I cant imagine for one moment that anyone
reading this will be investing in, or thinking of investing in
Chinese real estate, but the situation in China is a
fascinating example of lunacy.
I'm sure you have heard about the empty cities that have been
built in China. Okay, they are empty of people, but not empty
in terms of ownership. People have bought apartments in these
What is going on?
The general view is that Chinese people are keen savers, and
they think that the best way to save is to invest in real
estate. After all, why is it called real estate? Because it is
real. It's basic. It's what all wealth ultimately rests on.
The joke is that although real estate in non-communist
countries is real, that isn't the case in communist countries
where the government owns the land, and of course this is the
case in China. This means that investing in the stuff is
really a matter of investing in the government. The investor
owns a lease not a freehold, and we all know that a lease has
a time value and therefore is a wasting asset. Hold on, why
would one want to invest in a wasting asset? How on earth can
that be a sensible investment?
In the West, a lease is usually set up not because someone
else owns the underlying entity, but because a building may
contain many owners, but there is just one building, and
someone has to look after the building, and so a company is
formed to nominally own that building, and be responsible for
it. One therefore buys a share of that building, and that
share is renewable. That is not the case when the state owns
all land. The government can determine that lease, declare it
null and void, or simply say it's use only lasts for the term
of the lease, and can then be sold to someone else.
Buying into such a project when the lease is set at seventy
years seems fine if you are thirty and want to have an income
when you reach retirement age because the lease will no doubt
outlive you, but then what? You now leave an inheritance to
your offspring that is rapidly losing value. If you die aged
eighty, which is reasonable these days, then the lease now has
only twenty years left to run. That lease is unsellable, or
worth just a fraction of what was originally paid for it.
Why buy into an asset class which is gradually going to get
less valuable over time, and as you move into old age is going
to start losing value at an increasingly rapid rate?
Let's look at this from another point of view.
Because of China's one-child policy in earlier years there is
a preponderance of males in the country, and so families have
become much smaller as fewer males can find wives, and the
richer, urban-living citizens' prefer to have less children.
This means the replacement rate of people in China is
declining rapidly. It is estimated that over the next
twenty-five years China will lose nearly a third of its
population due to natural deaths, and low replacements. Excuse
me, but under such circumstances what is the point of building
more cities to house less people?
China has already reached a point where there simply aren't
enough people to buy into what is essentially a ponzi scheme.
Let's try and put this all together.
You are Chinese. You dont want to invest in the stock exchange
as it is too risky. You are prevented from investing abroad.
You like the idea of owning something tangible, so you invest
in a newly built apartment in a newly built city. You see
prices rising, and so you assume you are onto a good thing. In
five years you will be able to sell your apartment to some
other mug and bank the profit. And because you have just made
some money, you re-invest. And so the pyramid of the ponzi
scheme rises ever higher.
On the other side of the equation is the plain fact that there
are very few people to buy these apartments for the purpose of
using them as homes, and this number decreases every year.
That means 95% or more of them remain empty and start to
deteriorate, and so, in real terms, become less valuable. They
are, in any case, badly built to start with.
That means the investment brings in no return at all. Normally
one would buy the property, and either live in it or rent it
out to provide a return on investment capital, and eventually
a pension. That can't be done under current circumstances. In
fact the financial proposition is all negative. You dont have
enough money to buy the apartment so you get a mortgage, so
what is happening is that you are paying money for something
that brings in no income and soon begins to degrade, and after
twenty years or so begins to lose value as the lease begins to
So what is going on here?
What is really happening is that the government has found a
way to screw the population and keep people in work and
massage the GDP figures all at the same time. It's a neat but
totally fraudulent operation.
Government owns the land. It uses police and the military to
throw peasants off the land (because it isn't their land to
start with). They then reclassify the land as urban and give
the task of building a new city to building companies. This
creates work and money. Citizens borrow money, and buy into
the project, which pays the wages of the builders and the
financial operators, and creates a thriving business. These
figures are then added into the GDP figures, and China can
show how well the country is doing economically.
The trouble is, at the end of the day, the ordinary working
person has borrowed money to finance a project which is no
use, and is going to cost those people money for the rest of
their lives. At bottom, these cities are a form of taxation.
They are stealing wealth from citizens, while boosting the
country's economic figures without anything to show for it.
As these empty buildings age and start to deteriorate they
naturally start to lose value even faster. Eventually enough
buildings become so unsafe they are knocked down as being a
safety hazard. The government then takes over the land and
decides that a whole area is now so bad that adjacent
buildings are also knocked down, the leases terminated, and a
plan is drawn up to build new apartments and the whole grisly
charade starts all over again. That, of course, leaves the
ordinary citizens who have paid, and are probably still paying
for the apartments, with absolutely nothing to show for all
The whole operation is a massive fraud. Ponzi schemes always
end badly, but as with all predictions these days, one cant
tell when the implosion will occur. Maybe this fraud will
continue for another decade, or maybe even another generation,
but I cant see it running beyond that.
And what is happening to those people who then realise they
have been right royally screwed? They will realise they have
gone short of things all their life to save for a future they
will never enjoy. They will have scrimped and saved to die in
Somewhere along the line there is going to be a reckoning. The
question is: what form will it take? I can't help thinking
that China is a ticking bomb, nearly ready to explode.
Next week I will try and answer some questions. In the
meantime have a good week.