For years, I have emphasized a critical point: China's real estate industry is riddled with inherent risks. Despite the passage of decades, it appears that many still underestimate this reality. Consequently, simplistic thinking continues to prevail. Therefore, it is essential to revisit this discussion.
First of all, the real estate sector carries an intrinsic and substantial level of risk. The perception of real estate magnates living extravagantly, with private jets and yachts, may create an illusion of invincibility. However, this could not be further from the truth. In reality, this industry involves high-stakes ventures, where missteps can result in severe legal consequences, potentially leading to incarceration and financial ruin. What might initially appear as legitimate business endeavors can rapidly devolve into criminal activities within this sector.
Secondly, why is the real estate industry considered high-risk? This is due to the presence of what I call the "Chan Cycle Model" characterized by irrational price surges. To generate significant profits in real estate, prices must continually rise. In the past, investment options were limited, and buying property, which provided both housing and appreciating value, seemed like the best investment choice. Subsequently, the rising prices inevitably led to higher government land auction prices, triggering fierce competition among buyers. The profits earned from the previous round of property sales were often consumed by these soaring land prices, necessitating loans. These loans had to be repaid, driving the need for even higher property prices. As land costs escalated, so did construction expenses, demanding even higher prices and increased capital investment. This cyclic pattern continued, ultimately evolving into a self-perpetuating model, which constitutes the reality of China's real estate and land finance.
Thirdly, when can the real estate industry tally its earnings? Once one delves into this sector, it becomes challenging to disengage, and there always seems to be more money to be made. In the end, determining when to make a decisive exit during profitable times is the key. The remaining funds after this decision signify the earnings reaped from it. This industry relies on exit strategies to gauge profitability. Currently, in the Chinese real estate sector, I observe that only the entrepreneur Pan Shiyi who is the former Chairman of SOHO China comprehends this industry's secret.
Fourthly, in the face of this cyclic model, land-based finance is imperative, and a land-based economy is inevitable. The accumulation of debt and financial risk to astonishing levels is undeniable. These are all inherent in the structural dynamics of the real estate sector. There is no room for accidental factors or rational debate. Most research institutions are, in practice, merely displaying a semblance of conducting research, as everything has long been predetermined.
Fifthly, within this cycle, the paramount risk factor revolves around pricing dynamics, particularly the formation of capital. Pricing exerts the most influential forces. When land prices surge, property prices must inevitably increase. This trend extends to all related aspects. There exists no viable alternative, as failing to adjust prices upward would precipitate a collapse. Throughout this process, capital formation experiences a surge, as mentioned in my book Crisis Triangle. There are no other sectors or industries that can keep pace with such price increases. Hence, the real estate industry will have no alternative industry to replace it.
Sixthly, from a policy perspective, in China, everything relies on land and real estate. This is the simplest economic development approach because land is a resource held in the hands of government authorities, unlike other resources. Alternative approaches, such as manufacturing, are only feasible in a small part of southern China where officials are hardworking and capable to some extent. In other regions, expecting officials to attract investment, seek assistance, and truly provide services is simply not viable.
Seventhly, an inevitable outcome of this situation is impending collapse. With the continuous surge in prices, two significant repercussions become evident. The first is that it is imperative to maintain a market economy, as prices require this framework to function effectively. However, this shift would result in the economic aspect overshadowing the political one. The second is that as prices continue their irrational ascent, the fragility of the financial system steadily intensifies. This phenomenon can be likened to a dam teetering on the edge of rupture due to the infiltration of ant holes. The current reality is that real estate has permeated both urban and rural areas, creating a landscape riddled with these ant holes, and the dam appears on the verge of collapsing.
Eighthly, a forced withdrawal is feasible, albeit with substantial losses and repercussions. This stems from the fact that land-based finance and the land-based economy have become entwined with capital dependencies. The question arises: What could serve as a viable substitute for generating profit? Will it be manufacturing or other industrial sectors? Finding an alternative to this would require the concerted efforts of substantial personnel and resourceful policy administrators, as it poses a challenge that transcends mere rhetoric and demands tangible action.
Finally, the actual outcome is that China has achieved super-urbanization, rapidly concentrating a substantial rural population into cities, without considering the consequences. The urban landscape and infrastructure here are cutting-edge, including high-speed trains, airports, subways, electricity supply, and highways. However, government departments have become deficit-ridden entities. Each local government is a heavy debtor, with towering levels of debt. In reality, within government circles, this consequence has been known to every administration. When the debts were initially incurred, there was never a serious intent to repay them. Borrowing constitutes capital formation, while repaying entails massive constriction.
Reflecting on all this, over the past few decades of development, China's government operations heavily rely on the rise in property and land prices. The nation's prosperity is contingent on capital formation, constituting a form of absolute capitalism. For a long time, China has overwhelmingly depended on the power of capital, to a degree that even surpasses capitalist countries. However, the tricky issue lies in the fact that relying on the strength of capitalists to build a "wealth equality" communist society seems like an impossible task, thereby creating a significant paradox. In reality, there is hardly any Chinese capitalist willing to explicitly shoulder this social responsibility, not even Jack Ma. Those involved in financial capitalism are even less willing to do so. Hence, China faces an enormous, seemingly insurmountable social contradiction.
It should be clarified that the reasoning presented here originates from discussions I initiated more than a decade ago, and in some instances, several decades ago. Over the years, I have penned numerous articles on these subjects. Initially, they were met with skepticism, then progressed to a state of disbelief, and ultimately became self-evident. Nevertheless, these concepts are not inherently complex to be understood; individuals with training in information analysis can readily grasp them. The real challenge lies in enduring the difficulties they pose for the future.
