Expect a Slowdown for the Chinese Economy, but Not a Crash

There’s a lot of talk in the United States about rising interest rates depressing the housing market. What is the situation in China?

It’s so pricey—almost like New York or Palo Alto, even though incomes are lower. I, personally, cannot afford an apartment in Beijing. Over the past 20 years, buying a house has been the easiest way to make money. My parents always want me to buy in my hometown, and like many others, they say, “Don’t miss the opportunity!” But economists know a market like that can’t last. A slowdown would be a good thing. 

The situation is different with industrial land prices, which haven’t risen nearly as much. Every economist sees a discount, and there’s been a lot of discussion about what’s causing it. 

Why are industrial-land prices so much lower?

Oftentimes, people say it’s due to a distorted land policy, that the government wants to subsidize production. But my coresearchers and I argue that another explanation makes more sense. 

The government is a monopolistic supplier of land. Like many people, my grandmother owned a piece of land before the Communist Party took over, after which point everything belonged to the state. But beginning in 1998, China developed a land market and started slowly selling the land—or, technically, the rights to use it­—to finance infrastructure investment. Most construction is on newly released land. 

In residential real estate, the local government sells land to a developer and gets money at the point of sale. But with industrial land, the government will also collect future tax income. From a public-finance perspective, is someone doing a careful calculation and taking into account the money that will come in over time? In research, we find that we can explain the price differential through this simple time-horizon perspective.

Is it dangerous to make assumptions about the Chinese market on the basis of what happens elsewhere?

Indeed. For instance, land is a scarce resource in China, and it’s important to understand the local governments’ economic decisions, which can provide perspective. In the United States, demand for land is important to prices. But in China, prices reflect land supply.

Also the involvement of the Chinese government is different. In 2021, there was a lot of concern that Evergrande Group, a big real-estate developer, was going to default and cause a Lehman moment [when Lehman Brothers’ 2008 bankruptcy shook the global financial system]. I said it wouldn’t happen. The government made a huge mistake in allowing a practice unique to Hong Kong and China’s mainland, in which developers can sell a house when it’s only 20 percent built. The issue is whether Evergrande will default on promises made to people who bought homes that aren’t finished. For that, the Chinese government has zero tolerance, and it has built an ad hoc fund to make sure developers finish these projects.

Is there a takeaway for investors?

As a simple fact, an economic collapse will not happen in China. I always tell my students a collapse only occurs in an economy like the US where market forces are paramount. China’s past growth has been extraordinary, and what will come is a smooth slowdown. But there will still be speculation. 

Zhiguo He is Fuji Bank and Heller Professor of Finance and Jeuck Faculty Fellow at Chicago Booth.