Globalisation ensured that China has not been immune from the recession, but early intervention and a banking sector with fewer freedoms than its western counterparts has helped it weather the storm better than most. MIPIM Asia keynote speaker Professor Fan Gang, a leading economist and an expert on macro-economics and the economics of transition, tells Paul Strohm why he is optimistic about the prospects for China's economy in general — and its real-estate sector in particular.
While China has not been untouched by the global financial meltdown and recession in the real-estate sector, Professor Fan Gang — listed as one of Top 100 Public Intellectuals by Foreign Policy (US) and Prospect (UK) — is upbeat about prospects for the Chinese property market.
“China is already part of the global market and relies on it greatly,” he says. “That dependence on globalisation is part of China’s story of rapid economic growth.”
One consequence of the country’s booming international business was that exports decreased by 20% during the first quarter of 2009, which has had a profound effect on many sectors and regions — particularly the country’s coastal areas.
“A lot of workers, particularly blue-collar and migrant workers from rural areas, have lost their jobs and about 20 million returned to their home villages at the beginning of the year. They have therefore been affected quite seriously,” Fan says.
But he explains that, compared to many other countries — and especially those in the more developed world — China has been relatively unscathed by the downturn. That, Fan says, is because its manufacturing industry is largely focused on what he terms “necessity goods”, which people will buy whether there is a recession or not.
“In times of recession, more people turn to low-cost goods or cut down their consumption of high-priced luxury branded goods,” he adds. “We can see this in the case of Walmart, which basically has the advantage of low price. Walmart has actually been growing and its profitability has increased. And 70% of what Walmart sells is Chinese manufactured goods.”
Because it is less dependent on luxury goods and financial services, China has a comparative advantage over many other countries. “We can expect that China will recover first in the global market,” Fan predicts.
But China has not been sitting back and waiting for the global market to recover to reverse the downward trend. Since October 2008, the government has implemented aggressive macro-economic expansion policies, along with fiscal stimulus packages and monetary expansion. “These policies are working,” Fan says. “The domestic market is recovering quite rapidly and there are signs of a recovery in investment.”
But he acknowledges that much of this investment is directed at government projects and comprises “fiscal investment” in infrastructure, urbanisation and urban facilities. However, he insists that a recovery of the real-estate sector is now apparent: “Since April, the housing market recovery has made a big difference to the economy. I take that as a very strong signal of recovery.”
He continues: “We should understand what has been going on in China. Since the last quarter of 2008 — even before that — the Chinese economy has been re-adjusting itself after the housing market bubble burst, along with the asset bubble in the security market. Added to this was the overheating of the economy overall. The government has been employing contractionary policies since 2006 and these policies started to show results from the beginning of 2008. We can see that, in 2008, quarter-by-quarter growth slowed down. Then the recession came to a head that December, when Lehman Brothers crashed.”
The housing market had also overheated, Fan explains. In response, in September 2008, the Chinese government adopted a package of policies designed to cool the boom. These measures proved effective. As a result, when the recession gained a grip worldwide, house prices in China were already on their way down. This meant the government had room for manoeuvre and could change its policy, enabling it to use housing demand as one of the key factors in its stimulation package.
Consequently, since the second quarter of 2009, the housing market has again been warming up. Sales of houses and apartments have started to increase dramatically and investment in housing has also begun to grow.
The outlook is for a more gentle growth curve — which, Fan says, is just what is needed. “China experienced a period of overheated growth between 2004 and 2008, rather than normal growth,” he says. “Two-digit growth is too high for China and, from a macro-economic perspective, I believe we are more likely to achieve sustainable growth if China does not experience the same rate of growth as before. What China needs is stable and normal growth of 8%-9% annually. That is sustainable and less of a problem for the economic structure. And it also means that we can avoid big economic cycles, inflationary bubbles and financial distress.”
Meanwhile, the progress of China’s dramatic urbanisation has been curtailed — the return of 20 million migrant workers to their home villages is ample proof of that. However, Fan points out that the stimulus package of infrastructure investment that followed the slowdown has laid the foundations for future urbanisation.
“For example, railways, subways, highways and urban facilities will all improve conditions for the growth of China’s cities and the absorption of more labour from rural areas,” he says. “This will create better conditions for people moving to the city centres. That is why I think there are positive consequences of the recession for China.”
The real estate and construction sectors are already a key part of China’s recovery story and are driving the re-emergence of both the private and public sectors.
“The construction of urban facilities is leading the recovery,” Fan concludes.
“Corporate investment in real estate will support this growth and make it sustainable. Next year, government investment will start to slow down but, if private sector investment increases, that will sustain the next phase of recovery.”