In 2008 China had the third largest automobile market in the world. In 2009 China had the largest. Collectively China’s driver-consumers passed their Japanese and American counterparts in the much-acclaimed race to consume the most cars and trucks. And it was not a small jump – reported sales in China exceeded total reported sales in the United States and Japan combined.
What is going on here?
Well, obviously for one thing Operation Enduring Bubble (to quote Doug French) petered out in the United States. The “Cash for Clunkers” campaign seemed to hardly make a dent in that trend. Nor did Japan’s never-ending stimulus efforts fare much better. But at the same time, annual vehicle sales in China did actually DOUBLE within 12 months.
It seems to me that there are two factors in play here. One, the monetary bubble caused by the red-hot printing press, tends to get most of the attention these days. This is no doubt a major factor, and the above graph hints at the tenuousness of its staying power. I will consider this factor later in a separate post.
There is however another factor involved – one which is arguably much more crucial. Never before in living memory have so many people possessed the purchasing power to buy so many attractive goods. They possess this purchasing power because in the past 20 years both the Chinese people and foreigners were once again permitted – and even encouraged – to save and invest. To put things another way, they were given somewhat believable rights of property – over cash, over goods and over real estate – AND they were allowed to keep the fruits of investing that property.
Certainly since 1990 at the latest anyone can walk into a Chinese bank and deposit 1m RMB in cash without being asked a single question, or even encountering any surprise. At the same time, the effective tax on investment return (=corporate + individual income taxes + capital gains tax – what can be circumvented) remains very low. For good reason less than 1% of Chinese file annual income tax declarations.
And starting in approximately 2000 the central government abandoned its previous policy of assigning housing in favor of releasing state-owned land to developers to build and sell apartments. At the same time, previous apartment “occupants” were allowed to purchase their dwellings for token prices, or were given one or more new apartments as compensation for having to abandon their soon-to-be-torn-down hovels. Admittedly politically well-connected developers with privileged access to financing and land did very well off the arrangement, but in the end, so did broad swathes of the Chinese public. For the first time in their lives they gained control of valuable assets.
With the prospect of attactive returns, many put those assets to good use, at least in monetary terms, re-investing the surplus in new capital goods and new housing stock. Of course in bubble times this can become a problem: residential housing stock is not a productive asset – like cars, it is a consumer good. While it may generate human satisfaction and monetary returns, it does not “grow” the capital of society. And if the estimate of 64m empty apartments is even remotely accurate, at some point it even ceases to qualify as a consumer good, the marginal utility having reached zero. Once the hope of rising prices fades, owning 5 empty apartments just doesn’t make any sense.
But from the point of view of the buyers, it HAS made sense until now, because understandably they measure “sense” in terms of the RMB which they get for reselling those apartments. And until February of 2010 this amount has been steadily increasing. The apartment which I purchased a decade ago is now worth 8x in terms of RMB. Even in terms of restaurant meals or carrots it’s still worth at least 4x what I paid for it. And though much of the “profit” remains stuck in overpriced real estate, substantial portions of that surplus have since been converted into shiny BMWs and Geelys, not to mention extravagent weddings and vacations. While individual tastes in extravagance will always be a matter of taste, what matters was that it was their choice to make.