By Randall Margo, Ph.D., Board Director, G.L.O.B.A.L. Justice
Winston Churchill famously remarked that "Russia is a riddle wrapped in a mystery inside an enigma." Contemporary wisdom could similarly be offered on the present state of China given the government's harsh crackdown foisted upon several of the country's leading technology firms. Why during a worldwide pandemic causing economic turmoil, along with a multibillion dollar tariff tussle with its largest trade partner would the government unleash a severe regulatory attack on some of its largest and most successful technology companies, including Alibaba, Tencent, and Didi, wiping out hundreds of billion dollars of equity from its shareholders?
The conventional wisdom is that these technology companies became too big for their own good, and therefore, posed a systemic threat to the government due to their large wealth. But China's opaqueness may becoming transparent with the recent collapse of Evergrande, the country's largest real estate development company as more accurate information emerges to unveil the company's as well as the nation's present condition.
Note: Ratio of median apartment price to median family disposable income, as of mid-2021. Source: J.P. Morgan Asset Management Guide to China.
To wit, the chart above succinctly displays the prodigious cost of home ownership in China's major cities, far surpassing the vast sums needed in the west's most expensive cities. Clearly, these housing values are unsustainable, which is one reason why the Chinese government is not interceding to bailout Evergrande. But there is a more significant issue that ties the crackdown of major technology and the real estate predicament: the growth of technology and the cost of housing has resulted in greater income inequity within China, similar to its occurrence in the United States. Why is this a problem?
With the accession of Xi Jingping in 2012, the theme of "common prosperity" has increasingly and more fiercely been emphasized. Xi views the Chinese economic model as superior to the western model of capitalism, whereby society as a whole prospers more equitably and appropriately under a hybrid system of capitalism managed and controlled by sturdy and benevolent government leadership. The Gini-coefficient in China, which measures distribution of income on a scale of 1-100 with 1 being a totally equitable society, is 38.5 compared to Russia's 37.5, with all of its oligarchs and poverty, and comparable to the 41.1 level in the United States. Consequently, it becomes difficult for a communist government to contend its policies ultimately result in common prosperity, when its ostensibly utilitarian model of governance offers no meaningful difference from other systems regarding income inequity, while also lagging behind the standard of living of its capitalistic competitors.
The adverse effects of high technology and real estate sectors, like in America, fall primarily on the young. The real estate sector is particularly pernicious towards the young, pricing most out of the home buying market in places proximate to where the best employment opportunities exist. High technology also creates huge inequity issues. In America, Amazon, among the richest companies in the world, is about to become the nation's largest employer. Yet, the vast majority of its workers toil in fast-paced warehouses and delivery trucks for wages at or modestly above minimum wage. China's largest technology firms, including Taiwan based Foxconn, which manufactures most Apple products, mimic Amazon's approach in what Chinese employees call 9-9-6, meaning work from 9am-9pm six days a week. Meanwhile, the large mostly migrant labor force building all of China's expensive real estate projects labor 72 hours a week for pay that offers little likelihood of ever owning the increasingly expensive housing units they are constructing. All of this has given rise to discontent and cynicism among China's younger population struggling for an economic foothold in modern China.
There is one notable difference between American and China. Youthful housing aspirants in America can readily borrow upwards of 90% of the cost to purchase a house from private lenders, whereas most housing in China is purchased without borrowed funds. To the extent private credit exists, most new homeowners need to provide 40-60% of the purchase price. As a result, most homes in China are bought by existing homeowners with equity in other properties, primarily for investment, because real estate values always go up - don't they. This situation exacerbates the difficulty for first-time homebuyers in China. Moreover, as younger workers struggle to save there is less disposable income available to move its society away from an export related economy dependent upon low wages to a more affluent consumer oriented economy. It also has left China with an estimated 65 million vacant housing units.
This confluence of factors is also harmful to the formation of marriage and families, which is already under distress due to its decades long one-child policy. Unfortunately, China's elimination of its one-child in 2016 hasn't boosted its population, and in fact, produced only 1.3 children per female (15-49) resulting in just 10 million births in 2020 compared to 17.86 million in 2016. As China's population begins to shrink, its economy will likewise suffer, as we have seen in Japan.
Xi Jingping surely recognizes these circumstances and is determined to achieve his "common prosperity" goal in a manner that evades potential conflict while addressing economic issues that have been festering and undermining China's governance model. Whether it can be done is the ultimate question. Perhaps his Russian counterparts can help him unwrap this enigma.