Fan Gang on Current China‘s Real Estate Market amid Economic Fluctuations
The economist from Chinese Academy of Social Sciences says China's real estate has reached the bottom and calls for further urbanization and institutional reforms to unlock China's economic potential.
Fan Gang is the President of China Development Institute, one of National High-end Think Tanks in China; Professor at the Graduate School of Chinese Academy of Social Sciences (CASS) and at the Peking University HSBC Business School. He was previously a member of the Monetary Policy Committee of the People’s Bank of China.
FYI: Pekingnology once provided a roadmap of China’s National High-end Think Tanks 国家高端智库.
Between 1985 and 1987, Fan served as a visiting fellow at the National Bureau of Economic Research (NBER) and Harvard University in the United States. He then earned his Ph.D. from the Chinese Academy of Social Sciences in 1988.
Fan delivered a speech at Boao Real Estate Forum 2024. The yearly forum, initiated by the “Guandian Organization” in 2001, focuses on China’s real estate market development, attracting over 8,000 companies during 24 years. This year’s forum theme is: “Beyond the Bloom繁花过后.”
BTW, I’ve compiled the theme of each forum since 2001 from the website of Guandian Organization, offering a glimpse into the development of China’s real estate throughout the 21st century.
2001: Reflecting on the Rise and Fall of China’s Real Estate, Inspiring New Thoughts in Real Estate; 反思中国房地产的兴衰成败，启迪地产新思维
2002: New Real Estate, New Capital, New Wealth; 新地产、新资本、新财富
2003: China’s Real Estate under Financial Tightening; 金融紧缩下的中国房地产
2004: China’s Real Estate under Macro-control; 宏观调控下的中国房地产
2005: China’s Real Estate in Transformation; 变革中的中国房地产
2006: China’s Real Estate in an Era of Transition; 转型年代的中国房地产
2007: Seeking a Common Future for China’s Real Estate; 寻找中国房地产共同的未来
2008: Thirty Years of Reform - New Opportunities for China’s Real Estate in a Major Transformation; 改革三十年 大变局下中国房地产新契机
2009: The Future of Real Estate in Recovery and Change; 复苏与改变中的房地产未来
2010: China’s Real Estate under New Policies; 新政下的中国房地产
2011: The Next Decade — Real Estate in Change; 下一个十年 改变中的房地产
2012: Balance and Development — Sustainable Chinese Real Estate; 平衡与发展 可持续的中国房地产
2013: New Forces in Real Estate in the Era of Reform; 改革时代的地产新力量
2014: Real Estate in the Downward Channel; 下行通道中的房地产
2015: Chinese Real Estate in a Period of Transition; 转变时期的中国房地产
2016: The Power of Change; 改变的力量
2017: Cross-Domain and De-real Estate Trends; 跨域与去地产化浪潮
2018: Real Estate’s Return: Time and the Future; 地产归途 时间与未来
2019: Balance and Reconstruction: The Multidimensional World of Real Estate; 平衡与重构 地产的多维世界
2020: Real Estate Foresight: the World that Restarts; 地产远见：重启的世界
2021: Rationality and Stability: Changes in Real Estate; 理性与稳健 房地产的改变
2022: Creating the Future: Seeking Solutions; 创造未来 寻求破解之道
2023: Breaking Through in a Major Transformation; 突围大变局
2024: Beyond the Bloom. 繁花过后
In his speech titled “Policies and Strategies Amid Economic Fluctuations”, Fan said China’s real estate sector has indeed reached, or is very close to reaching the bottom. After hitting the bottom, there would be a phase of crawling along the bottom (around three to five years), which is often referred to as an “L-shaped” recovery.
He also noted the relationship between urbanization and the real estate sector: the urbanization brings about migratory demand迁移性需求, which may help boost the development of the real estate market. Compared to Japan, which saw a population decline after its urbanization was largely complete, thereby increasing market pressures, China began experiencing a population decrease while still in the process of urbanizing. This remains a positive factor for China’s economic development and future modernization efforts.
Therefore, to address the challenges faced by the real estate market, Fan calls for accelerating the urbanization. The urban diseases arising from the urbanization can be addressed by establishing urban clusters and advancing public services. In this sense, China’s potential growth rate remains objective; the challenge lies in how to recogonize and unlock it.
