Is China in a economic crisis or just propaganda? : China

china's property bubble is the real reason their GDP is flat despite BYD and high-speed rail. they'll still be dealing with that for another five or ten years no matter what kind of futuristic factories and shit they might be building in the meantime.

I think nobody knows better than real estate developers in China that they're building more houses than there exists demand. But knowing that doesn't change the fact that the average local government depends on land taxes for a whooping 45% of their income.

Well, I say that. But technically speaking, China doesn't have a land tax, since you don't really own the land, and they can't justify taxing you for something you don't own (yet?). But they can charge you money to “lease” the land from the government for 70 years. According to this news report, the amount of money real estate developers pay the government to “lease” then land, and then to pay taxes on building the houses and selling it, accounts for 60% to 80% of their profits. Whereas looking at American real estate developers, the rule of thumb here seems to be to that land should take up only 25% of the cost of the development.

In fact, I've seen people work out the price of leasing the land, and joke that it just about accounts for 70 years of property taxes. You just have to pay it up front.

And when anywhere from 30 to 60 percent of your income depends on real estate developers continuing to throw 60-80% of their money at you, of course, the government comes up with all kinds of policies to prop up real estate prices. I've mentioned before the policy that you don't qualify for public school unless you own, not rent. There are almost no laws guaranteeing the rights of renters in China. The landlord can kick you out anytime they want (even if you signed a contract for a year), they can come into your home whenever they want, they can raise rent as much as they want. Rural land are designated to be agricultural land, and you're not allowed to do anything other than agriculture with it. Some people speculate that the government deliberately makes sure that there's shitty infrastructure in rural villages to drive young people towards the cities so they buy more houses there. Maybe that's true. Or maybe rural governments are just actually too poor to build infrastructure. That seems likely to me too.

Either way, they put pressure on real estate companies to buy up land, then pass laws that push or maybe even force people to buy up houses, so that real estate companies have more money to buy up more land. All so they could spend money on creating a China that looks a lot more first world-y and strong and prosperous than it actually is, so that people have confidence in the government and in the future. So that people are more okay accepting shitty conditions and long work hours and low pay, because they think their sacrifices are actually bringing about a better tomorrow that they dreamed of.

I've seen China's real estate market described as a “government-backed ponzi scheme”, and I think it's an incredibly accurate description. I would even call it a government created ponzi scheme.

At least at first, it wasn't so bad, because while people invested in housing, it's still undeniable that the houses being built were actually needed. China's population was growing, and China's educated, skilled population was growing even faster. There really was going to be a flood of people moving away from agriculture and into cities to do white-collar jobs, with or without government policies. For a while in there, I do believe that China's rising housing costs had a basis in reality.

I think it all turned around in 2008, with America's subprime mortgage. I think that really gave the Chinese government a bit of a heads up, and made them look into China's own problems with giving out loans too easily and tighten the laws around loan approval. This had a bit of an affect in China—a lot of industries really did slow down as loans became harder to get. All of a sudden, the stock market wasn't doing too well. Starting a business wasn't really an option. And this didn't draw too much ire from the people, because everyone understood that there was a global financial crisis going on. Of course times are going to be a little harder for a while.

But real estate continued to do well.

Because real estate was the only market that was still able to easily get loans.

And they did this by never going through the banks at all.

Their weapon was “pre-sold houses”. It's basically the concept that instead of building a skyscraper full of apartments, and then trying to sell it to people, they build one sample apartment unit, and then sell that concept to people. “Pay me up front today, and I'll start building a skyscraper full of these apartments. When it's done being built, you can move on right in.” They're basically getting a loan from thousands of normal people, and using that loan to buy up a bunch of government land that they're forced to, which they'll use as a collateral to get more loans from the bank now that they have real assets that are valued as worth a lot of money, and then use that money to buy more land from the government, which they'll use as collateral to get more loans…and so on and so forth, allowing real estate to become the only market which could add basically infinite leverage onto itself.

And when you pay a real estate company 3 million RMB (for example) for a house that won't exist for another 3 years yet, you're basically giving that company a 3 million RMB interest-free loan. Well, that's putting it generously, actually, because you probably won't even get the principal back. Because all they ever promised you, and all that's ever written on the contract, is that they'll deliver an apartment unit that looks like the sample they showed you. The size might be written down in the contract, the utilities that come with it might be (like a dishwasher or central heating). But you won't get to go through and inspect every detail like you can with a house that already exists. And the more they cut corners on the things that weren't clarified, the more of a profit margin they can make. And any company would be desperate for more of a profit margin when they have to pay 80% of their profits to the government. That's why you keep hearing about Chinese concrete actually being made out of sand. Or corn. Or cardboard.

So with all of the above information, it's not hard to see then why China's real estate market's collapse is inevitable and entirely unsurprising. It was never sustainable to begin with.