Economics with Chinese characteristics

Right in the middle of the most stressful time of the semester I thought it’s about time to write again. Quite a few things have happened. Friends visited, family visited, it rained (yes really, that’s worth reporting) and I got an internship which by extension means I’m going to move to Guangzhou in July.

Spring activities: Chilling...

Trying to pose like middle-aged Chinese women

Spring is the time when family and friends are visiting their offspring / mate abroad. I’m not entirely sure why everybody is coming here the same two months, but it’s probably a mixture of climatic (in China) and holiday (in Germany) reasons. The problem in China is, unless your visitors know some Mandarin, they can’t really do that much besides visiting main attractions if you’re not with them, so you better have plenty of time when they are around. This came at a cost for university in my case, but then again, applying the language in daily life is just as important, isn’t it?

Spring is also the time when something ominous happens in the skies of northern China: Clouds start to form. You easily recognize that, because other than smog, real water vapor forms discernable objects. At some point, even more ominously, out of these objects water is falling, allowing more modest plants to blossom, thus adding some color to a city that I thought was eternally grey. I never knew just how good the smell of fresh rain vaporizing on the ground can feel until I moved here. I neither figured out how the grass and trees that are not irrigated survive the 8-month period with virtually no precipitation (since this is China’s capital, it wouldn’t be too surprising if every park and roadside tree were manually irrigated either). Anyways, spring is a short and intense period, with temperatures ranging from below zero to 30+ all within one week.

Sometimes, just sometimes, Beijing can be charming

Yet the explosion of outside activities that I’m used to when the men and women of Berlin recalibrate from their hibernation mode is not so present here. Clothes tend to get shorter (on some girls longer to protect the pale color of their skin) but the number of people outside doesn’t increase much. Beergardens and open-air restaurants seem to be an expat-thing too. Problematic levels of air pollution could be a reason, but Beijing people usually don’t care about those much, so I guess it’s mostly a cultural difference. If you look at how developed Asian cities like Singapore or Hongkong were basically built to minimize exposure of their citizens to the tropical climate around them, you realize how romantic our concept of being out in nature is.

What’s extremely fascinating about traveling in China is that it’s not built yet, there are still huge swaths of people and resources moving as provinces and cities scramble to boost their economy and be part of the country’s transformation. And as I stressed before, you just can’t understate the scale of development when a country has 1,4 billion inhabitants. It means that even the smaller cities Europeans might know (Qingdao, Hangzhou, Chengdu) are bigger than Europe’s largest cities. Building homes for hundreds of millions of people in cities with the population of Austria is nothing like what we’re used to. A housing developer usually builds dozens of buildings next to each other, not semidetached houses on a suburban side street, but 30+ storey apartment blocks, each easily inhabiting more than a 1000 people. Thus, a single development project might house more people than a mid-sized European city. To sustain the daily needs of those people, often a shopping mall and for larger projects concert halls, museums etc. would be added. The initial infrastructure usually consists of a grid pattern of roads the width of highways and some bus lines, later metro-, high-speed-railway-stations and actual highways might follow. Within a few years, whole neighborhoods and cities are built from flat land and the most stunning part about this is, they often remain uninhabited for years to follow.

Typical suburban development I visited near Suzhou: Endless lines
of apartment skyscrapers

 

And some higher ones for luxury penthouses and office space

No ambitious project would be complete without a mega-mall

And a landmark where people can take selfies

Does this picture have symbolic character?

Yet despite my condescending remarks, you can't deny it's impressive

One reasonable way to divide China is by urbanization. Among the cities, there are 4 tiers, from fully developed metropolis to provincial city. Housing is being built everywhere, but the demand is absurdly distorted. Extreme inequality in allocation of resources (for a number of reasons each worth an own article, to name a few: rapid development needs focal points; China is traditionally a centralist, top-down state; Chinese people care a big lot about namedropping, be it universities, companies or cities) means that everybody is trying to make it to Beijing and Shanghai. Those cities have all the best universities, the best healthcare, the best infrastructure, nearly all the biggest companies and by far the highest wages. The downside: To own a house or apartment in these cities remains a pipe dream for all but the richest few percent of the population. To give a comparison: The price of a 3-room family apartment in Beijing’s city area, not necessarily central, adjusted for income would be like having to pay 3 Million Euros for the same apartment in Munich. Even unadjusted, China’s major cities have long surpassed ours in property prices. Renting is comparatively cheap (I have to stress “comparatively” here, the income-to-rent ratio in Beijing is still the worst in the world), but China is still culturally conservative and family-orientated, so owning an apartment is widely considered a prerequisite for starting a family as a man. Despite being some of the largest cities in the world, land is scarce in Beijing and Shanghai and newly built flats are sold in an instant at fantastic prices even in a sluggish market.

On the other hand, projects in the hinterlands of 2^nd and 3^rd tier cities are often devoid of people for years after being constructed, though most of them eventually fill with life. The most obvious question then is: Why would any investor do that? The general, vague answer is: Because the market environment is very different, which is to say less demand-driven. Whereas a city and subsequently private investors in Europe react to a surge in demand, Chinese local governments try to create demand instead, hoping that a seemingly unstoppable high growth will eventually pull people out of poverty (= the villages) into the middle class (= their newly built suburbs). They have more money to spend and levers to pull when it comes to incentivizing investment and don’t mind creating overcapacities because they don’t have to be profitable. What’s more, Chinese local administrations are measured against certain KPIs, very often that is the local GDP growth. The country that vows itself to socialism with Chinese characteristics has a meritocratic style of governance that is more similar to the way capitalist companies function. Mayors of cities are usually in place for 5 years only and their next position will depend on whether they perform well during their legislative period. Since huge construction and infrastructure projects boost the current GDP and enlarge the leeway for future GDP growth, they are one of the favorite pastimes of local governments in China. Sometimes you can recognize a well-conceived concept behind them, sometimes they are just a pretense to save the mayor’s career and funnel some money into his daughter’s husband’s brother‘s construction company that surprisingly won the tender.

In addition to that, even private enterprises come with a “Just do it” mentality that is at odds with our conservative and frugal way of investing. I too still struggle to understand how pouring squillions of dollars into dubious land development projects or young start ups in extremely competitive markets with little potential for differentiation (Bike Sharing) would be a good idea. The real damage, whether it be small or big, of those misdirected projects will only be known once the Chinese economy as a whole cools down considerably. Investing in a place to live is a huge decision and therefore one of the first things to be postponed when people face uncertainty, which in turn pulls down the prices. Most experts agree that China does have a housing bubble and crossing the country by train you’d agree with them. However, nobody can reliably predict the size of it or the time it will burst. So for the time being, we’ll continue to see ghostly cities popping up in the most random places. For anyone who is interested in the “real” China, visiting one of these odd, megalomaniac suburbs is more telling than the glitzy first-tier cities or puffed up tourist sights.