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With the imposition of his “three red lines” regulations in 2020, Xi Jinping called time on China’s epic real estate boom. For the previous two decades, real estate had played a huge part in China’s economy, matched only by exports to the West. But Xi brought an end to housing as an asset class.
For Xi China’s building binge had a single purpose: to urbanise the nation. And now China has enough. Since 2004, 12.7 billion metres of housing have been built in China. In 1999, 65% of China’s population was rural; by the 2020 census, that proportion had dropped to 39%. Hundreds of millions of people moved into new houses, sometimes in entirely new cities.
In pursuit of this state-mandated goal, vast private building companies emerged and made their fortunes, including Evergrande and Country Garden. China’s GDP soared, not only due to the building boom, but also because new urbanites started to spend money. Rural subsistence farmers generate virtually no GDP: they plant crops, consume them and occasionally buy fertiliser. By contrast, urbanites buy washing machines and TV sets, they take trains, work at companies and eat dinner in restaurants. As of 2023, Shanghai’s per capita GDP is 190,000 RMB (around 26,000 USD); the average for rural China, according to government statistics, is around 20,000 RMB (around 2,750 USD). By embracing modernity and turning peasants into urbanites, China created infinite reserves of GDP.
Now this process is almost complete.
China’s colossal property developers will suffer as a result. But in the eyes of China’s government, they are disposable. They’ve served their purpose. Before last month’s Third Plenum, some speculated that China would revive its housing market by inverting the three red lines and somehow giving investors cash from the magic money tree. No such luck. Although Chinese leaders do want to continue the process of urbanisation by, for example, reforming the Hukou system, they have no interest in pleasing property tycoons and investors. In an effort to prevent out-of-control urban growth along the lines of Tokyo or Seoul, the Chinese government retained the Hukou system — in which Chinese people are entitled to education or medical care only in their hometown — during the boom years. As urbanisation has slowed, the system is gradually being abolished, with the intention of encouraging a few more rural dwellers to move to the cities.
China officially plans to reach 75% urbanisation, so there are still more than 100 million people left to go. But Xi is keen to retain that rural population: they preserve the nation’s food security and traditions, and tend to China’s wild spaces. At the same time, the overriding goal of the CCP is to create the conditions for the optimum number of healthy, highly-educated, middle-class Chinese. When India’s population exceeded that of China last year, the Chinese Ministry of Foreign Affairs said that the quality of the individuals, not just their quantity, was relevant. This comment alluded to the sense that in the globalised economy, one highly-educated STEM engineer is worth 10, if not 100, peasants; while China’s total population isn’t growing, the population of middle-class urbanites is, and that is the population relevant to latest goal: turning China into a sci-tech superpower. And now, these new urbanites must start inventing semiconductors.
Some of the property developments that were unfinished or unsold when Xi blew the whistle will become affordable housing in line with the Singapore model. Housing values have stopped rising, leaving urban middle-class families whose assets are tied up in houses — which make up 59% of household wealth, compared to around 25% in the US — feeling hard done by. But despite the hit to China’s economy, Xi Jinping continues to insist that houses are for living in, not for speculation. If China’s middle class don’t like it, they can book a flight to Ecuador.
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SubscribeThanks to Jacob Dreyer for an excellent article. Note to Unherd: more like this, please. Mr. Dreyer observes that: “Rural subsistence farmers generate virtually no GDP: they plant crops, consume them and occasionally buy fertiliser. By contrast, urbanites buy washing machines and TV sets, they take trains, work at companies and eat dinner in restaurants.” For me, this serves as an illustration of the dangers of economists’ over-reliance on GDP as the most significant metric of how a population is doing and as the basis for international comparisons.
Indeed. You can’t eat washing machines and TV sets.
“But Xi is keen to retain that rural population: they preserve the nation’s food security and traditions, and tend to China’s wild spaces.”
UK politicians are oblivious to this.
