The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World (14 page)

Manufacturers, energy companies, central bankers, health officials—these are just some of the various constituencies that are lobbying for and against renminbi appreciation and vying to influence China’s future currency policies. In the midst of all these sometimes conflicting interests sit the central-government decision makers. The central government must consider all of these important constituencies while thinking strategically about where to steer the country overall. It needs to ensure that the country moves toward a sustainable growth model without alienating powerful interest groups and destroying short-term economic growth. It is an extremely delicate balance to strike.

As noted, the Chinese central government has more people to satisfy than in a democratically elected administration, because its legitimacy derives from the satisfaction of different constituencies with its policies, rather than just one particular side or base. The central government needs to throw bones to and mollify many diverse sectors, because it does not have the numerical legitimacy that an open, democratic vote would provide. It is within this complicated matrix that its policies are conceived and decided upon.

One benefit of this model of governance is that all constituencies understand that they will have to compromise to be part of the consensus. This understanding minimizes risks of overt factionalism that could lead to a return to the chaos and radicalism within leadership circles that I highlighted in Chapter 3. Compromise and leading by consensus have been the hallmarks of leadership under President Hu Jintao, which contrasts greatly with the grandstanding and total lack of compromise in the U.S. Congress during the debt-ceiling crisis, during which Standard & Poor downgraded America’s debt precisely because of the inability of its political leaders to compromise and do what was best for the country and the world economy.

Chapter 7

CHINA’S REAL ESTATE SECTOR

BOOM OR BUST OR SOMETHING ELSE?

The fumes were like nothing I have ever experienced. My stomach churned, my head pounded, and I was scared I was going to faint or die from the odor. I finished up my duties as fast as I could and ran out, covering my mouth and nose.

I was not walking the floor of a chemical plant inhaling toxic waste, but in the bathroom of my friends’ home. Nearly a decade and a half later, my nose still burns and my eyebrows twitch when I think of the revolting smell wafting from that bathroom.

My friends Winnie and Karen were young twentysomethings when they invited me to their home to spend the night and to see how everyday urban Chinese lived in the late 1990s. I was so excited because at that time, Chinese did not invite many foreigners over for a visit—let alone overnight—probably out of fear of neighbors talking, or embarrassment from being too poor.

Until then I had visited maybe a dozen homes, but I had never slept over at one. Most of the people I had visited were professors or government officials. It always seemed they had approval to invite me over. Even officials’ homes were insanely tiny and cramped, more like walk-in closets than homes, really. The rooms were dark, and every last piece of space up to the ceiling was filled with boxes. Despite being cramped, the homes I had visited thus far belonged to the elite classes; I wanted to see how most urban Chinese lived, in the ramshackle buildings that dotted the landscape.

Winnie and Karen were everyday Chinese people, working as clerks selling socks in a state-owned department store in Tianjin. I had met them one night a few weeks earlier in one of the few dancing halls in town, Kung Hao, a massive, 1,500-person-capacity club that was full of partygoers seven days a week. People would buy tickets and start dancing in the afternoon, take a break for dinner, and then come back in the evening to maximize the value of their ticket. I had become famous there as one of the few foreigners who regularly attended. The manager had even asked me to dance for a while in one of the cages above the crowd, and I became an attraction—I’m not sure if it was because I was a good dancer or that I was a subject of curiosity—until the military owners disliked the spectacle and ordered me down.

I had become friends with Winnie and Karen after meeting on the dance floor. Staying with them would let me see how everyday Chinese lived—and was when I first started to see the subhuman conditions in which most Chinese then lived, and unfortunately in which many still do.

When I first arrived at Winnie and Karen’s home, the block housing where they lived looked like it could collapse at any time. The façade was covered in giant cracks and blackened by mold and soot. Then–Prime Minister Zhu Rongji railed against poorly constructed buildings and launched campaigns to clamp down on construction that allowed for unsafe structures. He called tottering buildings “tofu construction” because they looked solid but were really weak and cracked or collapsed easily. Prime Minister Zhu’s warnings would be prescient a decade later, after the tragic 2008 Sichuan earthquake, when too many buildings collapsed and shoddy school construction caused students to die.

The entranceway to the crumbling, tofu-like building was completely black, and I bumped into bicycles strewn about as I walked in. As with many Chinese apartment buildings, to save money and electricity the stairways were dark except for solitary, motion-sensitive bulbs on landings that flickered dimly when activated.

