LOCKDOWN SERIES PART ONE: Economic rise of China

The economic rise of China is tipped to see the country dethrone the US as the world’s biggest economy within the next decade, with the economy is tipped to grow by 5.7 per cent annually until 2025, and 4.5 cent annually from 2026-2030.

China’s economic rebound slowed in the second quarter of 2021, however it’s factories delivered another stronger-than-expected quarter of output after the country largely gained control of the coronavirus within its borders.

The Chinese government said gross domestic product grew by 7.9 per cent in the second quarter from a year earlier, but admitted it was slower than the 18.3 per cent year-over-year GDP jump during the first three months 2021.

“Our economy has seen a sustained and steady recovery with the production and demand both picking up, employment and prices remaining stable, new driving forces thriving fast, quality and efficiency enhancing, market expectations improving, and prime macro indicators staying within reasonable range,” the national bureau of statistics commented.

Speaking to the Australian Property Institute’s Voice of Value podcast, Cushman and Wakefield national director of research Tony Crabb said the rise of China economy is nothing short of extraordinary, adding the country’s urbanisation plans could be the crowning glory of the past century.

‘To get rich is glorious’ 

Standing at only 4’9″, Deng Xiaoping might been a man of diminutive size, but his impact as political leader forever changed the world’s economic history and the economic rise of China.

The authoritarian figure from the Chinese Communist Party trigged extraordinary turn of events in China when he said “to get rich is glorious”  in 1980 – the slogan would effectively split China’s economy in two.

While serving as the de facto leader of the People’s Republic of China, Xiaoping developed Chinese economic reform by opening China to the global market.

“You had the commanding heights of the economy where the government control what they regard as really important parts of the economy,” explained Mr Crabb.

“The unimportant parts of the economy, which was the market side of the economy, China decided to let rip and this made it possible for business to start legitimate enterprise.”

In the year 2001, China joined the World Trade Organisation – a move which saw China become a huge trading nation almost overnight.

READ MORE FROM ANZPJ’S LOCKDOWN SPECIAL:

PART TWO: UNDERSTANDING BLOCKCHAIN AND PROPERTY 

PART THREE: MELB WOMAN BUYS 25 PROPERTIES IN 25 WEEKS

PART FOUR: APIV SCHEME – EVERYTHING YOU NEED TO KNOW

“We saw the world’s manufacturing move from relatively high cost labour markets – such as the US and Australia –  to China, where people were working for much cheaper,” Mr Crabb explained.

“That saw the emptying out of  the manufacturing capabilities in the western economies as they all became concentrated in China.”

As part of Xiaoping’s “Great Tasks” initiative, the leader had hoped to see the de-collectivisation of agriculture and the unleashing of an entrepreneurial business class by the end of the 20th century and this is exactly what happened once China started trading.

“The Chinese were busy building factories and getting workers into them and increasing their standards of living.

“The most efficient location for a factory is in the city, not in the middle of nowhere, so this resulted in a huge movement of people from the countryside to the city – some 16 million people relocate each year from the city.”

When looking at how Xiaoping transformed China’s economy, which was about the same as Italy’s in 1978, it’s easy to see how he earned the reputation as the “architect of modern China”.

Currently, China’s economy on a nominal GDP basis is the world’s second largest behind the United States, and should surpass the US in the next few years. At the same time, China has lifted 800 million people out of poverty.

Chinese leader Deng Xiaoping is credited with unleashing a revolution that transformed China into a leading economy

Custom cities for China’s citizens 

The economic rise of China saw it  pour as much concrete as the US did in the entire 20th century in just two years.

After coming to the realisation that an agrarian population living in a community wasn’t the best outcome for it’s citizens;

“China looked around the world to see how people reacted in and around cities when they are just allowed to move freely, and what they found – particularly in the second and third world – were enormous slums. China said ‘we’re not doing this’,” Mr Crabb Explained.

To immobilise China’s large rural population, China introduced a “hukou” passport system in 1954, which limited access to public services, based on the birthplace of the holder. The plan was to segregate citizens, with the ultimate goal of  rural residents into newly constructed towns and cities over the coming years.

Originally, urban hukou holders were able to enjoy privileged access to public services such as education, health, housing and pensions. However, those with a rural hukou deprived of access to the country’s limited welfare system, unable to move freely to China’s more affluent urban centres along the east coast.

