Investment in the Chinese market: is it better an apartment or an innovative start-up?
Three-million-people metropolises are the new frontier of Chinese development. According to the forecasts, the future increase of the population will be concentrated there, with growth rates of 2.5% per year from now to 2030. Two main population flows converge on these cities: one from the surrounding countryside and one of migrants coming from bigger cities like Beijing and Shanghai, due to the government attempt to decongest them. In the meantime, more money is circulating. In 2010, the per capita GDP in first-tier cities exceeded 10 thousand dollars, which is the threshold beyond which there is a qualitative leap in consumption. Between 2017 and 2018, the third and fourth tier cities also reached that threshold.
Today the cities are invested by a great real estate development, the countryside is swallowed by the suburbs and the rural land becomes urban. Urbanization grants people access to services that previously did not have, such as modern hospitals or good schools. However, they lose the network of relationships they had before and their only source of income often becomes the house itself. They are transformed from workers to rentiers and they wait for the value of the building to rise to resell it. That is the real estate bubble: anyone who has some money aside invests in the brick and homeowners expect the value to rise steadily. The need of urbanization and the need for houses to live in are now facing speculation. The purchase of first homes is decreasing, while the one of second and third houses increase. People buy more and more to invest and not to live. Since 2015, prices per square meter have risen in China by 30% (on average), a growth far greater than that of developed economies. In the first half of 2018, investments in property development projects grew by 14% and banks plunged headlong into the deal, giving one-fifth more loans to building sites. Today, it is estimated that 30% of the Chinese GDP depends on the real estate sector. Therefore, it is necessary for the government to keep it healthy. Furthermore, some economists calculate that the Chinese brick is the single asset class of greatest impact on the global GDP, representing about 2-3 percent and so its collapse would have heavy repercussions even at the international level. Paradoxically, it seems that it is not the government that holds the Chinese in hand, but the Chinese who hold the government in hand. Probably it would be more correct to talk about complicity: who are that 30 percent of Chinese who own 70 percent of real estate?
The Chinese real estate sector is a guaranteed bubble, as long as the government has “life preservers” to offer. The “Great Chinese transition” consists in trying to divert resources from real estate to more productive sectors, that is innovation, new technologies, products with high added value. This is also why the “Made in China 2025” plan was born. In short, it is crucial to convince Chinese people that it is better to invest in a start-up rather than in an apartment. It appears a difficult job, but China this year has entered for the first time in the top 20 of the most innovative nations for The Global Innovation Index, thanks also to investments for research and development and number of patents deposited. The key point is to understand if the high-tech turnaround will come before the real estate bubble breaks out.
Luca Masoero