Why Chinese investors throw so much money into real estate
publish #mediareview wow I haven’t used that tag in a while.
Written 2023-05-02 when I should be working. Musings on everything else.
I didn’t realize this, but there’s a reason why Chinese people with excess wealth often invest in real estate instead of in other assets.
It stems from how the economy works in China. Property taxes in China are either non-existent or negligibly low. Typically, you pay all your taxes upfront upon the initial purchase of a home and don’t pay again until your freehold lease runs out (up to 70 years away).
Another relevant thing: all “private” property in China is really just freehold leases. The CCP prohibits actually owning urban land; all urban land is owned by the CCP and leased out to buyers on a multi-year basis. Rural and suburban land is a little different as they’re owned by rural collectives (i.e. local groups of farmers), called “collective land.”
Returning to the topic at hand: Chinese people often invest in real estate because bank interest rates are well below the rate of inflation. Parking your money in an apartment investment is low-risk. Plus, the yuan is volatile due to global tensions (as compared to the American dollar) making this investment even more appealing.
So why real estate and not stonks? Tldr: Chinese stonks are volatile too because they aren’t diversely backed nor tightly tied to market trends. Chinese stock markets are nascent and isolated from the rest of the world. According to Investopedia, barely 5% of shares in Chinese exchanges are owned by foreign investors; compared to the US’s 40% (source: 2019, taxpolicycenter.org).
Furthermore, Chinese companies are not nearly as reliant as US ones on equity financing. See: Types of financing
In the US, companies are mainly (Q: how much exactly?) reliant on equity financing (i.e. sale of stock) to fund themselves. In China, only ~5% of total corporate financing is funded by equity. The rest is mainly bank loans and retained earnings (Q: wait, shouldn’t the latter imply a high level of stability? The company is profiting!).
So because of this, stock markets play a larger role in the US economy than Chinese economy. While China’s economy is therefore more protected against ups and downs in the market, it also means Chinese companies are limited in their financing opportunities, stunting their growth (Q: I guess that makes sense, but I’d be interested to know exactly how stunted).
Anyways, the individual perspective on Chinese vs. American markets is deeply affected by this volatility. In the US, roughly 53% of the population owned stocks in 2019. In China, the figure is 7%.
The Investopedia article mentioned that the Chinese market is more casino-like for retail investors, and that studies have shown that increasing the proportion of institutional investors in the market improves the efficiency of stock markets because they are less motivated by fear and irrational factors. This made me think of the GME, AMC hype train but I don’t know what to make of it really. I think that institutional investors are also irrational, it’s just not thought of as such because they have a playbook to follow. I think following any playbook to a T is irrational behavior disguised as thoughtful.
Another case study in support of China’s market as casino-like: the 2015-2016 Chinese stock market turbulence
Back to real estate. China is in a weird spot. In 2013 they loosened restrictions on citizens who want to invest abroad, which provided some relief to their skyrocketing retail prices — it meant the difference between a 31% increase in Shanghai housing prices instead of a forecasted 50%. But now that over a trillion dollars is annually flowing out of China, the CCP is clamping back down.
Forbes notes: “Notwithstanding the considerable media attention being paid to the potential reassurance of a housing bubble, China’s faith in real estate remains remarkably strong. But this is less because of a lack of awareness that the bottom could fall out the market than because there are simply no better options available.”
According to China’s National Bureau of Statistics, 90% of families in the country own their own home (the real stat is estimated closer to 80% in Forbes) and roughly 21% of urban households own more than one house.