The horizon is not so far as we can see, but as far as we can imagine

Growth Through Real Estate Bubbles v.s. Sustainable High Income Growth (China)

All right. Let’s talk some basic development stuff, primarily in the neoliberal era.

Because industrial policy was disallowed with a few marginal exceptions due to the “rule based order” enforced by a variety of trade agreements and organizations, the traditional route of protecting domestic industries and growing behind tariffs became very difficult to do.

Various countries used different dodges. Russia, to get out of the Yeltsin era collapse, went whole hog into resources: advanced nations had to have oil and natural gas and minerals, and bribed key financial regions like London’s city with huge influxes of resource-money.

China did something different. They opened up partially and let foreign companies in, but they used bureaucracy to keep them under control (as had Japan, in part) and offered foreign elites huge labor arbitrage profits. They bribed the West’s elites with personal wealth, in effect. In exchange they insisted on, generally very strictly, in real technology transfer. Meanwhile, they created a protectionist bubble thru monetary policy, keeping the exchange rate in their favor.

But the other thing they did is what Turkey tried. They created a self-reinforcing property bubble. Municipalities and states built tons of new homes, people flooded in from the countryside to get the new factory jobs and the service and government and construction jobs which supported industry. Prices went up, municipal and state budgets went way up and a virtuous cycle was created, for a time.

Turkey did the same thing, but the problem is Turkey didn’t have an expanding industrial base, and that’s why Turkey imploded sooner.

All bubbles, including property bubbles are time limited. The more of a real economy you have, the longer they can run, but eventually inflation in property becomes too high, and most citizens can’t afford the housing. Meanwhile, inflationary increases in living costs make workers too pricey, and the industrial base begins to suffer.

You can start from three positions.

  1. Like the US or UK or much of the EU you can start with an industrial base and cannibalize it, or..
  2. Like Turkey you can start with a poor but big country and cannibalize an increasing part of your population, plus what little industry and agriculture you have (India is similar, but much larger and managed to get some industrialization out of this strategy), or..
  3. Like China you can build your industrial base at the same time.

Whatever you do, this strategy eventually runs into the roadblock of a cost structure which becomes too high to allow actual productive industries.

At that point, you have to tame the housing market and other out of control costs (medical, food, whatever). If  you don’t, you’re pushed back from 3 to 1, or if you did 2, the artificial prosperity begins to collapse. (India’s calories per capita have spent decades decreasing and someone who spent time there in the 80s, I can tell you Indians weren’t overfed to start with.)

So China’s now in a position where rather than bubbles, especially the housing bubble, being synergistic with industry and improvements in technology, they’re starting to strangle growth.

The route out (minus mercantalist imperialism, which is long run a loser too) requires you to stop relying on property bubbles, and start strangling your cost structure. The “free” money from asset bubbles has to go away, and you have to create a consumer society: not one like we have now, but one like we had in the post-war liberal era. Housing costs have to be kept at a level where people can buy or rent homes fairly easily: 30% of wages for rent or so, and at most about 5 years wages to buy a small home or condo.

Since the free profits of bubbles and speculation have to go away, companies have to make real money by providing real services and not just count on “real estate always goes up” or (America) “people have to have health care, so we’ll increase prices thru the roof.”

This is the task that China now has. It’s a hard task, akin to getting of hard drugs like heroin or SSRIs or Xanax. It hurts, because the financial pipes are reliant on what amounts to free or easy money.

During this transition, headline GDP and so on will suffer, there is no way around it minus looting expeditions, especially since simply running the printing press (something we’ll talk about in another article) defeats the point, which is making companies earn their money by providing goods and services for small markups at scale. (The post war liberal era worked on 3-4% markups for most mass goods.)

This is where China is. Where America and most of the West is similar: except it’s after destroying much of the industrial base and real consumer economy that doesn’t rely on massive price gouging on items people must have. There is no way to bring the good jobs back for most of the population in the US or UK or Canada or Australia without crushing the cost structure, strangling property speculation and prices and in the US tackling the medical and drug cartels.

China’s making the attempt. A lot of what they’re doing is clumsy and crude (but then, so was the one child law, but it worked even if it caused future problems.) So far the UK and Canada and the US and most of the West are not even trying, which is why you hear more about friend-shoring (aka to cheap places that are Western allies) rather than re-shoring, which can only be done for the goods that are either very high margin or which elites have realized are too militarily strategic to do in other countries.

This is why, as far as I’m concerned, the smart money is still on China, and if it wasn’t for climate change and ecological collapse, I’d consider it a done deal even if it took a couple more decades and a lot of screaming and shooting.

