China’s Economic Transformation: Shifting from Real Estate Economics to Advanced Manufacturing
Over the past decades, China experienced unprecedented economic growth under President Deng Xiaoping’s leadership and vision, shifting rapidly from an early planned economy to an industrialized powerhouse. One sector that has experienced exponential growth is real estate, which not only boosts urbanization but also contributes directly to the country’s GDP. Cities like Shanghai and Beijing have emerged as symbols of this real estate boom, costing more than $14,000 per square meter in the inner circle of the city. According to CEIC, a credible data gathering center, it pointed out that the average property price is about RMB 46941 (about $6480) per square meter in Beijing. At the same time, the median income in 2022 is about RMB 178K (roughly equal to $24,573) per year. In reality, the rate of increasing housing prices is faster than increasing an individual’s income. Relying on traditional jobs or salaries to purchase an apartment in major cities would seem impossible. Historically, the real estate market plays a critical role in the wealth distribution. The real estate boom benefitted the bigger cities, significantly drawing contrast between urban and rural areas. My hometown in Inner Mongolia is only worth 1000 dollars per square meter compared to an average of 10,000 dollars per square meter in Beijing. These distinct differences have exacerbated the inequalities. For instance, those who took advantage of this boom increased their net wealth by purchasing apartments or houses than those who didn’t. This economic disparity shows concerns about long term social stability and economic development in China. However, while this rapid economic progress over twenty years has brought numerous benefits, it has also presented challenges for future younger generations. Owning a home has become increasingly difficult for many individuals, which leads to tensions and greater disparities.
As affordability declines with stagnant wages and reduced income during the COVID-19 pandemic lockdown, the consumer purchasing power decreases, leading to the saturation of the real estate market and rising challenges in economic growth. For some real estate developers, notably the Evergrande company, they faced significant constraints of cash flow in this pandemic which therefore triggered more problems. According to Scott Neuman’s NPR article, Evergrande was once listed as the world’s most valuable real estate company, but just three years later, it was on the financial ropes. This trend highlights a weakness in China’s economy: overreliance on real estate, especially from the government side. For some cities, local governments have been depending on selling land to developers to increase their annual budgets. As the land value increases over time, they will receive more revenue from the land itself and taxation. However, each city has limited land, and it cannot sustain constant economic growth. Such circumstances challenge the fundamental assumption that real estate is “too big to fail.” The Chinese government must shift its focus from the real estate economy to high-end technologies to address these issues. With AI booming nowadays, there is a need for strategic change that promotes sustainable growth through advancements in high-end manufacturing. Achieving this goal requires changing the current labor structures, implementing governmental policies, and improving education systems.
As housing prices continue to rise, the younger generation faces the biggest financial challenges upon graduation. Most young people who graduated from top-tier universities cannot afford to pay the down payment in the current market, even if they work very hard for the rest of their lives. The exaggerated housing cost is not just a simple economic issue; it affects the quality of life among individuals. Many ambitious young adults are forced to defer their plans for homeownership by allocating their limited financial resources to other necessities. This economic trend in spending behavior forecasts a decline in the real estate sector and decreases consumer consumption. For example, when young adults cannot afford housing prices, they may delay starting a family, leading to reduced demand for homes and subsequent price drops. Additionally, signs of market saturation are becoming evident in the real estate industry. What was once a thriving sector that promised returns has become an investment with diminishing profits. In an article written by Michael Bryane and Simon Zhao from the Lincoln Institute of Land Policy, they bring attention to a matter in China’s real estate industry. They focus on the debts that local governments have accumulated during these real estate developments. They highlighted how the declining prices of real estate make it challenging for these debts to be repaid, which poses a risk to government finances and their spending ability. The recent Evergrande crisis which reported $300 billion dollars in liability is an example of how excessive borrowing from banks can lead to the collapse of bubbles.These real estate bubbles can severely damage the economy as well as each individual household. Investors are becoming more cautious as the returns on real estate investments are no longer attractive. For instance, according to the IMF report published in February 2024, experts reported that China’s housing market faces additional pressure due to a decline in population growth, and such decline indicates that the additional new housing will diminish in coming years. As a result, by facing these structural adjustments, the investment return is projected to fall further.