“96% of Chinese urban residents own their homes“. There are still many British politicians who believe that increasing the rate of home ownership is a highly desirable goal. They should note that the world’s highest rates of home ownership are in countries like China, Cuba (Fidel Castro was a big fan of home ownership) and Romania. The world’s lowest rates of home ownership are in Switzerland, Austria and Germany. UK politicians have obsessively nudged us towards the Cuban end of the housing market.
The Romanian rate of home ownership is interesting because many of the supposedly-homeless Big Issue sellers in Scotland are Romanians. Scotland must have absorbed a large proportion of the residual Romanian population who are not home owners.
So you believe it’s preferable to have a landed gentry and a majority of the population renting and never being able to accrue capital in any meaningful way, as opposed to one where the majority have the security that comes with owning their own home, not having to pay rent in retirement and owning an asset to borrow against to start businesses if they wish?
I have worked in Austria, Germany and Switzerland and I never noticed that people were not able to accrue capital “in a meaningful way”. The UK might be different because we brought in a million immigrants last year and only built 231,000 new homes, so not even enough for the new immigrants. Also “security that comes with owning your own home” does not apply to people with a mortgage and negative housing equity, which will happen when interst rates have to rise (as a consequence of our new government’s proposed policies). Your argument that housing assets are a good source of funding for new businesses does not seem to work in Romania. In many a town in Scotland, the Beggar, the Busker and the Big Issue seller all come from the EU’s highest home-ownership country.
If you want to copy those countries then Britain needs to have much stronger tenancy laws in favour of the tenant rather than the landlord, something many on here will claim is against their free market principles
The problem is not so much home ownership itself but the financing of those homes. In practice, it never takes long for prices to endlessly increase because selling credit and speculation – not the house itself – becomes the way to accumulate capital. Thus prices start to deviate from wages more and more forcing people to take on more and more debt and incentivizing banks to sell it.
Basically you have inflation driven by credit money, prices increase because people expect them to increase. A Ponzi fundamentally. This is what triggered 2008. It is also what triggered Japan’s lost decade. Contrary, in Greece many people own a house without a mortgage.
Home ownership means very little if much of what you own is actually debt.
This is one reason why home ownership in Romania (and much of Eastern Europe) is higher. After the fall of communism, people were given the flats and houses they lived in at no cost. And in Romania, private home ownership in villages was normal – and it was normal to build private village homes even under Communism. I’d suggest that ownership levels in Eastern Europe will drop from their current level. Although the demographics will take some pressure off house prices – the population is failling due to low childbirth rates, huge emigration and almost zero immigration.
Sounds like a perfect advert for the virtue of home ownership: it saves you the danger of ending up in Scotland selling the Big Issue.
Is it really credible given the astronomical level of house prices in Chinese cities and the mass migration of poor rural workers to these cities that most of these new arrivals are not actually renting or living in company hostels ? My understanding is that a considerable amount of housing in China is in workers hostels owned and run by companies.
Is it really also credible that the housing situation in China is really part of some cunning masterplan as the author implies ? Or that Xi has managed to avoid “out of control urban growth” and that the huge Chinese cities are more attractive and liveable than Singapore or Seoul ? Call me sceptical.
There is also no such thing as “infinite reserves of GDP”. GDP is simply a measure of current output. Having high GDP today is no guarantee of maintaining that in the future.
I’d beware of taking statistics out of either China or Romania at face value (I have some personal knowledge of Romania here – urban housing is certainly not cheap there when compared to local income).
One note about Romania. Planning permission is considerably easier to obtain in rural villages (a huge amount of housing has been built with remittances from overseas earnings – as in much os Eastern Europe). And more “flexible” in urban areas (it’s a Latin country in many ways).
A colleague who has spent a large proportion of his time in China in the last 15 years has told me something similar about China. Often, when he asks Chinese colleagues about whether residents of properties are owner-occupiers, they say that the arrangements are actually very complex. Like you, they are scornful of the official housing statistics.