As it is, we’ll see. But China’s at least trying to do the right thing.



None of This Had to Be: The Two Paths


Open Thread


  1. Astrid

    Yes, it is a painful break that the Chinese government has repeatedly kick down the road. And it’s not just housing. Cost of food, healthcare, and education are also extremely high, especially in first tier cities. The government seems to be trying to tackle healthcare and education costs first and doing a holding pattern on property.

    I’ve long considered this can kicking to be a mistake, as presumably it will get more painful the bigger the bubble gets. I still think so, though the income growth has been high enough to cover a good chunk of the RE price growth. Also most people do not pay the current market clearing price but a much lower price, so the pain of high prices (and eventuality of price decline) is focused on the latest buyers. You end up with a market kind of like coastal California.

    But now I do wonder if the delay is partly in expectation of waiting out the West’s expected implosion. Dealing with economic instability for a time would be easier if they don’t have to worry about regime change forces at work at the same time. I believe Chinese government will be ruthless and repressive if that’s necessary to keep themselves in power (and rightfully so when the alternatives are demonstratively dire), but they will prefer a lighter touch of that’s possible.

    China does have a couple of ace up its sleeve to cope with the property bubble. All “private” property are sold as leases that legally revert back to the state after a couple decades. So there’s a legal pathway way to convert that housing to essentially public housing after that time, where the “owners” might have to pay rent to there local government or have limited rental and transfer rights. This may start to surface with certain 20-30 year leases, with the majority of the housing being in 50 year leases.

    The market is also concentrated in small holders, people who bought a couple units and either rent out or keep empty in anticipation of future price growth. That’s easier to manage than Blackstone paying cash for whole developments of housing and then upping the rental prices. Renting is much much cheaper than buying in China, even if it’s still pretty high. I think rentals in Shanghai are going for between 1/500 to 1/1,000 of their selling price per month.

    The shrinking demographics will eventually affect demand and perhaps buffer some of the downside of price decline. Lots of younger couples (oldest are now in their 40s) expecting to inherit housing from both sides when their parents pass on, in addition to their own homes.

    And the government can always just build public housing in parallel and rent them out at reasonable rates.

  2. Astrid

    Housing costs doesn’t necessarily affect industrialization though. Most of the factories have dorm housing for their workers and those workers have property rights in their ancestral villages. It’s only a problem if you want to stay in the cities.

  3. Tallifer

    This is probably paywalled, but I have read the print article. Time will soon tell if the Chinese command economy is beating the West. The corporate welfare bums (as the NDP long ago identified them) have dragged down the Western economies for decades, but there are still millions of small businessmen and workers freely working away.

  4. Purple Library Guy

    Western elites don’t really seem to have the ability even to frame the situation in a way that will let them define the problems well enough to conceive of solving them.

    I still like the word “decadence”, defined as when the elites controlling a society are so focused on their personal short-term gain that their activities actually weaken the society they control, making them unable to advance any kind of societal project that will benefit them as a by-product of strengthening the society they’re at the top of. The West is like that, and so any definition of the situation that implies those elites will have to reduce their predation for things to improve, is off limits. China . . . probably not, at least not entirely, not yet.

  5. different clue

    China doesn’t have to outrun the bear. China just has to outrun the rest of us.

  6. Ian Welsh

    It’s a misunderstanding of the Chinese economy to say it’s a command economy. It isn’t the USSR or China under Mao, or even anything close to that. As I understand it the main restrictions (which are real) are on foreign trade, but domestic incorporation is easier in most of China than in the US.

  7. Mark Pontin

    Ian W.: ‘It’s a misunderstanding of the Chinese economy to say it’s a command economy. ‘

    Yes. Two major keys seem to be that:

    (1) China being so vast, party bosses in various provinces are allowed considerable latitude to experiment; a successful experiment in one province may be viewed by Beijing as a lesson learned and then implemented elsewhere.

    (2) Only China’s central bank can do credit creation. Though there are lots of banks, they all have to apply to the central bank for funds to make loans.

  8. marku52

    Good question. PK at NC comments that countries get embedded in structural processes that make it difficult to change. RE investment and all the non-productive behavior that goes along with it (flipping houses as a means to societal wealth? Really?) are deeply embedded in the US. And as others have commented, our elites aren’t even contemplating making the US internationally competitive. That would men driving down the cost (and hence profits) of housing and medical. The Horror!

    China, OTOH, has been trying to move away from export lead growth to more consumer based economy for at least a decade or two, and hasn’t make any progress. they have had several RE related crashes, and haven’t really resolved them either.

