How Chinese Real Estate Became the Biggest Bubble in History

25:38And they land on land, basically. They see the land auctions, which are off balance sheet revenues. They do not count for the purposes of being remitted to Beijing in the same way that normal tax revenues do. And they say, right, okay, that's it. That's what we'll do. That's how we'll raise money. And you see the proportion of income rise and rise and rise very aggressively through the late 1990s from a pretty sort of residual amount that was useful for land allocation. It wasn't mostly useful at the beginning for raising money and it becomes the main fundraising tool. And then they're in the trap.

26:11Yeah. The land trap. Has any country ever successfully gotten out of this type of situation? It depends what you mean by success. Yeah. Without a massive collapse or without a period of very long stagnation, which seems to be what China is in now? I would say basically no. And funnily enough, I actually think one of the best cases for relatively rapid return to normalcy is after 2008 in the US specifically. You can tell how few cases there are that I'm using for the Great Recession. This is the best one. I was like, this might be the best outcome for a number of different reasons. But yeah, that might be the best outcome.

26:50There are places that didn't get into the trap in the first place. Right. That That seems to be the ideal, probably. I've obviously never been to mainland China. All of the China news that I consume is on propaganda that makes it onto my Instagram reels that shows all these incredible futuristic cities and robots doing everything. 100 % of my China news consumption makes it look like paradise on Earth. Again, because I only consume propaganda. Is it actually stagnating? I will say I can't claim to have been to mainland China for years now. I think it is. I think the long term threat from undermining what was really right at the middle of the Chinese development model for a very long time and not replacing it with anything has been really dangerous.

27:35you've seen this effort as investment in the real estate sector has dropped and dropped and dropped to drive it into the manufacturing sector but the reality is the manufacturing sector as big as it is in china isn't big enough to productively absorb all this is the question like can the u can the chinese manufacturing sector just be so dominant that it just offsets the decline of real estate and your analysis is no my analysis is no chinese economy is too big i would say and and And too big means that the domestic real estate market is absolutely gargantuan, right? The thing you're trying to replace is enormous.

28:13And there's only so many buyers for your products in the rest of the world. And this is why you see, I think, the anti-involution campaigns. Trying to get consumption up. Exactly. The pressure against it because the sort of consequences, the negative consequences are already starting to display themselves. And we're really like three years into this really big push to drive the investment into manufacturing. And it's showing those problems. in a way that it took real estate much longer, I don't think it can be a like-for-like replacement. Wait, talk more about real estate and productivity, because this is something that I didn't really internalize until I read the chapter in your book, the China chapter.

28:47Yes. So there is a lot of really, really interesting research about real estate in China and what it's done to productivity. So if you think about it from the perspective of, we're going to get into a banking argument that's already, that's going to get me in trouble as well in terms of the amount of credit you can have. But if you think there's any constraint on the amount of credit, which obviously in China there is, there are actual targets and limits, it's still a fairly state-oriented system in lots of different ways, then the resources going to one part of the economy means they aren't going to another part of the economy.

29:19And in China's case, this means employment, it means material investment, it means steel and concrete and copper and everything else. The real estate sector in general, in the long run, I think has pretty low productivity, right? You can build constructively in places where, you know, housing's really in demand, but there's only so much you can get out of it. You're not making new stuff. No, totally. And certainly in China, what has happened and what was certainly happening during the run up to the three red lines policy is you saw a lot of productive entrepreneurial and innovative activity instead going into real estate.

29:55We talk about Chinese real estate developers having lots of arms. Every big Chinese company was trying to run a real estate company on the side during the 2010s, right? Because there's so much money to be made. Why not? Why not do that as well? And there's really interesting research from Yu Shi at the IMF talking about how individual Chinese entrepreneurs would go into real estate over time because there's so much money to be made. And it is productivity destroying, especially if I think you're in a state-oriented financial system where you're not probably going to see like a 2008 style crash.

30:26This is where you see the consequences come through. That's interesting.