After Chinese communist revolutionary Mao Zedong died in 1976, young Chinese people sent to the countryside during the cultural revolution 1966 to 1976 were returning to the cities. By the 1990s, rural migrants flocking for urban industrial clusters to become low-wage labourers.

Migrating from the countryside to the city came with its own challenges, with rural migrants routinely experiencing discrimination at the hands of Chinese city-dwellers.

The CCP has recently announced reforms to the hukou system, which allow migrants living away from home to acquire an urban hukou –  some municipalities have introduced an Australian-style, points-based system allowing those who meet certain criteria become eligible for urban hukou.

It comes as China continues its urbanisation plans – as of 2020, 60.6 per cent of the total population lived in urban areas.

“It’s been an extraordinary achievement to move some  500 million people out of poverty. As a human rights achievement, that would be the crowning glory of the past century,” Mr Crabb explained.

China’s urbanisation rate has been amongst the highest in the world. In the 40 years of reforms, it moved from 19.9 percent to 58.5 percent, with 46 percent of the population having moved from rural to urban areas.

A very Chinese way of dealing with the world

As the biggest supplier of seaborne iron ore in the world, Australia has been cashing in – spot iron ore reached a record high of $US240 a tonne.

While the commodity thrived during the pandemic and helped shave $50 billion off the budget deficit, it was also the catalyst for the China/Australia trade war.

As China continues to build cities to bring its residents from poverty, it has a high demand for iron ore to create new steel for developments.

“Almost 50 per cent of steel in the US is recycled because they have had nearly 200 years of using steel to build things. Chinese don’t have any recycled steel, so pretty much 100 per cent of their demand is for new steel and that will remain the case for the next 50 years,” Mr Crabb told Voice of Value.

Struggling to meet demand with supply from Brazil and Africa, China has begrudgingly been forced to pay a premium – a move which saw them ban copper, coal, barley, wine, sugar, lobster and timber.

“China deals with the world is a very Chinese way of dealing with the world – that doesn’t make it wrong, it’s just something we need to learn to manage,” he said.

“People in China don’t care about tariffs, if they want it, they buy it – price is not something that persuades them,” he explained.

“There are some 400 billionaires in China and countless numbers of millionaires – there’s an extreme amount of wealth, so price isn’t an issue.”

Although China and Australia’s trade relationship remains rocky, there is optimism for the future.

“In time, we will see the iron ore price move back to $80 or $100 a tonne and I think what you will find is, the Chinese will lift their sanctions on wine, lobsters and so on,” he said.

“The other good thing from an Australian point-of-view is because China is such a big buyer, it forced some businesses to be lazy and not find other customers – who have now opened new markets in the Middle East and North America and Europe. That hasn’t been a bad thing.”

Iron ore shipments to China rose $1.1 billion to $14.8 billion last month and the increase accounted for more than a third of the total month-on-month rise in the value of goods exported.

Where is the Chinese investment coming from?

When it comes to Chinese investors in the Australian property market, Mr Crabb breaks it down into six main types.

State-owned enterprises:  We don’t often see them in Australia as they tend to operate within China. Outside investment would only come for the purpose of owner-occupation.

Insurance companies: In China, insurance companies are a much bigger deal than they are in the western world. With Chinese insurance companies listed among the biggest in the world, they are looking for ways to remove risks by diversifying their portfolio with investments outside of China.

Chinese banks: As Chinese business expands, the country’s banks want to follow them and do banking with customers. The Chinese are also looking to stand alongside other established banks around the world, so they are buying branches around the world for owner-occupation.

Sovereign wealth funds: China has three large sovereign wealth funds and all three are in the top 10 funds in the world. The purpose of these is to buy assets outside of China to mitigate risks that may come from inside the country. China does have a small number of REITs and this is tipped to grow.

Developers: The investors Australians are most familiar with. These companies are developing a vast amount in China to facilitate the movement of 16 million people from the countryside each year.

While this has been happening for decades, developers have recently started to become listed and want to have diversification in cashflow from sources outside of China. Developers have also started following Chinese migrants into foreign markets to build them properties for owner-occupation.