    My money is on Russia for economic success in the near future. In a disintegrating world, they are the closest thing to an autarky. Energy, cheap housing, and lots of arable land (more every year as climate changes). And demographics can be solved by immigration, with the right policies. I see several westerners on Utoob that have moved there, and seem to like it. The vids look like a nice place. And really, does the west have much to offer in comparison? If you don’t trouble the authorities, they don’t seem to bother you. To claim that the US or Canada is much better ignores the destruction of Occupy WS in the US or Trucker’s Protest in Canada. Those were the acts of seriously authoritarian governments….

  9. bruce wilder

    Astrid is much better informed than I, but I wonder about three things.
    1. China’s strong growth period involved vast production in “investment” industries like concrete and steel. China produced more concrete in one decade than the U.S. in the entire 20th century. Unwinding industries of that size and scale is never easy.

    2. China’s vast allocation of resources was largely financed by enormous household savings rates, savings pored into housing at inflated prices. Letting the air out of the balloon of accumulated household “wealth” is not going to be popular.

    3. China became workshop of the world at a point in the curve of tech development where the numbers needed in the workshop is diminishing radically. Round number estimates suggests China built a modern economy structure that has places for maybe 600 million people. How does China break the news that there is no room in the Inn.

  10. bruce wilder

    In some critical ways, the U.S. has an easier set of problems to solve than China, not in small part because the fall of the incumbent regime would aid the solutions. The evaporation of the paper wealth of the billionaires is devoutly to be wished. The de-throning of the dollar internationally could well aid that process, as undoing globalization gathers pace. The political instinct for antitrust is showing already.

  11. StewartM

    At that point, you have to tame the housing market and other out of control costs (medical, food, whatever). If you don’t, you’re pushed back from 3 to 1, or if you did 2, the artificial prosperity begins to collapse

    Yes, yes, and yes!

    I’ve always thought of housing ‘investment’ only as a notch or two above, say, “investing” in baseball cards, fine art, precious metals, or currencies, or Hummel figurines. It shouldn’t be called “investment”. Only money devoted to causes that more directly increase production of real goods and services should be honored with the word “investment”, not any thing do to gain personal profit. The stock and bond markets in theory should be an “investment”, but since Reagan when paper manipulations were allowed to replace advancements in the delivery of real goods and services it too has become a false investment.

    In a good economy, a house should be valued for the same reason an automobile should be valued–as a thing you can use (i.e., live in). Not something that you ‘flip’ to make more money.

    There are key drivers in the persistent inflation we’ve had for most of my life, but a big one is the elevation in profits due to paper manipulations over profits derived from delivering real things. In classical economy theory, people who earn more by creating real value don’t cause inflation, as the value cancels out the price gain. Over my lifetime we’ve gone to economy where the people making the most money actually create little if anything of value, or of very dubious value. I’ve noted that while inflation is a problem everywhere in the world, it’s less of a problem in countries that still make real stuff.

    Oh–and I think even 30 % is too high a value for housing costs. That would only hold true for someone making so much money that his/her other needs is a vanishingly small part of his/her expenses. For most, no more than 25 %, and 20 % is better. For the poor, less than 20 % as their other costs eat up a larger fraction of their budget.

    A financial collapse of the US would devastate us, and reveal to Americans a fact that most here know but many American’s don’t: Ronald Reagan and his philosophy turned the US from a rich country to a poor one. As the proverb says, “give a man a fish and you feed a man a day; teach a man to fish and you feed him for a lifetime.” Since Reagan, the US has been un-learning how to fish, which has resulted in our real economy becoming a poor one.

  12. bruce wilder

    Ever the contrarian, let me say that feudalism was a “property bubble” petrified into nearly 600 years of oppressive politics. Once the renter class has solidified its near-monopoly on economic opportunity and a huge slice of national income, loosening that grip is not necessary to survival of the system — systems of political economy can stagger on under enormous handicaps and ruinous inefficiency. Murderous conflict among elites will not necessarily create a revolution that goes far enough. The French Revolution played out for most of the 19th century before the Republic was secure and hereditary monarchy a dead letter – and even that required that candidates for monarch prove themselves idiots. Britain may be falling apart, but the current Duke of Norfolk is the 18th and enormously rich; the Spencers, the Percy’s — many historic families persist in possession of land and rents at scale.

  13. different clue

    @Bruce Wilder,

    China could pioneer full underemployment for everyone. If it has 600 million potential workers and 300 million workbenches for them, have each one work 20 hours per week.


    In a runaway heater world, Russia will gain more arable land for a while. But some of its arable land will be subject to random megadroughts and megafloods, Death Valley heatwaves, etc. Agriculture will be a challenge.