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32:36That's H-I-S-C-O-X dot com. There's no business like small business, Hiscock's small business insurance. You know, I'm thinking about that line in The Sopranos where AJ tells us something, he's like, buy real estate. They're not making any more of it. Whether China elsewhere, it's not really true. Like, A, artificial islands exist. B, again, in the Chinese. Artificial islands, literally a drop in the ocean. You got to start somewhere. You got to start somewhere. But more importantly, again, if the my mainlining consumption of Chinese propaganda, I always see these things like this used to be a desert.

33:12Now it's this beautiful, like farmable land and there is greenery here. Like whether it's China or elsewhere in the history of land, like it's not really that fixed. They're always find new ways to sort of create habitable land. That's that's what it means to be human. I think there's two things there. One is like actual reclamation, which is like, we've probably added like a - Can you, by the way, I think that's the most powerful word in the English language, reclamation, because it's like, it means turning watery land into land. Yeah. But the implication is like, we're reclaiming it. We are reclaiming what used to be ours.

33:46I think that's such a powerful word, reclamation. It's very like Francis Bacon sort of thing. It's very like, you know, man's dominion. Yeah, it's like, this land that we can't live in was only, we were temporarily embarrassed in the grand scheme it's always good to do land reclamation where you can but there's really not very much of it I think the more interesting way that you can create more land in the way that I think of it is more like if you think of land as a like a commutable reachable area then we've always created more land right it's like the Bronx wasn't useful land 150 years ago and now it's extraordinarily expensive land because you can get into the productive center of New York and that's actually one thing that that loosens the sort of trap conditions around land over time.

34:30You see this in the US, like during the early 20th century, you saw New York, for example, loosen a lot of its problems with housing and real estate. Because suddenly it was like the outer boroughs, you could populate full of people and they could work in Manhattan still. And that was fine. And that was a bit like creating multiple New York's worth of land to attach to it. Oh, here's where we can talk about the hook system. Because that ended up being precisely a limiting force on this dynamic. Yeah, absolutely. And I think that that feeds into the whole question of the Chinese welfare system and the fact that Chinese households are driven to invest so aggressively in land, right?

35:07If your welfare is linked completely to the place where you grew up and you become a migrant worker and you go and work somewhere else, then you're going to want to invest very aggressively either in real estate where you can in the place you've moved to or in real estate at home it's essentially like a sort of savings technique more than it is again in china it feels like the the land use and the land as an asset are more divorced from one another than anywhere else you can see this in the rental yield data right rental yields in china rents in china aren't expensive even even in you know the the really popular cities they're not expensive at all so that that sort of gap and the hukou system really feeds into this by essentially it's another force driving chinese households to invest more and more and more sorry i don't totally understand explain a little further what is the essence of the system what are the constraints are played and then clarify like how it how that the incentives therefore are to acquire got it so the essence of the system basically is that you have a welfare system that is linked to the place where you're registered as a household it's usually the place where you grew up right so you're able to get all sorts of different ordinary welfare state things based there only and if you move for work it doesn't matter right so you're not eligible if you're a migrant worker to all of those things in in shanghai for example and these things are really really you can move there you can move there but you really be a sort of literally a second class citizen yeah absolutely so this is without huge amounts of external migration or with almost no external migration, really, China has been able to create the system that lots of other parts of the world have with very poorly paid migrant workers turning up who don't have many rights in the place they're moving to.

36:54These are the people doing the construction jobs. They're people doing a lot of the low paid work. I don't know if this still happens, but I remember in the 2000s, early 2000s, if you walked around Beijing at night and looked in the windows of some of the restaurants, the waiters would be sleeping on the table because most of them came in from the farmland, didn't have access to housing. So kind of crazy. Yeah. Yeah. People who are sort of more on the immigration restrictionist end in the U.S. will often say things like, you know, the U.S. has actually fallen behind on productivity because we have this endless supply of cheap labor with diminished rights.