The continued challenges in real estate are not unique but also highlights the urgent need for economic transformation. As we witness the majority of the young people struggle with inflated housing prices, it becomes obvious that the future economic stability of China needs to transition from investing in real estate to other parts. By comparison, China’s close neighbor, Japan, experienced a similar event that happened in the 1980s and early 1990s. During that time, Japan faced an immense real estate bubble due to the combination of low interest rates and aggressive quantitative easing (QE). During the economic bubble, the entire Tokyo’s land value was enough to cover the sum of real estate value added in the United States. As the bubble bursted, it led to a period of economic stagnation. An article written by Nishimura Gota from Tokyo Keizai Inc pointed out the idea of “Japanification’’ in China of how the current economic stage is similar to Japan in the late 20th century. The article pointed out the phenomenon of investment in fixed assets and extensive use of indirect financing. From the vivid example drawn from the neighboring country, the author suggests that strategic economic planning is the key to solve long term stagnation. It is always a great lesson to learn from history, government officials in China need to consider the necessity of making this strategic change.
In the past, China was known for its immense production and manufacturing capabilities; for instance, the Foxconn factory is a symbol of low-cost labor. With heavy reliance on low-cost labor, it brought significant results to China over the last two decades. Companies from abroad are looking for opportunities to manufacture their products cheaply. Apple, for example, designed its products in California and used Foxconn to produce 90% of its product for a labor cost of $2.96 per hour. The cheap labor costs provide huge benefits and profit margins for international companies. This economic reliance on low-cost manufacturing delays China’s progress toward high-end labor quality. The “Made in China 2025” plan is a moment that requires the shift from labor industries to sectors characterized by advanced technology and automation. However, the Made in China 2025 plan did not meet its expectation. Once recognized as the World’s factory, China faces challenges of moving upward toward its value chain under some educational and geo-political issues.
To better address the long-lasting impact from low-end manufacturing, China must prioritize industrial upgrading to maintain its competitive advantage and prevent rising unemployment. For instance, companies like Apple are actively exploring opportunities in Vietnam to improve cost efficiency by relocating their factories out of China. Therefore, industrial upgrades are important for China to sustain its advantageous position without increasing unemployment. In Kevin Zhang’s analysis of China’s Manufacturing Performance and Industrial Competitiveness Upgrading, he emphasizes some criterias used to evaluate competitiveness. These criteria include Manufacturing value added per person and the proportion of Medium and high-tech manufacturing value added in MQ. Zhang’s research results suggest that China performs well in terms of productivity relative to its economic size, but there are still opportunities for potential improvement in the high-tech sector to increase the overall competitiveness. These findings highlight the significance of enhancing manufacturing quality and making itself irreplaceable. China is already attempting to change by showing considerable improvement in information technology and semiconductor manufacturing areas. Having labors focusing on these high-end technologies can facilitate product development and improve manufacturing quality. In this way, employees from big factories could avoid worrying about being replaced by automated machines. By actively embracing these changes, China will transition from traditional low-end manufacturing to high-quality production. One day, China might have a chance to develop the most advanced Chips without relying on imports from Taiwan and the United States. Ultimately, the economic transition from real estate to high-quality manufacturing will foster sustainable growth.
In order to have a smooth economic transition, the government’s support is needed. Governmental policies shape economic development in multiple ways. For instance, as China entered the WTO in the early 2000s, there were massive foreign orders for manufacturing. In recent years, China has promoted innovation in various ways, such as tax advantages for technology-oriented companies, increased investment in research and development, and substantial efforts towards modernizing infrastructure. With considerable government support, these promotions set the foundation to drive long-lasting innovations. Specifically, a key to making a difference is emphasizing STEM education. Countries like Japan and the United States have already established a focus on STEM education programs instead of passing college entrance exams as a goal. If China adopts STEM education, it will prepare young adults with the necessary skills to succeed and foster a culture where science is a top priority. There are other benefits: the STEM program encourages students to think critically and promotes experiential learning. From an educational standpoint, this program may not have an immediate effect, but it will have a long-lasting impact on innovation and creativity. Such reform is the first step to achieving innovation, and the government must also place supportive policies in other areas. In their article titled “State Capacity in China’s Innovation Subsidy Policy,” Kaidong Feng and Ziying Zhang talked about the Major Project Program (MPP) as an illustration of how China supports projects through subsidies. This program subsidizes two-thirds of projects in China by showing a strategy that involves planning and collaboration with companies and a proactive monitoring system. The Major Project Program offers the government’s commitment to foster and nurture innovation in various ways. Additionally, the founder of Huawei once said there are still considerable differences between the US and China in terms of creativity; thus, China must invest heavily to cultivate future mathematicians. His suggestions provide useful guidance for government officials to implement further.
