If Real-Estate Crumbles Will China And The West Get Along?
Chinese money is fueling a building boom in the world’s top cities. What happens if the money dries up? What happens if Chinese buyers and Western governments become caught between the opposing needs of Chinese authoritarianism and Democratic transparency? Does the U.S. own the property because it’s backed by U.S. dollars? Does the Chinese factory owner personally own it? Does the CCP own it for the benefit of “communist” China, or all Chinese people?
In the next recession those questions will take center stage.
Will common ground be easy to find? Let me be clear, I’m not anti-Chinese. The question isn’t ‘good’ versus ‘bad’. However, there are strong historical differences between Chinese and Western values in who does what in society. Will our institutions be up to those challenges?
In China there are thousands upon thousands of newly built dwellings that remain empty. The Chinese keep building skyscrapers in China, while some that were built a few years ago begin to crumble apart, literally.
The fact is, cities everywhere are expanding faster than people are moving into them. Unlike the U.S., the Chinese government is giving incentives to people in the country to move to the city. Very much like the U.S., the only jobs available to those people, once they get there, don’t pay enough to maintain a better lifestyle than what they experienced back in the sticks. Many move back.
In the U.S., where we have complete freedom of movement, I’ve never overheard, “We just moved here from Alabama, Arkansas, Mississippi” or, fill in your favorite state without a thriving metropolis. I would think that as luxury buildings go up, those in the city who have done well would move into them. Then people from outside the city would move into the places left vacant.
In both China and the the US, most people outside the cities can’t afford the jump. They can’t join the middle class just by moving to the city.
Large groups of people in both the US and China are becoming bitter and angry.
After the 2008 “subprime” crash, the Chinese began buying up real-estate investment properties in all the prestigious U.S. cities. As existing properties ran out, builders began to build more, and continue to build as I write. Where did the Chinese get all this money? It’s the money that, for the past 20 years, has been building up at the Treasury from our trade imbalance. Simply put, all the money they earned, making stuff for Walmart, they’re now spending on foreign luxury properties.
From the urbanite’s perspective, either in China or the U.S., what’s the problem? The world is becoming an easier place to travel and live. Certainly, there is stress in some parts of the Middle East, Africa and South America. Problems with the poor, the world over. But for anyone living in any major city, in China and the U.S., life continues to get better.
Real-estate collapsed in 2008 because people could no longer afford to maintain or pay for their properties. If the economy kept growing there would have been no 2008 meltdown. Maybe it would have happened in 2009, or 2010, or never. There is no certainty that lending a lot of money to people leads to defaults.
Are cities growing fast enough to digest all the new investment money in higher-end real estate? Will maintenance costs grow and surpass the investment return on the mostly empty space that the Chinese are buying? Unlike China, where the government controls the currency and immigration, Western countries have free markets where people can sell in a panic, because, unlike China, in Western markets investors are free to do so (for better or worse).
I have all the respect in the world for the Chinese. What they have accomplished is nothing short of spectacular. But some observations must be made.
China doesn’t have churches and charities and people wandering around trying to help the homeless. Either one’s family or the government does everything (or nothing).
In America, when the sprinklers stop working at the local kiddie park, the government is called, naturally. But given enough time, individual citizens will put in the time and expense to fix the sprinkler. That isn’t the case in China, from what I understand. Again, this isn’t a fault of China, just a difference in cultures.
Most Chinese investors will not care for their “Western” property in the same way as a Westerner. From centuries of authoritarian rule it is accepted that if you can get anything on the side you should as long as the government doesn’t say ‘no’. Of course, Westerners are no different in the amount of greed they have. What’s different is that Westerners, despite their libertarian ranting, feel somewhat responsible for each other, as strangers, in a way the Chinese do not (partly because the CCP doesn’t encourage it).
Immigrant cultures, like the U.S., must become tolerant and compassionate or fall apart. Indeed, it is that part of our culture that motivates many wealthy Chinese to come live here!
You’ve probably heard that many old buildings in your city do not want to sell to Chinese investors. Most don’t articulate the reason why, but there it is. In America, for example, it is common for two neighbors to become bitter enemies because one mows their lawn and the other won’t. Yet they will have two opposing views that, at least philosophically, each respects. One believes everyone should care for their neighbor (and cut their lawn), the other believes he should be free to do as he pleases. Neither believes the other’s views don’t matter.
The Chinese neighbor doesn’t see the point in either side. As long as the government says it’s okay he can do whatever he wants. The Chinese don’t set up quasi-governments as Westerners do, to solve these conflicts, like school boards and condo boards. Their central government already takes care of those things.
So a real estate crash would be aggravated by the difference between Western values of civic maintenance, which is both private and public, and the Chinese, which are dictated by the CCP. In other words, the Chinese are more likely to dump and run than Westerners because their government may give them no choice. This is also easier for them because they don’t live in many of the Western properties they own.
A couple of major facts about China one should not forget: There is no immigration in China. Virtually no foreigner ever gets a green card. China can buy Western properties and buy their way into Western countries. The reverse is not the same. That imbalance, and the difference between Western and Chinese governance, will make a smooth adjustment to the current building boom difficult. Things will work, then they won’t. In short, without a buffer of shared responsibility, the market will crash where it can, which is here.
My guess is that long-term, cities will continue to grow. But they will eventually need to take a breather. To support that view, even though the tech-heavy stock market crashed in 2000, technological development continued its growth unabated.
A gloomier prospect is a return to old ways for both the West and East. Against economic pressure the West may go back to its military playbook, sending the poor back to be killed in larger-scale proxy-wars around the globe. They certainly have the weapons stockpiled. The Chinese Communist party may enforce greater Hokou, make it difficult for its people to live in the West, use it’s facial recognition database and internet censorship to send malcontents to ‘re-education’ camps.
Let’s hope all this new housing gets filled, sooner rather than later. Let’s hope that when trouble comes knocking, both cultures can respectfully resolve their differences in expectations.
If you’re interested in non-mainstream reporting about China, I recommend China Uncensored and Serpentza. UPDATE 11/15/2021. I would no longer recommend China Uncensored because they’ve lost their sense of humor. My current favorites are: China Observer and China Insights. UPDATE 5/4/2022 Lei’s Real Talk and mostly Taiwan Asianometry.