Conglomerates: The western world got rid conglomerates during of ’60s and ’70s, when companies started to specialise because investors wanted single purpose. However, the Chinese have kept conglomerates going and are happy to have investment coming from any number of sources.

Chinese banks are continuing to follow migrants around the globe.

Just like any other city in the world

In the early 2000s, China started to model its new urban cities off western architectural styles, with imitations of Versailles, Paris and Beverly Hills popping up all over the country.

“If you’re visiting one of the tier-one cities in China, you might as well be visiting New York, London, Sydney or Melbourne – it’s the same in every respect,” Mr Crabb told Voice of Value.

The Communist-style architecture of the preceding era did not retain much appeal in the new age of rampant consumerism; however the foreign-style architecture is rarely ever a direct appropriation as they need to fit the Chinese palate and context.

Shanghai was the biggest city to model the architecture and designs of towns in Britain, Italy, Spain, Canada, Germany, the Netherlands, and Scandinavia, with the country now populated by so many western-style buildings and towns that they have become a standard part of the new cityscape.

The trend even went as far as building a replica of the Eiffel Tower in the Chinese city of Hangzhou and a clone of London’s famed Tower Bridge – featuring four towers instead of two – in Suzhoua.

LISTEN TO EACH EPISODE ON SPOTIFY AND APPLE PODCAST 

EPISODE ONE:: ECONMIC RISE OF CHINA AND PROPERTY

EPISODE TWO: UNDERSTANDING BLOCKCHAIN AND PROPERTY 

EPISODE THREE: MELB WOMAN BUYS 25 PROPERTIES IN 25 WEEKS

EPISODE FOUR: APIV SCHEME – EVERYTHING YOU NEED TO KNOW 

Similar to their western counterparts, the cost of living in these custom-built cities is much higher than regional centres.

“It’s expensive by Chinese standards and its commensurate with the expenses you would expect to see in any other city in the world,” he explained.

China introduced a three-child policy in May 2021 after responding to its 2020 census results – the country’s one-child policy started in 1980 and was strictly enforced before being replaced in favour of a two-child policy in January 2016.

Despite this change, Mr Crabb believes there will not be a spike in children because residents already have an expensive lifestyle.

“The reaction [to a three child policy] is pretty typical of what you would see in the western world where reproduction levels are dropping,” he said.

“It’s expensive to have kids. You need two incomes to afford a house, education is expensive, transport is expensive, so it doesn’t come as a surprise young Chinese people only want one or two children.”

Just outside Suzhou’s modern SIP district is perhaps the city’s most peculiar replica of a famous Western landmark: London’s Tower Bridge.

China, property and ongoing relations

China became concerned after the GFC about money leaving the country, asking a number of corporations to stop paying such high prices for commodities.

This saw a large number of companies retract from the property market, with Australia and a number of other countries adding taxes on capital as a reaction.

“The reaction was to start putting taxes on capital – particularly into the residential markets – because it was distorting the market to disadvantage people from those countries,” he explained.

“Governments want housing to be affordable for its citizens – you can’t have citizens from another country coming in and buying all the property.”

While investment has cooled-down, Mr Crabb expects there to be a continued investment, when Australia opens it’s borders post COVID-19.

“We will see an increase in Chinese businesses who seek to do business with those that are here,” he said.

“From 2023, you would expect to see migration again. As the Chinese population grows, the two-way flow between the two countries will grow, and that will be wonderful for those looking to do business.”

One of the great ways to work with Chinese companies is to partner with them, although this is often not the way the western world likes to go about business.

“It’s the preferred model for them,  but not so much for us. [Australian companies] prefer to be employed and own venture complete as partnering is subject to so many things going wrong,” he said.

Mr Crabb lists differing time frames and expectations as some of the biggest issues facing working relationships between China and Australia.

“To say doing business in China is complicated is an understatement, but so is doing business here. If you were in China and looking at Australia, the layers of compliance, legislation and the number of people you need to hire must seem extremely difficult. Likewise, looking back the other way is also daunting,” he said.

“Industrial standards in China would not be equivalent to that of the western world – it would be like going back to the 1950s. There’s differences like that some companies would say we can’t partner, it opens us too many issues back home

“There’s also issues about employment contracts. China is coming from a very different industrial history and getting their heads around that is an issue for some business looking to partner with Chinese companies.”