For decades, the world has seen China as one of the world’s top growth economies and there was much to celebrate. China has about 1 billion people, many were in the rural areas and the leadership of China has transformed the country from an agarin economy to urban economy first focusing on manufacturing and now services. In general, there has been a great uplifting of people from small rural plots to urban paychecks and correspondingly middle-income lifestyle. Part of the way China did this was to build infrastructure. From an engineering standpoint – the roads, the trains and the new cities are things to marvel at.

In an article by Daisuke Wakabayashi and Claire Fu of The New York Times News Service, the infrastructure included vast building of apartment towers. The Chinese government encouraged property developers, particularly large ones to develop vast apartment towers and office complexes. With the shutdowns from COVID, the government imposed, cracks in the economy are to be seen including the real estate market is overbuilt and vacancy rates are up.

China’s housing boom started in the late 1990s in the biggest cities and spread to smaller cities in the 2000s. In 2,000 China built about 2 million apartments a year, by the mid 2020s, the number was 7 million apartments a year. Real estate was accounting for 25% of China’s economy.

To stimulate the economy, China in the past encouraged real estate companies with easy credit, but this time many large property developers are saddled with debt, cities have empty dwellings and local government finances are down because of COVID funding. In China, people can buy their apartment and in the past, buying an apartment was a good investment, now prices are now because of oversupply or high vacancy rates. Although prices are up in Bejing and Shanghai, but away from the largest cities, the rebound is more muted or non-existent.

In one of the smaller cities, Nanchang has had building boom for decades and it has the same number of buildings over 60 stories as Beijing although Beijing’s population is 3 times larger. Beijing is the 2nd largest city measured by economic output, Nanchang is 36th, this translates to a vacancy rate of 40% in the office towers. In terms of apartment towers, many of the newer towers are not finished and empty because developers ran out of money.

In North America, overbuilding happens on a regular basis but there is absorption of space over the years, free rent incentives and a host of other programs before banks will lend to build more. In China, the economy depends on building more buildings which is a different scenario. In addition, in China the property developers are linked to state owned companies which provided low cost financing. Essentially the taxpayer was subsidizing the property developers, at some point someone has to pay the debts, who will?

Linking to dividend paying stocks, in the early 2000s, people were evaluating stocks and everyone said the reason why the stock would rise was China. The country was a powerhouse economy and by selling goods and services to China who would not win? The Chinese government can move people in and around China, but it is likely China will not be the growth country it once was for a few years. The decision to buy and sell a profitable stock will have to be based on its business plans and execution of the plan, not that some of its market is in China.

There are more questions than answers, till the next time – to raising questions.