Why is China building a '5x5 office cubicle' for every man, woman and child?
Why is China building a '5x5 office cubicle' for every man, woman and child?
Context is everything (and it's actually much smaller)
Business Insider: Here’s the moment Jim Chanos knew betting against China was a once in a lifetime opportunity
“A real estate analyst was addressing the partners and he said: ‘Currently there's 5.6 billion square meters of high rises in China under construction. Half residential, half office space.’ And I thought for a second and I said: ‘No, you’ve gotten the American, rest of the world metrics wrong. You must mean 5.6 billion square feet. Because 5.6 billion square meters is roughly 60 billion square feet.’
And my analyst looked at me sort of terrified. He was a young analyst at the time. He said: ‘I know. I double checked. It’s 5.6 billion square meters.’ And I thought for a second and I said: ‘Well if half of that’s office space, that’s roughly 30 billion square feet of office space. And that’s a five foot by five foot office cubicle for every man, woman and child in China.’
And that’s when we all looked at each other and our jaws dropped. Realized, wow, this is a once in a lifetime kind of thing, where this whole country is in effect building itself out in a very short period of time.”
The number is simply an exaggeration. At the same time it’s important to realize that China does have pretty massive housing needs. I’ll discuss both of these points below.
First, just to level set, the statistic that Jim Chanos was referring to in the interview referenced above [1] is ”Floor Space under Construction” which is released publicly on a periodic basis. The most recently available figure (as of December 2016) was even higher (at 7.4 billion square meters) than the figure he cited.
P.S. I know Chanos was talking about office space, but as Robin Daverman notes, office construction has decreased significantly since 2013. For my answer, I am focusing on the other side of the coin, residential real estate, and the reasons generally apply to the commercial office space market as well.
Reason #1: “Not all of that floor space is going to actually be built.”
The “floor space under construction” figure is based on plans submitted by developers and construction companies to the local agency when they apply for building projects and ultimately aggregated into the national accounts.
However, the developers do not always intend to complete the project right away (or at all), instead planning to sit on the land for a number of years and holding the land in their “land bank”. I believe that there are certain regulations in China where you must be doing something with land in order to continue owning the right to develop it. This ends up exaggerating the actual amount of floor space that is really under construction.
Another way I know that the figure is exaggerated is by looking at the actual amount of floor space that was completed, which came out to 738 million square meters (also shown in the above table). If you divide the residential floor space under construction by this number, this implies that it takes an average of almost seven (7) years to complete construction.
However, I know that — once construction begins — most buildings are completed within a two-year timeframe (or 19 days in one case). It is more likely that the numerator is exaggerated than the denominator because the denominator is based on actual results — and there is no reason to under-report this figure.
Based on the 738 million square meters of actual residential construction, this amounts to a much more reasonable 5.7 square feet per Chinese person. So instead instead of imagining Chanos’ “5 foot by 5 foot office cubicle” (i.e. 25 sf) what we are talking about is more like an an above-average sized tile measuring 29 inches on each side.
By comparison, in 2015 the figure for the United States was roughly the same at 5.8 square feet per capita. When we were in the middle of a housing bubble in 2007–2008, this figure was around 15 square feet per capita. While space needs for the average American are significantly higher (2,700 sf per avg. single-family home!), as I explain below, China is also in a much more active period of urban development.
Reason #2: Incentives to “build, baby, build!”
In China, the most common method of corruption was for a project sponsor to conspire with a politically connected official on a development project. Converting farmland sitting on the outskirts of an emerging urban area is particularly profitable because farmland is owned by the village and farmers only hold usage rights.
There was no consistent mechanism to price “usage rights” so depending on how greedy/corrupt the main actors are, one can coerce villagers to give up their rights to the land for a low price, develop it and then sell it as fully owned property. It is this arbitrage between the value of “rights to use” and fully owned property that leaves a lot of room for the project developer to extract his pound o’ flesh. And if your village happened to sit next to a growing urban center, this arbitrage could be enormous.
Another big incentive was the lack of attractive savings options for Chinese households. Prior to 2013, the only three options for most Chinese people for their savings were to (i) deposit in the bank at a negative real interest rate, (ii) gamble it away in China’s volatile equity markets or (iii) invest in real estate. For many, real estate seemed like the best bet, thus creating significant demand for real estate as a long-term savings tool. Real interest rates were also very low, which meant capital was very cheap for developers and construction companies.
Since 2013, changes in policy and reforms under the Xi administration have changed these conditions. Real interest rates are much higher than 10 years ago and financial liberalization has provided Chinese consumers with a greater variety of options to park their savings.
Background reading:
In his highly recommended answer, Paul Denlinger discusses the important role that government incentives played in stimulating construction.
Corruption also played a major role here (Which country is more corrupt, India or China?)
Reason #3: Urbanization a.k.a. “Migrant laborers also have aspirations!”
This is probably the biggest reason. China is still in the middle of a mass urbanization where 20–30 million people per year leave the farms and rural areas and move into cities.
Right now, about 56% of Chinese people live in an urban area. In most developed countries, this figure is above 80% (U.S. is at 82% while Japan — an even better comp for China — is at 94%). This implies that there are still at least 330 million people that need to move into the cities.
Jim Chanos discusses urbanization in his various presentations on his bearish China views. However, as a bear, he views urbanization as “largely played out” saying that China’s urbanization rate is actually higher than the official figures — implying that there is less urbanization left than people think — and that the pace at which farmers will move into the cities is going to slow down as we approach “full” urbanization. Ergo, China Collapses™.
However, what he failed to understand is that urbanization in China doesn’t just end after the migrant laborer moves into the city. Usually when migrant laborers first move into the city, they live in on-site factory housing or are crammed together with other migrants in the cheapest possible urban housing. After all, they cannot really afford much more on their relatively low salaries.
According to Mr. Chanos’ logic, these migrant laborers plan on living under the same living conditions for the rest of their lives … with no plans to start a family, get educated, get a nice office job or start a business one day and one day, upgrade their housing situation.
But Chinese migrant laborers aspire to move up just like the rest of us. And this means that there is actually still a tremendous amount of urbanization left, as recently arrived urban residents look to gradually become “full-fledged” urban residents. In fact, there is even a good proxy measure of this gap — number of registered urban residents vs. total number of urban residents. In a previous answer (What are China’s main challenges over the next five years?), I wrote:
Continued urbanization and social reform. This not only includes the continued migration of people from the farms to the cities, but also the evolution of migrant laborers and their families into “fully fledged” urban residents (with hukou, proper housing, access to social services etc.). For example, although 55% of Chinese people reside in urban areas, the number that are registered is significantly lower because many migrant laborers are still not “registered residents”. China’s current five-year plan projects that urban residency will rise from 55% to around 60% while the number of registered urban residents rises to around 45%. The former number is merely the continuation of an existing trend while the latter figure will be a function of how quickly cities reform their hukou policies to allow resident migrants to register.
Hukou reform is one important piece of a large package of social reforms (relaxing the one-child policy is another) that is part of the Xi administration’s reform agenda. It is becoming easier for migrant laborers to register as urban residents in the cities that many of them having been toiling in for decades. And that means they will need more and better housing in the years to come.
Note
[1] Slide 9 in Business Insider: Jim Chanos: These Bizarre Cartoons Prove That Even China Is Worried About Its Fate
This was originally published on Quora in January 2017.