When the light finally flickered to life, I saw rusted pipes dangling from the ceiling, seemingly ready to drop but held up miraculously by thin pieces of wire and rope. Exposed wires coiled and twisted around in the corner. As Winnie and I made our way up the stairwell to their eighth-floor apartment, paint and putty sloughed off the walls.

Waiting for us at the top of the landing, Karen opened the door with a beaming smile and welcomed me in. Their home was one of the smallest I had ever seen. It seemed to be no larger than the back of a Ford pickup truck. Winnie and Karen had squeezed two toddler-sized beds together, which also served as their sitting and eating area. There was no mattress, only hard wooden planks and a grubby sheet as a blanket. As the guest, they told me I would sleep on the wood-mattress bed, which had a pillow stained with years of head grease and sweat. Just looking at the pillow made my hair itch.

As we sat down and started to talk, Karen said, “I know this apartment might seem small and dirty compared to wealthy Westerners, but this is better than what we get in the countryside. Back at home, we have dirt floors and no running water. We have to pump the water ourselves from a well that we share with several families. Our home is also better than the dormitory-style accommodation many companies offer employees, where eight people share a room with bunk beds stacked to the ceiling.”

Over the next few years, I visited more homes and dormitories and found the condition of Karen and Winnie’s home was fairly common for far too many everyday urban Chinese. Many lived scrunched together in impossibly tiny homes that often stank or seemed ready to collapse. I would define the accommodations that many of these homes offer as subhuman—barely fit for farm animals. Migrant workers in Beijing have moved into desolate underground tunnels built as fallout shelters decades ago. Stories abound of migrant workers living in public bathrooms because there is running water and light.

The lack of affordable, decent-quality housing is one of the biggest problems facing China today. Soaring home prices and substandard living conditions for too many people cause depression and anger among lower-income classes that could threaten social stability if not adequately addressed. One common joke among construction workers, who use their hands and sweat to put up towering apartment blocks, is that it will take them one year of labor to be able to buy one square meter of the apartment they just built—or a decade to buy the toilet area.

One of the main goals of the five-year plan the central government announced for 2011 was to address the common complaint that decent housing is too expensive by building more affordable homes and rental units for poor Chinese. The government announced that it will construct 10 million units of affordable housing, but even that will not be enough. Having decent housing that won’t collapse under heavy storms is a human rights issue.

One major global debate is whether or not there has been too much housing and infrastructure construction in China. Many economists estimate nearly 50 percent of the country’s economy deals directly with real estate, and local governments derive much of their tax base from land sales because few cities have any kind of annual property tax in place. This has caused a dangerous cycle, in which local governments push land sales to get tax revenue for short-term spending while creating unsustainable long-term real estate developments. Because of restrictions on issuing municipal bonds, some local governments establish real estate companies and compel local branches of state-owned banks to lend them money, just to pump liquidity into the system. Fears that the numbers of nonperforming loans made for poorly crafted real estate projects will rise are hitting the financial sector, and the central government’s Huijin sovereign fund has had to buy shares to prop values up.

If China’s real estate sector collapses, the reasoning goes, the subsequent financial collapse would spur a domino effect that could take down the world economy worse than what followed the 2008 Lehman Brothers collapse. Global demand for iron ore and other commodities used in construction that have fueled booms in Australia and Canada would drop, sending those nations’ economies into a tailspin in an already-fragile world economy. Banks with exposure would fail and need to be bailed out.

Many analysts, like famed hedge fund manager and short seller Jim Chanos—who proudly states that he has never been to China—have made waves in financial circles by questioning whether there is enough demand for all the homes being built, and whether too much leverage is being taken out by home buyers. Chanos thinks China’s real estate market is on a “treadmill to hell” and will collapse far harder than Dubai’s. Other economists, like New York University professor Nouriel “Dr. Doom” Roubini, argue that China’s infrastructure spending on railroads, airports, and highways has been wasteful in triplicate. Roubini predicts that China will suffer a serious slowdown sometime in 2013 due to inefficient and wasteful construction.

At first glance, Roubini’s and Chanos’s fears seem to have merit. Housing prices throughout the country have soared since the late 1990s, when the government started to allow people to buy homes for the first time. Twenty percent annual increases in housing prices have been typical throughout the country, even after the government implemented strict mortgage controls in 2010. Overall, housing prices more than tripled between 2005 and 2009 and have risen faster than average wages. The average price per square meter in Shanghai is over $3,500.

