China's real estate(1)

 I would like to discuss China's real estate, but I don't want to rely solely on official data because China's official data has always lacked transparency, and the government strictly cracks down on third-party research organizations. Not to mention that in the past few years, almost all foreign auditing firms have been expelled from China. Today, let's talk about what's really happening in China's real estate market, or more precisely, what China is going through, based on the experiences of people around me.

First, let's clarify some basic realities that many foreigners (those living outside of China) may not be aware of. First, all land in China is state-owned; there is no private land ownership in China. Whether it's a developer wanting to build houses or an individual wanting to build a house, they must purchase land from the government or apply to the local government. It's almost impossible for individuals to build houses in urban areas; generally, individual houses are located in rural or economically underdeveloped regions. Most of the time, these houses are built on land that was transferred from collectively owned farmland to individual residential land after the 1980s. In this land market, the government is the sole supplier. Moreover, since the reforms initiated by the Chinese Communist Party in 1978, government officials rotate positions, meaning local officials cannot stay in one place for too long. Every few years (typically 3-5 years), they must move to another location, either at the same level or for a promotion or demotion. This rotation is designed to prevent the formation of local power cliques. Each central government official also works in different locations before taking up their current position, building networks along the way. An official's performance during their tenure is a significant factor in their promotion or demotion, and this performance assessment is controlled by higher-level officials and accumulates upward. County-level achievements are reported to the city, and the city compiles them to calculate its own achievements. Metrics like per capita income, employment rates, and children's enrollment rates can be manipulated, but attracting investment and infrastructure development involve tangible assets. Furthermore, officials never know how long they will stay in one place, so they naturally strive for larger and more impressive achievements. After all, they will be gone in a couple of years, and the mess left behind won't be their concern. So, in the 1980s, when the government began loosening regulations on private enterprises, the real estate market took off.

The key is that during an official's tenure, all land is state-owned, which means it's under their control. They decide who gets the land and for how much. Developing infrastructure and real estate not only yields enormous profits that can last for generations but also leads to more political achievements and greater chances of promotion. Can you guess who can resist such temptations?

In European countries, the United States, and most democratic nations, land is mostly privately owned. In land transactions and housing construction, the government acts as an intermediary, taxing each transaction. This is not related to the interests of officials. In China, within this hierarchical system where everything flows upward, controlling land represents not only enormous financial interests but also power and promotion opportunities.

Leaving aside these opportunistic behaviors, let's look at China's real estate market today in the context of the official data released in 2020. Land costs account for 43.8% of housing prices. In other words, in the expenses incurred by Chinese people when buying a house, the money directly paid to the government, including land costs (43.8%), deed tax (3.7%), and value-added tax (11%), adds up to 58.5%. Keep in mind that this is the money the government officially records as its revenue.

Moreover, don't forget that the Chinese government doesn't sell land; it only leases it. The 43.8% of the house price only grants the right to use the land for 50-70 years. What happens after that is something the government has not clarified.

When we understand all these factors, it becomes much easier to grasp the current state of China's real estate market.