China: Finishing touches

1 country, 2 special administrative regions, 9 passport stamps, 12 company visits, not to mention planes, trains, automobiles, and boats!  There’s no denying the Chazen China trip was moving and shaking for a full week.  Now that I’ve had some time to digest it all and recite the details of the trip to friends and family (not to mention fully adjust back to Eastern Standard Time), I find myself repeating certain details and questions that I found to be major takeaways of the trip.

–          Beijing Matters: The central government’s role in Chinese economics is obvious and profound.  The policymakers in Beijing take on a lot more responsibility then most others.  For example, the Chinese government owns all of the land in China (yes, all of it); you can only develop or own property in leased fee status, which means that you are essentially leasing the ground from the government for a certain period of time.  When that lease expires, the government can technically just take the building back, no questions asked.  This hasn’t happened yet because no ground leases have come to their expiration date yet, but it’s the 800-pound gorilla in the room anytime anyone is interested in developing property in mainland China.  This is just one example of the government’s reach and influence, but shows how dealing with policymakers can be somewhat sticky.

–          Population Situation: China’s 1.3 billion people is obviously a big figure, and is still growing (albeit at a slower pace due to the one-child policy).  Most people predict the high pace of urbanization to continue in China at a rate of approximately 80 million people per year (equivalent to the population of Germany).  There are already over 150 cities in China with over 1 million people. Where will most of these people work in order to support that type of population movement?  According to the visits we had, about half of them will have college degrees.  What will be the makeup of both the cities’ demographics and the real estate property mix? Longer term, what will the impact of the one-child policy be?  What will it mean for China’s workforce in the future?  This will have a big impact if China truly wants to transition from a net exporting economy to an economy that relies more on domestic consumption.

–          Pollution Solution: One thing we could not get away from in either Shanghai or Hong Kong was the air pollution.  It’s unfortunate, since both cities have tremendous skylines to showcase.  We recently debated in my Global Economic Environment class whether China could continue to grow without major pollution effects. The answer was contested, but after having been there its obvious there’s a long way to go in the major metropolitan areas, despite the fact that the manufacturing operations are on their way out to the tier 2 and 3 cities.

Hong Kong skyline through the fog

–          Debt’s Not the Issue:  Unlike the US and other major Western economies, China doesn’t have an overleveraging problem in their residential real estate sector (at least for now).  Consumers rarely take mortgages that are higher than 50% of the value of the property (compared to upwards of 80% in the US).  So if China were to undergo a “bubble popping” that so many are predicting, it won’t be because of over-leverage.  It’s more likely that if anything extremely negative did happen in China, it would be a black swan situation that no one saw coming rather than a debt issue.

–          Unique Urban Landscapes: Shanghai and Hong Kong are genuinely beautiful cities, albeit in different ways.  Shanghai has a dazzling office district, and has a number of beautiful urban areas throughout its massive area, despite some zoning inconsistencies.  Hong Kong is obviously a lot smaller, but still has an amazing array of commercial real estate to show off along the reclaimed shoreline.  They are definitely places worth visiting for the real estate, as well as for the unique cultural aspects of daily life.

Overall the trip was a huge success in terms of the quality and variety of the companies we visited, the number of sites we toured, and the breadth of the education we received.  It was certainly worth the 30 hours of flying, the bureaucratic red tape, and massive jet lag.

Shanghai’s Pudong district skyline

Thanks for following along.  I hope you enjoyed all of the Chazen blog posts throughout our spring break!

Matt Giammanco ‘13

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