37:29Had we not had that, that would have forced U.S. firms to do more capital deepening, maybe invest in robots, etc. It's interesting because we think of China as a very advanced industrial nation. And yet, your description of that makes me think that story doesn't really hold water. Totally. And I understand why people concentrate on that element of the Chinese economy. It's like the most exciting, interesting bit. And you don't need to downplay in any way, the advanced manufacturing and the sort of hyper futuristic elements of it to say that that doesn't represent the overwhelming share, even Chinese industry, right?

38:05Which is relatively low productivity, relatively low return. It's at scale, but it's not enormously like futuristic. And certainly once you get out of the manufacturing industry, you are going into the standard East Asian development model where the service industry's productivity is absolutely awful, right? Really, really poor service productivity. So yeah, I think the two things are true at once, right? It's large and it contains multitudes, but it's not most of the story to me. Do you see any signs that Chinese people are starting to, I guess, move into other assets like equities? Probably not bonds.

38:39But we know the government has been trying to stimulate the entire economy. And I think they've been pretty clear they've been trying to lift various asset prices, not housing. Well, now they're doing housing as well, actually. But do you see any signs that people are starting to change their minds on something like Chinese equities? I think to make the Chinese equity market really work, you would have to make a series of deep political decisions about the way China's run that I think they probably won't make, which is basically things like Jack Ma when he got really slapped down. Yeah. Right.

39:11Basically, you need to allow that sort of behavior. Right. You need to allow the innovation. You need to allow the entrepreneurs to sort of go nuts. You can't have all of these restrictions around, we don't want the young people playing video games, and we want it to be driven into this kind of robotics and not that kind. And all of those sort of limitations are going to, I would say, prevent that from happening. There's too much political activity that a Chinese company has to do. What about just like the hyper competitiveness? I mean, people say, wow, there's hundreds of EV companies in China.

39:42Most of them are going to fail. And yet you read about new launches. I don't know, like this is one of those stories that I really like because it feeds all my biases. So therefore, I'm sort of very skeptical of it. But I probably repeated it. It's like, oh, like China's stock market hasn't done well because they're too good at capitalism because it's too competitive because they really get it. They're really competing. has driven all this abundance and so forth. Like, is there something to that, that like the reason Chinese equities haven't done well is because with such intense competition, with the provinces all having their normal champions, that none can really sort of capture something that might reflect sort of monopoly rents?

40:21I think there's definitely something to that in a way. When I think about that, I would say it's true when you're subsidizing the competition. It's not true of competition in general. It seems crazy to me to say like net bad if everyone's getting like cheap inputs. There's lots of competition. But the provinces still do have a role in subsidizing, either implicitly or directly, in subsidizing their national champions. And when she says, yeah, that we want to make spark plugs a big priority for the next five years, they all go, they still do that, right? They scramble to find their local spark plug maker.

40:52And I think there's lots of American examples and examples elsewhere in sectors where people said, oh, it's too competitive and no one will ever achieve it. Uber's a good example. People said this would never work. It does work. Right. So there is a scale that you can build where I think you develop a value even in a market that's really competitive and really sort of low entry cost. But you won't do that if every other, imagine a world with Uber, but where every other rideshare company was aggressively subsidized every time Uber got above a certain market cap. Then, yeah, you wouldn't have Uber at a certain market cap.

41:25I'm really curious because, again, the book goes through, it's not just China, it goes through all sorts of land models. But what was the most interesting one that you looked at? Not only does it go across different ways that different countries treat land across the world, it also goes across time, like 3 ,000 years worth of human history. Yeah, I should emphasize to anyone listening, I was really interested in China stuff, but it's not a China book. The two most interesting to me, one of which because I live there and I think it's the most unusual and fascinating real estate system in the world is Singapore, which has defied in many ways a lot of the limitations that other countries have seen.

42:04and one of the first parts of the book, which is like colonial America, where there were all of these efforts to turn land into money, right? These colonists get to a place where they have essentially to them, infinity land. It just keeps going on and on. They don't know where it stops. It seems to be relatively fertile and good and more people turn up, but have shortages in cash and labor and everything else. And there's all of these efforts to turn land into money with public and private land banking projects. I found all of that like absolutely fascinating. It's not actually something I knew very well before starting to research the book.