Both central and local governments need to implement policies that facilitate the development of businesses. The government needs laws that encourage innovation in certain areas, such as protecting intellectual property rights, ensuring that innovators are rewarded for their creations. Also, the government should offer cheaper land for companies to build their offices or factories. A notable example would be the emergence of Huawei, which received substantial funding from the government to build factories, hire top scientists abroad, or offer higher wages to its employees. With the necessary support from the government, it will improve underlying innovations and enhance its attractiveness as a place for foreign investors. In the distant future, China aims to become the leading player internationally in design and manufacturing. China can use its influence on the technological landscape. With governmental support, China will transition from over-reliance on the real estate economy to a self-developed, innovative country.
Although this is a difficult and long lasting process, China deserves some credit regarding the success they have made so far. China’s economic development in the past forty years has been marked as the most successful case in history. As part of Generation Z, I did not participate in the real estate boom, but I am in the middle of the technological boom with a strong demand for independent intellectual property rights. In the past few years, I have witnessed how some Chinese firms get banned by the US government for some technological areas. This strategic economic change will address housing saturation and social inequalities while focusing on technological advancement. To support such change, the role of government is significant by offering appropriate policies to aid the growth of individuals or companies. This transformative shift will elevate the nation’s GDP per capita and increase the salaries of individuals. One day, those young graduates will find opportunities to achieve home ownership while making contributions to their home country.
References:
Michael, Bryane, and Simon Zhao. “A Look at the Five Channels Which Affect China’s Bubble Economy.” Bubble Economics: How Big a Shock to China’s Real Estate Sector Will Throw the Country into Recession, and Why Does It Matter?, Lincoln Institute of Land Policy, 2016, p. Page 24-Page 43. JSTOR, http://www.jstor.org/stable/resrep18594.5. Accessed 20 Jan. 2024.
Kevin H. Zhang. “China’s Manufacturing Performance and Industrial Competitiveness Upgrading: International Comparison and Policy Reflection.” China’s Domestic Transformation in a Global Context, edited by LIGANG SONG et al., ANU Press, 2015, pp. 297–314. JSTOR, http://www.jstor.org/stable/j.ctt16wd0dw.17. Accessed 29 Jan. 2024.
Feng, Kaidong, and Ziying Jiang. “State Capacity in China’s Innovation Subsidy Policy: A Perspective on Government Knowledge.” China Review, vol. 21, no. 3, 2021, pp. 89–122. JSTOR, https://www.jstor.org/stable/48618338. Accessed 29 Jan. 2024.
NISHIMURA Gota, Columnist. “An Era in Which China Once Again Learns from Japan — Discuss Japan.” Discuss Japan -, 21 Feb. 2024, www.japanpolicyforum.jp/economy/pt2023070513383813170.html. Accessed 24 Apr. 2024.
“Property Price: Residential: Beijing.” CEIC, www.ceicdata.com/en/china/property-price-residential-prefecture-level-city/cn-property-price-residential-beijing. Accessed 24 Apr. 2024.
Published by C. Textor, and Jan 15. “China: Average Wage of Employees in Beijing 2022.” Statista, 15 Jan. 2024, www.statista.com/statistics/1135556/china-average-wage-of-employees-in-beijing/. Accessed 24 Apr. 2024.
Neuman, Scott. “Here’s What to Know about the Collapse of China’s Evergrande Property Developer.” NPR, 30 Jan. 2024, www.npr.org/2024/01/30/1227554424/evergrande-china-real-estate-economy-property-collapse. Accessed 28 Apr. 2024.
Jain-Chandra, Henry Hoyle and Sonali. “China’s Real Estate Sector: Managing the Medium-Term Slowdown.” IMF, 2 Feb. 2024, www.imf.org/en/News/Articles/2024/02/02/cf-chinas-real-estate-sector-managing-the-medium-term-slowdown. Accessed 28 Apr. 2024.
