Real Estate Investments in China Seminar: SFO On May 3-4

Just to be nit-picky: "ya'll" is a subject+verb contraction (you + will), whereas "y'all" is a pronoun contraction (you + all). This leads to great combinations such as, "Y'all'll all go then, right?"

Hi Dan.

Thanks for the post and info. I went to the ACI web site to try to get more info re the event but was having difficulty accessing the info there. Do you know if one needs to be an ACI member to attend the conference? I will also give the 800 number on the web site a call to see what I can find out. I am 50/50 re: whether I can make it. Too many meetings that week I need to try to escape from. Hope to see you there, but if not, sounds like a great conference!

China's middle class and therefore real estate growth may not be what you think.

"http://asiasentinel.com/index.php?option=com_content&task=view&id=447&Itemid=32"

China�s Middle Class: Not What You Think It Is Print E-mail
Philip Bowring
11 April 2007

Look at the numbers without the hype and it will be awhile before 1.3 billion still-poor Chinese outspend the American consumer

ImageThere seems no end to the American delusion that it can and should keep its economy buoyed by consumption and borrowed money.

But much of Asia is guilty of two related delusions. The first is that it can ever get back the trillions loaned to the US, except, at best, in heavily devalued currency. The second, and more recent, is that even if the US consumer fades, the growing wealth of a billion Chinese consumers will compensate and enable the rest of the region merrily to carry on.

The latter delusion has been helped along by the foreign media, who imagine that most of China is like the top 10 major cities they visit, where most households already own the standard electrical appliances and a growing number have cars. The phrase �middle class� is bandied about as though China now had huge numbers happily consuming at the rate of your average Los Angeles suburbanite.

Even taking into account the huge income disparities in China and accepting that most people are still poor, that would still seem to leave a few hundred million people with significant and fast-growing disposable incomes. So it�s worthwhile to look at the actual numbers. Who might be in this free-spending, upwardly mobile urban economy? Who is going to buy all the clothes, toys, electronic gizmos, cars, shoes and assorted bric-a-brac that currently gets shipped off to earn dollars for the nation�s leaders to squander on acquiring more foreign exchange reserves?

While bullish investment banks have been peddling daydreams, the Swiss bank UBS has an economist, Jonathan Anderson, who has come up with some startling numbers. Although official data say there are 577 million urban residents, many of those are farmers living on urban fringes, or in towns where income levels are a world apart from the major cities. By UBS�s more stringent criteria of what constitutes a city, the number is reduced to 244 million and to just 115 million if one uses the populations of the 50 largest cities where most wealth is concentrated.

How many of those 115 million people have a household income of $10,000 or more, the minimum likely needed to afford a significant level of consumption � a mortgaged apartment, a car, a computer, the occasional karaoke visit? This group may total 70 million. Up the household income level to $18,000, the point at which it might begin to equate in purchasing power terms to a median household income in the west, and the number falls to 25 million.

Of course, the 95 percent of Chinese who do not fall into these top categories are also consumers � but their purchasing power for items beyond very basic food, clothing, fuel and housing is tiny. Take the overall GDP numbers and China�s consumption expenditure was only 12 percent of the US! Of that, the consumption of the urban �core� - 70 million people - was only 3 percent of the US figure. Even if one assumes that China�s official data overstates investment and understates consumption � highly likely given the amount of �investment� diverted to entertainment and cars for company officials � the gap is immense.

On a purchasing power parity basis China�s consumption would be higher because of the very low cost of services, and hence of some retail prices also. But the higher up the income chain Chinese go, the less the gap between their income and real prices. For instance, rice and a pair of local jeans, let alone a haircut, may cost much, much less in China than in the US but cars and computers cost about the same.

Even if China can sustain 8 percent growth while reducing investment and shifting private consumption from 40 percent to 55 percent of GDP � where it used to be and should still be � it will be several years before it can have an impact on global demand approximating that of the US.

The fact that Chinese growth has had a huge impact on commodity prices should not lead one to assume that it will play a similar role in stimulating global demand for consumer goods. Supply of commodities is inelastic and may require several years to bring new capacity on stream. The same does not apply to most consumer goods. China�s domestic growth has been led by infrastructure development and construction, both heavy users of metals and minerals. Even on the consumption side, the biggest impact of higher incomes has been on food consumption � the shift to higher value-added foods requiring more inputs of other commodities � and housing.

Of course, much more could be done to spur consumption at all income levels at the expense of (often wasteful) investment. But it is hard to imagine that the higher income groups in China will start to spend more of their income and save less while they, a now ageing group, face the costs of health and education and uncertainties over social security. This will change, but not fast enough to offset the impact of a reversal of two decades of growth built on exports geared to consumers in an increasingly indebted west.

None of this is to argue that we are headed for the abyss, along with the US consumer. Taking Asia as a whole, policies could stimulate demand throughout the region to offset some of the decline (yes, decline, not just stagnation) in US import consumption. Consumption can rise in rich Japan, Korea and Taiwan as well as in low-income China. Investment can rise throughout middle-income Southeast Asia and parts of South Asia. But even with the most expansionary policies and lots of luck it cannot be enough, if only because the US locomotive role has only been possible because of its reserve currency status and the touching willingness of Asia to believe that the USA is an AAA-rated risk.

nh --

To quote my 9 year old, "tell me something I didn't know."

Providing a URL and then copying and pasting the entire text of the article does not count as blogging, it's google result polution.

emlak --

You are very welcome.