGFVs transformed
from a little quirk of its financial system to the backbone of local economies. If these ‘financing vehicles’ default
on their loans, or if housing prices fall too steeply, local governments now have just
as much to lose as homeowners. If a local government stops taking out loans,
it instantly loses over a third of its revenue, causing a different kind of doomsday. So while the central government may direct
local officials to control their debt, the best they can really do is feign cooperation. Again, these are not insurmountable challenges. But the solutions are far too costly to assume
their implementation. Anyone who portrays the Chinese government
as an all-powerful monolith, always willing to make such drastic structural reforms must
contend with its complete inaction when faced with a declining birth rate during the final
years of the One-Child Policy. To solve the problem would require a delicate
and invasive surgery, one which risks making the problem worse. To accept these short-term losses to its economic
growth, its social stability, and global narrative, the country’s leaders would need to exhibit
wild confidence. To survive such an operation, in other words,
its health would otherwise need to be quite strong. In truth, China’s government knows it faces
several ailing organs in the years to come, including one at the very heart of its continued
physical survival… Next time, in Part 3, of China’s Reckoning. In the meantime, you might be wondering how
the housing market has fared during Coronavirus. When it first began spreading, alarms were
raised that perhaps this would finally initiate the housing collapse long anticipated. After a rocky first few months of the year,
not only were skeptics proven wrong, but the pandemic drove prices even higher. By June, they were up 4.9% and one of its
largest developers had increased its annual sales target by 23%. How does it, time and time again, avoid disaster? Before we reconvene for part 3, I’m going
to assign you some homework to answer this question. “China: The Bubble that Never Pops” is
one of the books I myself listened to on Audible while researching this video, and consider
it essential listening to understand the whole picture of what we’ve just scratched the
surface of in this video. The reason I love Audible is that when you
download a book, you own it — you can listen back at any time, download it to your device,
and bring it with you wherever you go. With an Audible membership, you get 1 credit
a month to listen to any of its thousands of great audiobooks. You also get free access to its Plus catalogs
of books, podcasts, guided meditations, and much more. Visit Audible.com/polymatter or text polymatter
to 500-500 to get one free audiobook of your choice and start listening today.
the other one about demographic crisis
https://www.youtube.com/watch?v=vTbILK0fxDY
That cut at 8:30 gave me an orgasm
Interesting video
3 kids per family seems to be the sweet spot to have an economically sustainable population growth
Watched it, very good video!