Commercial Real Estate News / Insight / Recent Ongoing Protests In China Are A Huge Deal

Recent Ongoing Protests In China Are A Huge Deal

Published: 12-15-22 Category: Insight

MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.

TL:DR

Protests in China are not uncommon but typically happen in response to local land use initiatives that disenfranchise land owners or renters.
These protests are explicitly about the CCP and Chairman Xi and this is practically unheard of in China
Because Xi has so thoroughly purged the government of potential rivals, 2 things are true: no bench of ready-to-lead talent exists anymore, and no one has the audacity to bring him any good or bad news.
Chinese history: the coast gets wealthy, and the interior stays poor. Little regional interdependency exists; therefore, these disparate regions, ranging from arctic to fully tropical, must be held together at gunpoint by a strong central authority.
This only works for so long, until it doesn’t, and the place regionalizes
This is likely an important historical pivot point for the PRC and bears close watching
China’s problems are compounded by terminal demography and far too much debt for them to manage
Global interest rates and currency markets are likely to experience greater volatility as reality sets upon investors, but US CRE should work to back and fill, allow price discovery to take place, and proliferate, fueled by repatriation of industry and flights to quality.

The ongoing (still) nightly protests in the People’s Republic of China are highly significant and should be watched with scrutiny. These are not normal.

China, contrary to popular belief, does have reasonably frequent protests, but these usually center around people having been disenfranchised by local party bosses in land use policies. The current protests are acutely and virulently anti-CCP, and anti-Xi Jin Ping. This is new. This does not normally happen in the PRC, and when it has happened, it has quite literally been swept under the rug and a whitewashed, government-approved version of events is created to replace it. For example, if you look up Tiananmen Square from inside China, you’ll find pictures and patriotic images of the place. If you look it up from outside China, you see the 1989 massacre the CCP launched to put down the student demonstrations there. Whitewashing them is a double-edged sword, apparently, as nobody has the massacre to point to and say ‘maybe we should be aware this happened in the past before we go protesting like this.’

Chairman Xi has instituted a defacto cult of personality greater than Mao could ever have hoped for. He has purged anyone and everyone who could potentially rival him for power from the party, and this has included allies as well as enemies. One effect of this is no one wants to bring him news anymore. A strong case can be made that Xi is flying at least partly blind the majority of the time, for this reason.

Chinese Geography Is Problematic

The history of the Chinese landmass is one wherein the various regions tend to fight with each other and only ally for specific purposes, for finite time periods. This is due to China’s unique geography - deserts and mountains to the west and north, jungles and hills to the south, and a cage of islands off its coast that have prevented China from ever trading with the outside world at a sustainable scale until very recently, under US sponsorship. It has three major river systems that do not connect, and thus three major industrial arteries with little interdependency. Its coasts tend to generate wealth through trade, while its interior is hobbled and remains relatively much poorer.

Countries need geography that favors their ability to not only keep out would-be invaders but also to facilitate domestic transport of goods and services. Natural borders such as deserts, mountains, and bodies of water work especially well on the external extremities of countries, but add cost to distribution when they are in the middle of a country. Transportation over water is a fraction of the cost of transport over land, as well, further preferencing China’s coastal prefectures over its interior.

China’s Demography Is A Much More Acute Problem

The much bigger issue in China lies in its demographic structure, which has been plagued by its government attempting to centrally plan its demography and not only failing miserably, but further exacerbating the problems these interventions were intended to ‘solve.’ When Deng Xiaoping put the 1-child policy into effect, he singlehandedly killed China’s chances of ever being a world superpower. Geography did the rest.

Today, China is aging faster than any other country on earth, but due to a perverse incentive structure in its politics, it also overcounted its population by over 100 million people in the last census. Analysis suggests the population is actually shrinking, and will be at half its current level in the 2050’s, not the 2090’s as was believed previously. These are huge in terms of what they mean for the country’s growth: it’s over, and it’s going in reverse. And all these slow-motion train wrecks we are seeing are part and parcel to the bigger picture train wreck that is happening vis a vis China’s marketing efforts in convincing the world it was a contender for superpower status.

Nowhere Close To Being A Superpower

To actually become a superpower, China would have to issue a currency it doesn’t care to manipulate for trade purposes. It would have to have an open capital account, which it cannot, because every time it tries even incrementally, capital flees in droves. And it would have to have a navy that can sail more than 1000 miles from shore in force, which it does not have, and probably won’t have for the foreseeable future.

Beneath the surface, China is rotten to the core. But it was allowed to essentially fake its way into WTO membership, the UN Human Rights Council, and playing debt trap sponsor to the third world, so there’s a perception that China belongs at the adults’ table; it doesn’t. The average GDP per capita in China is only $12,500. That’s not what a superpower looks like.

These Weaknesses Will Impact Money Markets

As China’s ability to pay its massive debts with a smaller population recedes, it will go to some lengths to be able to pay them, including liquidating reserves and shuffling assets around international institutions. The bottom line, however, will remain: China will require a workout at some point. What this might look like is the hundred thousand dollar question, and is too far off to game. But knowing the fundamental issue is one of too much debt and the inability to pay it, we can reasonably anticipate that markets will respond with volatility to any large-scale surprises, and this is likely on Jerome Powell’s mind as he signals in his latest speech that the fed will allow rates to consolidate further, suggesting debt markets can take a breath, but that their resolve to keep hiking remains intact. Basically, the US has the ball, and will do what it wants to do with it. It has discovered a new and highly effective form of prosecuting war, it is quietly consolidating its geopolitical gains for its next act, and don’t look now, but commercial loans in the US are catching some breath, just as it appeared a lot of CRE deals would be headed for workouts.

Things Remain Relatively Calm In US Markets

The US continues to be the place to invest for most intents, and as cap rates have been able to subside a bit from their huge spike on the heels of the fed’s rate hikes this year, we are seeing deals able to complete that could not do so before. Industrial property still being bid well, and B-C office property vacancies being addressed at some increased scale, both encouraging developments.

But the biggest gift China could give the world would be for the Chinese people to reject the CCP, and form better governments. It’s already going to be a slog for them, in any case. Human nature can be vicious in its quest for power. At least this way could be less bloody. The demonstrations ongoing in China at present offer that level of possibility. This is not normal. This is a massive departure from normal.

Money Markets Impact US CRE

Lending, investing and consuming all share a global ecosystem, such that butterfly effects abound. What happens in Beijing affects real estate prices in Denver as well as Philadelphia, so keeping on top of goings on abroad as well as understanding them in their context can help investors and property owners to foresee directions, impacts and degrees of force in future market conditions.

In this case, China’s leadership organization, the CCP, has been successfully pressured to lower barriers to physical mobility in the country. This bears watching very closely, just as a function of China’s size and relative weight in the US’ trade basket. If they begin changing, say, their capital control structure or suffer a crisis of confidence, that’s a game changer for the world financial system, and that system contains a bunch of commercial loans in the US.