With regard to Romania, they have had a mass exodus to the rest of the EU (even Scotland!) and negligible immigration. So the housing market is under some deflationary pressure.
Cuba is nice and simple: Fidel Castro simply announced that everryone was now the owner of the proprty in which they lived. (He was an even bigger fan of home ownership than Mrs T.) His policy has been fairly disastrous.
Chinese cities, despite a fair amount of propoganda to the contrary, on the whole are safe, clean and pleasant with a lot of tree lined streets and cheap restaurants where a bowl of fairly good noodles runs you about $4 or so.(this is based on personal experience across a fair few cities) You can fault the Chinese on a lot but their urban design and managemrnt is pretty spectacular and their food is still reasonably priced even by developing country standards.
“As to the results? As former CCP leader Deng Xiaoping said of the French Revolution, it is too soon to tell.”
I thought that had turned out to be a misintepretation: Xiaoping had been asked the question shortly after the 1968 Paris student riots and thought it referred to those.
Anyway, the idea that all these newly-urbanised peasant classes will become inventors does sound a little bit like a 21st century version of Mao’s Great Leap Forward, when he decreed that every village must have a steel furnace. Admittedly this was because he was confiscating Chinese grain in vast amounts to buy Russian nuclear weapons, leading to a famine that killed millions of Chinese people and there’s no danger of anything like that happening now, but all the same the defective and dangerous command-economy thinking is still there.
*It was actually Zhou Enlai who said this, in 1972.
Ironic that almost everyone owns their home in a communist country, while in the most capitalist countries, home ownership among the young declined dramatically, as it is now unaffordable. In fact, people are even driven into homelessness because renting is unaffordable too. What is it worth to live in a first world country if you cannot even have the basic need of housing?
Building too many houses for macro-economic reasons will probably be a problem for China. However, in the West it seems we have this problem in reverse. The housing market is a Ponzi bubble and the shortages are necessary to prevent it from popping.
“… in the most capitalist countries …”
It’s not ironic: , it’s a time shift.
You are refering to several decades ago, when the country was recovering from the Winter of Discontent, and the reason that “home ownership among the young declined dramatically” is that the UK has had Blairism, Socialism with Globalist Characteristics, from the end of the last century.
Yes, Cameron even promoted himself as the Heir to Blair.
Well, a quick look at the data will show home prices as well as private and household debt exploded after the 80s already. The problem is that under neoliberalism, not only the middle class got into the housing market, but also the financial industry. And they turned it into a speculative ponzi.
Then again, Blair was of course considered the heir of Thatcher. At least according to Maggie herself.
It’s more correct – in Eastern Europe – to say that almost everyone owns their home in a *post-Communist country*. People were usually given the homes they lived in at no cost when Communism collapsed. Though many are building newer, better homes than the awful prefab commi-blocks they had to live in.
Well since China is no longer Communist, I think the irony is that even countries that have only recently adopted free markets can still teach the increasingly-clueless western political class about the nature of supply and demand.
Good as far as it goes, but also important to delve into the relationship between changing housing investment parameters and local government finances, given that their pivotal play in local investment has not only included housing but been sustained by their investment in it. For example. additional credit lines recently extended to local governments are designed to remedy or reinforce what?
“As to the results? As former CCP leader Deng Xiaoping said of the French Revolution, it is too soon to tell.”
Oh dear, not this old chestnut that rather diminishes the rest of the article about which I’ll doubtless add a comment or two later.
Deng Xiaoping was speaking about the ‘French Revolution’ in 1966:
“In 1972, Zhou Enlai, the premier of China under Mao Zedong, was asked the question: “What was the impact of the French Revolution?” His answer: “Too early to say.”