42:37Yeah, so Singapore and colonial America. What is it about Singapore that makes it? I actually, I don't know why I sort of assumed they did the same 99 year land lease. This is the most interesting thing. They start off with all the inherited things that Hong Kong starts off with. Up until the middle of the 20th century, the cities are run on very, very similar lines. Hong Kong goes off in one direction and Singapore goes off in another And the Singaporean direction is basically, how do you maximize home ownership permanently? How do you have a sustainable model for making sure people can still afford to come in?

43:08So what they have is this bizarre public-private system. I say bizarre, it's very impressive, where the government owns most of the city's land, not all of it like in Hong Kong, but most of it. And they have the Housing and Development Board that builds housing estates. They then sell the units in the housing estates to Singaporean citizens. You can only own one. You can't own multiple and rent them out. There are restrictions on how long you can hold them for, but there's an internal market, but you can only sell them to the Singaporean citizens and permanent residents. The amount of building is done to make sure that everyone can afford.

43:42So they've really divorced usage from speculation. Totally. They've divorced usage from speculation and a place that I think most people think of as very capitalistic free market, low tax has basically decided this asset class, land and real estate, this is something different. Not for us. Yeah, we're doing a different thing with this. The normal forces. Singapore, there's so much international money, center of capital and trade flows. It's rich. They do have commercial REITs, though, in Singapore. They do. I remember this because when I was in Singapore, I saw the ticker symbol on the side of a few buildings.

44:13It's like, you could invest in this. But anyway, yeah. Yeah, they've got the commercial real estate a little bit different, but the residential real estate. And they've done this in, again, they decided land was different. They have a thing called the Land Acquisition Act, which really allowed them to strip a lot of people of their land extraordinarily low prices through the sort of 60s, 70s, 80s. And it's allowed them to do something very, very different. I don't know whether most countries can sustain the idea that capitalism works for everything but not land. And we're just going to be one Singaporean senior politician describes it to me as piracy, what they did in the 70s and 80s.

44:48Pennies on the dollar, basically demanding people hand over this land. So it could be housing for Singaporeans, but it has worked very well. Okay. So China probably cannot pursue the Singaporean model at this point, right? But why can't they institute a stronger social safety net so that the burden of saving for retirement, for health emergencies, things like that, doesn't always necessarily fall on the citizens. And therefore, they have to invest in highly speculative assets? Yeah, they should, is the answer. There seems to be huge political opposition to doing this at the top of the Chinese Communist Party.

45:24And it's bizarre, again, because you talk to someone like Richard Koo, and he'll explain why if you don't do this, this is the consequence, right? Japan is the consequence. Long-term stagnation, it's going to be really difficult. They should do all that. And maybe they will be sort of drummed into it eventually, because I think the alternative is both stagnation and lots and lots of trade friction with the people you're exporting to, as we've already seen. Right. Because it's not just the US, is it? Everyone's sort of... There's got to be a lot of countries that are not thrilled. No one's totally happy with it.

45:58It's a weird mix because for some countries, it's like, if you're not going to make some of these items, right? If you're a country that's simply not going to make EVs, then why should you care about getting the really cheap EVs? But everyone's got something to be upset about. In Southeast Asia, it was always steel when I was there. Everyone wants to have their own local steel sector and they don't like the Chinese dumping of steel. In Indonesia, they don't want like cheap Chinese direct to consumer merchandise coming in because it messes with their small and medium sized businesses. I guess for most of these countries, the difficulty is, do you want to pick a fight with the Chinese government?

46:31It's not an obvious question like it is in the US. I guess I just have one last question. And, you know the sort of singapore example is what reminded me like land is weird like the idea that you could have a capitalist system except for residential land a lot of people actually kind of think that you hear what is uh the georgists right and they think like no land is special and we need to have these like special taxes on ownership and yeah we love free markets but But again, maybe because there's always so much land, they're not making much more of it, et cetera. Maybe there really is something to do.