Below is a full translation of his speech, and all the words in bold are added by me. The translation has not been reviewed by Fan. The Guandian Organization has made slight cuts 略有删减 to the original text.
经济波动中的政策与对策
Policies and Strategies Amid Economic Fluctuations
Firstly, I would like to congratulate the Guandian Organization for its commitment to hosting this forum, even under challenging circumstances. It’s remarkable that this forum has been going strong for over two decades, and I have had the privilege of attending almost every session, likely the most among scholars. On the corporate side, Ronnie Chan Chi-chung holds the record — he has particularly been participating in this forum in recent years.
If you take a look at the photo of participants outside, you’ll notice many faces have changed, but both of us have been consistent in our participation. Chen Huai has also been a steadfast presence, and together, we hope to see the real estate industry - and the forum - continue to develop.
Today, I will explore key trends in the development of the real estate industry amid economic fluctuations.
Starting with a macroeconomic perspective, China’s economy is far from booming, with growth rates of 5.3% in the first quarter and just 4.7% in the second quarter. Numerous challenges persist, and the downward pressure on the economy remains significant, with a great deal of uncertainty still looming.
Right now, there’s a palpable sense of anxiety. From last night’s 50 participants meeting to this morning’s economist breakfast, many people are asking the same question: where is the bottom? Last night, people turned to Ronnie for his take on current situation. He noted that the issues that needed to be exposed have surfaced, and after this phase, a relatively stable period of improvement can be expected — Ronnie is suggesting that the sector has likely reached the bottom.
During this morning’s breakfast, an economist said that someone had analyzed 22 historical instances of global real estate bubbles bursting and subsequent crises. The analysis revealed a pattern: typically, there’s a decline lasting three to five years, followed by another three to five years of adjustment at the bottom. The adjustment phase is characterized by relative stabilization, with no further decline.
China, especially its real estate sector, has enjoyed over forty years of rapid growth without encountering significant downturns. While there have been minor fluctuations, its real estate sector has never faced recessions or major crises. Having moved at such a brisk pace for so long, China has missed out on the experience of navigating through these kinds of economic fluctuations.
As I mentioned earlier, the analysis of those twenty-some global real estate recessions offers valuable international insights. Ronnie’s ability to assess these cycles, I believe, stems from his extensive experience as an entrepreneur who has invested in real estate worldwide, including in Hong Kong. He has personally navigated through these fluctuations and cycles, such as the real estate bubble burst in Hong Kong that led to a crisis. Since the real estate industry in the Chinese mainland hasn’t faced similar challenges, China’s judgments and expectations demand more careful consideration.
Charlie Munger once said that “China is being smarter about handling booms than capitalist America.” What are booms? It’s when the economy is overheating and surging. Such booms lead to the implementation of various macro-control policies to suppress bubbles and achieve a soft landing - this is what he meant by managing booms. He also mentioned, or perhaps someone else added, that the Chinese are not as adept at handling depressions. While I’m certain he said the first part, I'm unsure if the latter was his exact words. However, if he did say it, I believe it holds truth; after all, China hasn’t had to navigate through such deep economic downturns.
China, particularly its real estate sector, has never encountered decline or even recession, nor has it experienced prolonged periods of low growth rate. However, it seems that the real estate sector is now likely in a recession. As you can see from the white paper Ms. Chen Shitao just presented, it indicates decline, and in some areas, the decline is quite severe. This suggests that at least within the real estate sector, a recession is underway, even though the broader macroeconomy hasn’t yet entered a recession.
At this juncture, how the authority assesses and plans the next phase of development is crucial — not just for the economy, but for the businesses in China as well.
I personally believe that China’s real estate sector has indeed reached, or is very close to reaching the bottom. After hitting the bottom, there would be a phase of crawling along the bottom, which is often referred to as an “L-shaped” recovery. This means the sector will still face a challenging period ahead. However, the silver lining is that all the hidden issues are now out in the open, and policies have been adjusted accordingly.
Why did this situation arise? Over the past few years, we’ve had numerous discussions on this topic. Key factors include the underdevelopment of capital markets and the massive concentration of wealth in the real estate market, where commercial housing dominates.
