China doesn’t have a housing bubble. Here’s why

China needs a large and vibrant real-estate sector to build enough housing in its big cities to meet the urbanisation demand in the next 10-20 years
Its high levels of savings and investment should also be seen as a blessing, especially given the costly necessary transition to clean energy

James Liang

Published: 9:15am, 5 Nov, 2021

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In a recent New York Times article, Paul Krugman suggested that China’s economy could stagnate because of its unsustainably high level of savings and housing bubble. His prescription is that “China really needs to change its economic mix – to save less and consume more.” Both the diagnosis and prescription are very misleading.

China has a large real estate sector and housing prices are high compared to other economies. But Krugman jumps to the conclusion that this constitutes a bubble. However, the high housing prices in large Chinese cities are not signs of speculative demand but, rather, a reflection of the supply shortage relative to real housing demand.

Per capita living space in large Chinese cities is small and new housing supply is well short of demand from young people wishing to live in these cities. Every year, millions of university graduates move into major cities to work, but struggle to afford housing. Moreover, there are hundreds of millions of migrant workers, most of whom can only afford to live in dormitory-type housing.

In the next 10-20 years, there will still be massive demand for urban housing and infrastructure investment in these large cities. China’s urbanisation rate is only about 60 per cent, some 20 percentage points below other typical middle-income economies such as Mexico (79.58 per cent) and Malaysia (74.84 per cent). Another 300 million people are expected to move into cities, especially large cities.

Over the next 20 years that would mean roughly 15 million people potentially moving into cities every year, with each person requiring US$200,000 of investment in housing and urban infrastructure on average, which works out to US$3 trillion a year, or 20 per cent of China’s current gross domestic product.

China’s biggest social problem is its urban-rural divide, particularly the hundreds of millions of migrant workers living in its big cities who cannot enjoy the social benefits urban residents do. The only long-term solution for this resident-migrant divide is to help migrant workers relocate to cities with their dependents, so they and their children will no longer be considered migrants.

So, China’s problem is not that it’s real-estate sector is too big. On the contrary, China still needs a large and vibrant property sector that can build enough housing in its large cities to meet the demands of urbanisation.

That said, there are housing gluts in certain regions, especially in lower-tier cities, but prices there are only a fraction of those in large cities. Overall, China has a geographical mismatch of housing demand and supply; too much housing in less-developed areas, but also an acute shortage in large cities where people want to work and raise families.

So, the best policy is to rapidly increase housing supply in high-priced areas. In the past, officials in charge of land supply did not follow price signals, and housing supply in large cities did not increase nearly as fast as in less-developed areas. This supply-demand mismatch has exacerbated the shortages in large cities, causing prices to rise quickly.

06:04

Life gets harder for Beijing’s migrant workers as the city tries to limit its population growth

Thus, the correct policy prescription for the Chinese government is to increase housing supply in these large cities. It certainly has the ability to do so, since it owns the land and can build very efficiently.

There are still arcane zoning laws in some major cities; in Shanghai, for example, a third of the land is reserved for farming.

Recently, the Hong Kong government announced a massive housing development project in an area with a lot of farmland. Other major Chinese cities can certainly learn from that. If Beijing can successfully facilitate massive investment in urbanisation, a large and healthy real-estate sector will be an opportunity rather than a risk.

06:32

Hong Kong finance chief says Hongkongers can take part in financing of Northern Metropolis

Krugman also said China has an unsustainably high level of investment. I would argue that this is a blessing rather than a curse for the Chinese economy, which has certainly benefited from its very high levels of investment in technology and infrastructure.

Besides urban housing and infrastructure, there are many productive investment opportunities in China, such as clean energy. To achieve carbon neutrality by 2060, many countries including China need to make massive investments to upgrade their energy infrastructure.

Global investment in clean energy needs to increase by an estimated US$131 trillion by 2050 to avert catastrophic climate damage; every country would need to spend 5-10 per cent of its GDP on average to meet this. One can argue that China, with its high savings rate, is in a much better position to afford this massive investment than countries with low savings rates.

07:02

China tackles challenges posed by its ageing population

Of course, there are still problems for the Chinese economy. One of the biggest is China’s ultra-low fertility rate, which will hurt economic growth and competitiveness in the long run. Last year, China had only 12 million births, just half of the average in the 1990s.

At an average of 1.3 children per woman, China’s fertility rate is even lower than that of Japan, which already suffers from an ageing workforce. In just one generation from now, China’s pool of young workers could be reduced by half. Unless the Chinese government can quickly implement an effective pro-fertility policy, in 20 years, the workforce will be ageing and shrinking rapidly.

But that is 20 years from now. Until then, China still needs large real-estate investment in big cities. High rates of savings and investment, particularly in real estate, are not weaknesses but instead serve as potential, and are an opportunity for fast growth – but only if the government can clear the land supply bottlenecks in large cities.

James Liang is an economist and entrepreneur. He is the co-founder and executive chairman of Trip.com Group, and a research professor of economics at Peking University’s Guanghua School of Management