Row upon row of empty apartment buildings dot the landscape, despite the demand for housing by people like Winnie and Karen. There are even ghost cities like Erdos, an entire city built for one million residents that lies empty.

Infrastructure spending has also driven major economic growth. New tunnels and bridges seem to emerge overnight, and many question how safe such rapid construction can be—especially in light of the 2011 high-speed train crash that killed dozens and injured hundreds—and whether it is even needed. Much of China’s four-trillion-renminbi stimulus program, launched in 2008 to combat the Great Recession, went toward enlarging and expanding current infrastructure projects. Government plans to spend $300 billion on high-speed rail to carry passengers and cargo to every part of the country are now being reconsidered due to safety concerns. Still, over 6,000 miles of rail have already been opened, and another 11,000 miles are under construction and set to open by 2015. Nearly one million Chinese continue to take high-speed trains every day.

Subway construction to reduce congestion in cities has also been a major initiative. Shanghai alone has laid down more subway lines than there are in New York City. Beijing has opened 209 miles of subway track and 174 stations for its 14 lines. It has plans to spend $30 billion to extend the track by over 220 miles by 2020. Traffic has gotten so bad in Beijing that the capital city limits what days some cars can drive, because it can take hours to go just a few miles.

As of 2011, over three dozen cities have submitted plans to the central government to construct subway lines. Even with all the new subway construction, taking a train during rush hour can be a harrowing experience because the subway cars get packed. In my decade of regularly riding subways here, I can probably count on one hand the number of times I have secured a seat.

Airports have also seen tremendous growth. Shanghai’s Pudong International Airport has been expanding to keep pace with traffic by opening new terminals and runways. Passenger traffic grew 27 percent in 2010, to 40.6 million passengers. Pudong Airport is now the third-busiest airport in the world in terms of freight traffic, with 3,227,914 metric tons handled every year.

The fast growth and high prices would make it seem that there has been too much infrastructure and real estate spending, and give credence to Roubini and Chanos’s arguments. However, both of them overestimate the amount of leverage involved in these projects. They also use phantom facts in deriving their conclusions (for instance, Roubini has criticized Shanghai for opening new airports when it has not done so since 1999, and said that a maglev train connects Shanghai to Hangzhou when, in fact, there is not one) and underestimate the demand for cheaper housing and greater business efficiency.

The need for less-expensive housing and commercial space will require urban areas to spread out, and for all infrastructure spending to be used on railroads, subways, and airports. Aside from the terrible living conditions in which too many Chinese live due to overcrowding and lack of affordable housing, companies are having big problems finding good location for a store or office. Traffic also makes it difficult to arrange face-to-face business meetings. A shortage of retail spaces that can accommodate the needs of foreign retailers wishing to expand their outlets has also increased the demand for more infrastructure spending.

One executive of a large French home-decoration retailer told me, “We have plans to open fifty stores in the next three years, but one of the major limiting factors is finding locations that are affordable. Rents are sky high and vacancies hard to find.” Commercial rents along Shanghai’s famed Nanjing Road shopping district are now the 29th most expensive in the world, when you can even get a spot. Cities need better transportation infrastructure to reduce costs and congestion, allow for more efficient business, and attract investment dollars.

If rising labor costs are the first major trend spurring the End of Cheap China, soaring real estate prices are the second, increasing costs for businesses and making profits harder to squeeze out of the country.

Many economists focus on monetary supply, and average wages relative to total land prices, to determine whether the real estate market is healthy or not. Largely forgotten in this debate are the subhuman conditions in which most Chinese live today. More housing and infrastructure spending are needed just to create basic living conditions that people can afford. The expansion of cities will create more business opportunities, which will allow incomes to rise further. A two-minute walk in any direction from the heart of Shanghai’s financial district will find millions living in subpar conditions. To ensure stability, the government must advocate and support more affordable housing at any cost.

Even for middle-class Chinese families, it is typical for three generations to live in 300-square-foot apartments in towering high rises with few green areas. Buildings are squeezed together and remind me of sardines when I look down at them from airplanes. In comparison, the average house in America is 2,330 square feet, according to the National Association of Home Builders. That doesn’t even include lawns and terraces, which are common in America but are luxuries reserved for only the superrich in China.