The French Revolution took place almost 200 years before Zhou gave this response to Henry Kissinger. Thus Zhou cemented China’s reputation, in the eyes of West, as the country that thinks in centuries. Unfortunately the French revolution that Zhou was talking about wasn’t the well-known one in 1789, but the student uprising in Paris, in 1968, an event that had taken place only four years before, not 200 years. While after too many years, the translator of that conversation set the record straight and confirmed that Zhou was indeed talking about the 1968 “French revolution,” this misunderstanding had already become a norm.
From 1979 until 2010, China’s average annual GDP growth was 9.91%, reaching a historical high of 15.2% in 1984 and a record low of 3.8% in 1990.
Today the central government here is castigating one province of failing to reach the 5% growth target, something most western government’s would give their right arm for.
China cooks the books regularly; I’m not sure of the veracity of their figures.
Since my first visit to China in 2002 I’ve spent almost ten years living here, mainly in what’s called a second tier city of between 4 and 6 million people, depending on how it’s counted. I’ve also travelled very extensively in 19 of China’s Provinces and districts, from Xinjiang in the north to Xishuangbanna in the south, to the deserts of Gansu in the west and to Anhui in the east.
So first, and because poverty, queuing for basics, and starvation is still in the memory of anyone here who’s under 50, older Chinese people are still notorious savers and according to World Bank estimates, the savings rate to GDP is the highest among the world’s large economies. Money ‘under the mattress’ is common place, as are security bars on the windows of even high rise buildings.
The writer hints at but doesn’t specify that since ‘opening up’, announced by Deng Xiaoping in December 1978, in order to embrace capitalism and open the door to foreign businesses that wanted to set up in China, the transformation of China has been beyond incredible. And that’s really observable, even since my first time here in 2002.
So from the World Bank – the international voice of capitalism:
“Since China began to open up and reform its economy in 1978, GDP growth has averaged almost 9 percent a year, and more than 800 million people have been lifted out of poverty. There have also been significant improvements in access to health, education, and other services over the same period.”
https://www.worldbank.org/en/country/china/overview
Even last year official GDP growth was 5.2%
So when I still see more top of the range ‘Western’ motor cars (many are now built here) on the streets of China’s poorest provinces, than I’d see in any city in the UK outside of London, I suspects predictions of the country’s economic demise is somewhat speculative.
Of course in a country of 1.4 billlion people, some are disgruntled, but how would anyone feel about their country coming second only to the USA in the Paris Olympics?
That tired Deng quotation was a misunderstanding. When he made that comment in the 1970s, Deng was referring to the May 1968 student unrest. In which case it makes sense.
Blimey, this piece reads like the last 10 odd years of rampant misallocation of capital, rampant corruption, and rampant suppression of individual enterprise hasn’t happened.
All that debt that used to be thrown at the construction is now being chucked at producing consumer goods. Which can’t be consumed by the Chinese alone because they’ve not yet made the transition to a high value add service economy and therefore can’t afford them. So they are trying to dump them all on the international markets instead. The tariffs being raised against EVs are just the beginning. It’s that or get swamped by Chinese product dumping.
China has to export as it’s the only way to keep the wheels turning. When they get walled in by tariff barriers they’re going to drown in mountains of white goods and widgets that nobody wants.
Oh, and then there’s the demographics, which are the worst in the world. I give them 10 years tops. Let’s hope they don’t take us all down with them.
XI is a smart man.
It’s difficult to keep an industrial society with productive salaried workers when the main source of wealth acquisition is housing speculation rather than wages. In the West, high housing prices have been an undeserved boon for boomers and a curse on almost everyone else, especially families.
We should look at China and copy some of their effective policies.
“As former CCP leader Deng Xiaoping said of the French Revolution, it is too soon to tell.”
That apocryphal comment about Deng Xiaoping was in fact an error in translation. He was referencing the recent events in France occurring within the past decade (at the time of speaking), NOT the French Revolution of a century and a half ago.
If he had in fact been referencing the original French Revolution, it wouldn’t have been such a wise comment. By that standard, how do you ever tell what is a successful policy and what isn’t? Perhaps 3,000 years might suffice?