47:10It's sort of unfair. Like I get born in the year 1980 and I already a bunch of people already own the land around me, which doesn't really seem fair. It's like I was just born. Where's my chance? Like, we're never going to go to the pure Singapore model, but are there things that we could do with the tax system that would like sort of further hammer home the idea that residential land is for living? Yeah, I think there's dozens of different things you could do. But I mean, one of the big things is that the legacy of Henry George and the politicians in municipal America that really loved Henry George is that America has relatively high property taxes.

47:46Anyway, you can do all sorts of things with property taxes to lean more of the value on the land rather than the structures, right? Lots of states, lots of cities have done this. I think it's going to be increasingly important in the future. Because what you're going to get is increasingly people inheriting homes from their parents when you can't afford them. and then that main store of wealth is about whether your parents decided to buy in the right place at the right time. I talk to a lot of 70-year-olds who'll be like, well, I picked my two-bedroom flat in 1973 and yes, I bought it for three and a half dollars, but it's mine.

48:17That's going to be a lot less tenable, I think, when it's handed down wealth. So yeah, there's loads and loads of things and Henry George is in the book. The political consequences have George's and fell apart in there too. All right, Mike Bird, thank you so much for coming on All Thoughts. Congrats on the book. Thank you very much for having me.

48:46Joe, that was really great. And genuinely, the book is great. Yeah, I love talking to Mike. Once again, I'm just like, hasn't he been on the internet as much as we have? How did you write a book at this time? I have no idea. I don't understand how anyone writes a book, especially a very serious book on a very big meaty topic but uh i just really like tweeting constantly while tweeting he tweets a lot speaking of productivity it's like it would be one thing if you were never online he's online as much as i am okay you know when you ask that question about whether or not chinese cities are actually futuristic yeah i have an anecdote on this point i think i might have said it before but china is the place where i went to both the most impressive bathroom ever in like a highly futuristic luxury shopping mall in Beijing and also the worst one ever in my entire life, which was in a rural village.

49:38Please describe it in vivid detail. No, I won't. But it was basically a hole in the ground, right? Yeah. It was terrible. China, it's a land of contradictions. Thank you. Thank you for highlighting the cliche. No, I thought like it always did seem very interesting. It still does that like there's so much speculation that happens in China. And I always found that to be a little weird. I also just find the idea of like buying a property, but it's actually really you're not buying it. You're only buying the property for like 75 years to be a little weird. But on the other hand. That kind of exists in New York.

50:12Yeah. Yeah. And in the U.S., like, look, we pay property taxes in perpetuity, which means to some extent that when you own something, you are paying a permanent rent to use it. And if you stop paying that rent, then you could theoretically lose it. So maybe it's less weird than I thought. It is actually, we should do more on Singapore specifically. But also, you know, like, I'm not sure to your point in the very beginning, whether people actually want the divorce between usage and speculation. I just think that for several of the last decades, people didn't have to choose. You got to live in it and you made a lot of money.

50:48I think it's very hard to get off the train once it's kind of rolling. Right. And that's the problem that we're seeing in China. And now they're trying to walk this very fine tightrope where it's like we don't want to make everyone incredibly poor, but we also want to depress housing and the importance of housing in our economy in order to boost manufacturing and productivity. This is why, again, my proposal, affordable housing for one year only, and then it goes back to being really expensive. All right. Well, you can suggest that, Joe. Yeah. When we go to Beijing. I'll run on that. I'll run on that.

51:20I'll run on that platform. All right. Shall we leave it there? Yeah. This has been another episode of the All Thoughts Podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our guest, Mike Bird. He's at BirdieWord. and check out his book, The Land Trap, A New History of the World's Oldest Asset Class. Follow our producers, Carmen Rodriguez at CarmenArmin, Dashiell Bennett at Dashbot, and Cal Brooks at Cal Brooks. For more OddLots content, go to Bloomberg.com slash OddLots with the daily newsletter. And you can chat about all of these topics 24-7 in our Discord, discord.gg slash OddLots.

51:56And if you enjoy OddLots, if you like it when we talk about the world's oldest asset, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

52:31Thank you.

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