    And once all the ice features have finished melting and all the permafrost has finished permathawing, a million or more square miles of low elevation land which Russia currently “has” in West Siberia will all be under a new shallow sea, as the low elevation tundra-taiga permafrost subsides as its 50%-by-volume ice-component melts away and a rising sea rises to meet a subsiding landscape and then rises above it.

  14. bruce wilder


    pray someone pioneers a general reduction in economic activity. the U.S. also theoretically has opportunities to save the environment and make everyone better off by simply dialing down hard on the salesmanship

  15. Ché Pasa

    Real Estate: All right, so my mother bought her first house new in 1954 in the San Gabriel Valley of Los Angeles County for — I believe — $6,400, 100% VA financing so no down payment. Mortgage was like $60 a month, about 20% of her monthly income. Five years later, she let it go and moved to a little town in Northern California. There had been no appreciation in value of the house in the San Gabriel Valley — in fact, the realtor said he probably couldn’t get as much for it as she paid. So she let the VA take it back. I don’t think it was a foreclosure, but it may have been. Three years later, she bought another house, five years old, bigger and nicer, in Northern California for — I believe — a little over $15,000, 10% down, FHA mortgage, monthly payments about $100, still well under 25% of her income.

    Over the years she bought more properties but she unloaded all of them as her health deteriorated in the ’80s, and all she had was Social Security and Medicare for her retirement income which wasn’t enough to get by on. The house in the San Gabriel Valley is now valued (by Zillow) at $650,000 to $700,000; the one she bought in 1962 at about $550,000. But of course those values are going down due to increases in mortgage interest rates. Oddly though, the high end real estate market ($2,000,000 +) is so far doing fine. Apparently mortgage interest rates or even mortgages at all don’t matter above a certain price point. It’s like fine art. Expensive classic cars. Bolt holes in the mountains or New Zealand. These people “pay cash.” Or in many cases don’t pay at all. They trade something, not money, maybe another property, a daughter, or who knows, and so there isn’t any mortgage interest, or cash, or… whatever.

    I think something like that’s going on in China on a large and small scale, as the inflated real estate “prices” don’t really matter. Of course there are some cases where prices are paid, mortgages are secured and so on. But often not.

    In my mother’s case, she didn’t have a choice. She wasn’t rich, just trying to get by; semi-middle class. So every property was mortgaged. Interest was paid on every loan. But people in the upper strata don’t pay interest, they collect it. From people like me.

    Real estate in the US goes through bubbles under the current economic system, whereas it didn’t really back in the day. Some people wind up with a lot of money in their pockets by buying real estate during a slump and selling during a bubble, but most don’t. They buy a house to live in. Surprisingly. I think they’re known as “marks.”

    Meanwhile, without massive imports from China and Vietnam and elsewhere, where would the US be? With little manufacturing, an economy based on bubbles, speculation, and financial manipulation, the only reliable “product” is agriculture and some resource extraction. Practically the definition of Third World. Any wonder people are angry, scared and despairing?

  16. Astrid


    I am most definitely not a “China expert” and I haven’t even lived there in decades. But I’ll throw in a couple thoughts:

    1. I imagine that part of the unwinding is BRI infrastructure projects. Previous to that, there’s been a push for rural development and development in inland areas. It would still require significant restructuring of the economy, but the CPC and Chinese are more used to such changes and don’t have to contend with special interests like Western societies.

    2. No, dampening the wealth effects of the inflated housing market is not going to be popular, but I don’t think the population feels as entitled to it as they would in the West. The “ownership” off RE are actually just leases from the government, so there’s more latitude for the government to act and make changes. It will be a rough transition as the value of the RE bubble is huge (a lot of people sitting on property worth far more than they can earn in a lifetime) but it’s more likely to work out if there is high degree of trust in the government.

    3. China has been trying to push for rural and township level economic development for decades, not necessarily successfully. So that’s one way to expand the economic structure. The other is that the number of young people is rather small and the CPC hasn’t been very successful at encouraging young couples to have more kids, so there might be enough jobs for all of them (there’s an arguably bigger problem of elite overproduction with younger people, as the parents and grandparents all want their precious only child to be great successes, and nobody wants to be janitors or electricians).

    If the problem is merely that 200 million people produce enough goods and services for 1.4 billion people, then the solution seems easy to me. 20 hours work weeks with good pay for people doing productive work, early retirement and as much free schooling as anyone care to tolerate, and everyone else can go off and try to make it as a WeChat influencer. The most important thing is to be sure to shut down all the business schools.

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