3 Unexpected Ways The Chinese Economy Affects US Commercial Real Estate
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
The Chinese economy has rocketed to the number two position in the world in terms of nominal GDP, behind the United States. It has done this in a very systematic, sometimes underhanded way, and has grown to a scale at which it cannot help but influence other economies. The US is arguably China’s most important trading partner, for reasons we’ll explore, but the converse is not true. China is one of a handful of important trade partners for the US, and it’s one the US could do without. Again, the converse of that statement is untrue, but that doesn’t mean goings on in China cannot affect parts of the US economy. Today we’ll explore three little-known ways the Chinese economy affects and will affect various aspects of commercial real estate in the US.
First, An Economic Primer On China
The People’s Republic of China (PRC), was formed in 1949 by the Chinese Communist Party (CCP), under Mao Tsedong. The Republic of China (ROC), now known interchangeably as Taiwan, Chinese Taipei, or Formosa, was, before 1949, the actual Chinese government. The CCP and ROC were in civil war during and after World War Two. The ROC soldiers under Chiang Kai Chek fled the mainland after losing militarily, to Taiwan, where they have operated since as an independent nation, and most recently a very democratic and prosperous one.
The PRC, in contrast, was an economic backwater until 1979, when US President Nixon visited to meet with Mao, at which point he invited the PRC to join the US-led economic and political order codified in the Bretton Woods Agreement. Mao had conditions, one of which was that Taiwan was not to be referred to as independent, but as part of the PRC. What resulted from this cute little game of make-believe has been the ‘one China policy, aka ‘one country, two systems.’
Nixon’s pivot to China represented a major move on the world stage and was successful at driving a wedge between the Chinese and the Russians. After Mao’s death, however, Deng Xiaoping became the party leader and openly decreed to the Chinese populace that it was now ‘glorious’ to get rich. Economic opportunity zones were created which allowed entrepreneurs to start and operate private businesses, and millions of Chinese citizens began to prosper for the first time in centuries.
China’s Geography Problem
Historically, China has displayed a general pattern of fragmenting and coalescing under different conditions. At the risk of over-simplifying, the vast majority of China’s 1.2ish billion live east of a diagonal line that runs from Heihe in China’s northeast to Tengchong in its southwest. Fully 94% live on only 43% of China’s land. In short, the population density was high, to begin with; forced urbanization made the problem much worse.
China’s northern extremes lie at over 53 degrees of latitude, while its southern ones lie at about 18 degrees. For comparison, this is like going from London to Mauritania - subarctic to tropical climate. Additionally, to the south lie the Himalayas, to the west the Tibetan plateau and Xinxiang, to the North lie the Gobi Desert, Mongolia, and Siberia, and in the east lie the east and south China seas, aka China’s cage. For 3000 years, China had been unable to sustain systematic trade with the world outside this cage formed by the so-called first island chain (Japan, Philippines, Vietnam, and Indonesia). Only since China’s having joined the Bretton Woods alliance has this been otherwise.
China’s Demographics
China claims a population of about 1.4 billion people; however, its most recent census belies this claim. The country has systematically overcounted its population by over 100 million people. Additionally, thanks to the one-child policy, there are significantly more men than women, and the country is running out of consumption-age people. Given the recent census data, China’s population likely peaked several years ago and will be at half its current size by about 2050.
Synthesis - What Does This Suggest?
This suggests that the PRC is far weaker than advertised, and indeed recent news backs this claim, as China’s property sector is imploding and their indignant claims about the US Speaker Of The House’s visit being an act of war they’d respond to in kind were completely ignored with no consequence. The weakening of the CCP should be viewed in its historical context, which is one where the country disintegrates along geographic lines - its 3 navigable rivers, typically, and then coalesces again under a strong enough emperor, or in today’s parlance, political party. Historically, the coast gets wealthy, the interior stays poor, and then commences long marches to take the coast’s wealth.
It also suggests that without US sponsorship and trade, the goose that has laid the golden eggs could die. This points up the United States’ interest in the region as one of holding all the cards and threatening not just to take its toys and go home, but saying the quiet part out loud, to put Japan and Taiwan in charge of the region. And that could make the ‘century of humiliation’ China endured in the 19th and 20th centuries pale in comparison.
How Does This Affect US Commercial Real Estate?
US commercial real estate values rise and fall for a host of reasons, but in short, they reflect the value to businesses of location and proximity versus the constraint of supply. Chinese companies listed on US exchanges have recently been forced to de-list, and this trend is likely to continue as well as grow in scope. Generally speaking, I reasonably expect US commercial properties to be impacted in the following three ways:
- Industrial Property should be in high and growing demand for the foreseeable future. This should stem largely from companies re-shoring much of the manufacturing capacity that went offshore to China during the 70s through 2000s, as well as from enterprising businesses rising to the challenge of meeting the US consumer’s drive to maintain the lifestyles to which they’ve become accustomed - a drive, for what it’s worth, that is particularly pointed in US consumers.
- Expect further consolidation in retail space. China is in the unenviable position of being extremely weak economically and demographically, yet having to back its claims to the contrary, as the rest of the world does not buy into the ‘saving face’ cultural imperative China does. To wit, this is what was expected when Nancy Pelosi visited Taiwan. She was supposed to turn back, if for no other reason than to let the Chinese government save face after making outlandish threats. That’s not a shared cultural value. Additionally, large US retailers are currently awash in inventory, and will likely use it to browbeat smaller competitors to take market share, which suggests fewer orders from China or anywhere else in the near term.
- Multifamily investment has nearly gone mainstream in the US, to the point Facebook ads proliferate in unsophisticated investors’ timelines urging them to get into multifamily syndications. This asset class could experience some additional cushion as Chinese investors attempt to flee with their capital and invest it in one of the asset classes they tend to be most familiar with, in general. Consider this idea in its proper context, but don’t discount it. Chinese citizens are remarkably shrewd and adept at circumventing the CCP’s capital controls. They need sound repositories for their funds, and multifamily properties in the US fit the bill in several ways.
Conclusion
China is far from the roaring tiger it portrays itself to be; in fact, it is quite the opposite, and its economic success on the world stage is completely due to US sponsorship. This is going away. Additionally, China’s population is shrinking and will be at around half of its current number much sooner than originally anticipated. Doing this with a significant sex imbalance and truly incredible debt levels should lead to some history-making events, and none of them seem inviting.
China’s worsening malaise will likely impact demand for US industrial and multifamily properties while acting as a brake on retail recovery. The good news is opportunity will abound if one knows where to look, and we are working hard to make this project one of those first places to look for value.
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