China’s home ownership rate is among the highest in the world, with wealth heavily concentrated in the housing market. This concentration has led to various policy inconsistencies. Since there is no guaranteed housing for low-income groups, authorities have been hesitant to fully open up the high-end market, where market forces could drive competition and regulate supply and demand. In contrast, Singapore has secured its fundamentals, allowing it to confidently open the market, enabling the wealthy to purchase high-priced homes.
Let’s set aside the reasons for the real estate industry’s current state. At this stage, it’s clear we may face a prolonged period of downturn.
A crisis or fluctuation isn’t something that resolves in just a month or two, or even a year or two. Issues that have built up over 40 years will likely take time to be corrected. During this process, many companies may face the risk of being phased out or undergo internal restructuring will become inevitable - a common occurrence worldwide. It’s during these challenging times that we see changes in enterprise concentration, where large companies grow, and smaller ones may be phased out. In prosperous times, no one is eager to exit the market, nor to be merged or restructured, but during downturns, such mergers and restructurings become more feasible.
Later, we’ll have a debate to discuss this topic, questioning whether we might lose many years to this downturn. During that time, comparisons are bound to come up. The most classic comparison is with Japan after its bubble burst in 1991, leading to 30 years of stagnation. Just yesterday, someone posed the question: could this year be the best one we’ll see for a while, with the economy possibly stuck in a prolonged trough? Of course, there’s no definitive answer, as many possibilities remain on the table.
After Japan’s real estate sector initially began to collapse, analysts debated whether the economy had bottomed out and how long recovery might take. Initially, the consensus was that things would improve within a few years, but instead, the economy languished at a low point for two to three decades. While a definitive answer cannot be offered for China’s situation, we can certainly analyze the situation. During that period in Japan, the real estate bubble burst, the population started to decline, aging became more pronounced, and increasing life expectancy emerged as a key indicator of economic development.
Looking at it from different perspectives, the situation brought its own set of problems but was also a byproduct of economic development. Let’s compare this with Japan.
It’s important to note that there are many fallacies in comparing our situation to Japan’s. We cannot directly compare China’s situation to Japan’s post-war rise. The more relevant comparison lies not in Japan’s post-war era, but in the period from the Meiji Restoration to the years leading up to World War II, a span of sixty to seventy years. By the pre-war period, Japan had already built a substantial fleet of aircraft carriers.
In 1991, Japan’s urbanization rate had reached close to 80%, indicative of a modernized, industrialized, and urbanized nation.
Currently, China’s urbanization rate stands at 65%, with the last report of 66.4%, meaning the country is still far from completing the urbanization process. While it’s true that Japan faced significant aging issues, those challenges arose after it had largely completed its urbanization — a fundamentally different situation from China’s, as China is still in the midst of its urbanization journey.
This is my perspective on urbanization and real estate development. Urbanization involves not only the rigid demand 刚性需求 and improvement demand 改善性需求 of those already living in cities, but also an important demand within the urbanization process that I’ve been emphasizing in recent years, which is called migratory demand 迁移性需求.
On one hand, there are farmers moving from rural areas to cities, which creates migratory demand. This demand is an additional layer beyond existing needs. Do these farmers have houses when they migrate? Yes, all farmers have homesteads 宅基地 and houses, often large ones. However, these homes are frequently left vacant, with farmers returning only a few days a year, as they transition to urban life and require housing in the cities—this is what we call migratory demand.
Urbanization and industrialization go hand in hand, with industrialization bringing continuous changes in industrial structure and the relocation of enterprises. As companies that initially grew in smaller cities expand, their resource needs, including human resources, evolve, leading them to transition to larger cities.
The merging of industrialization and urbanization drives the migration of people from smaller cities to larger ones. While this movement doesn't alter the overall urbanization rate, it does involve significant migration. Their house in the county town remains in their possession, offering them a sense of wealth and security. Owning that property provides a reassuring sense of stability.
The same goes for farmers. When a farmer has a large house back home, it gives them a sense of security—that house acts as a form of social security. Even if they have a house worth 50,000 yuan (about USD7000) back in Hegang in Dongbei, China’s rust belt, they feel they have a fallback option. However, they also have migratory demand to move to larger cities, which in turn drives up demand for urban housing.
In Japan, by the 1990s, urbanization was largely complete, with major urban clusters around Greater Tokyo and Osaka well established, and 80% of the population residing in cities. As the migratory demand from urbanization faded and the population began to decline, the pressure on the market intensified.
There’s a common saying, “China ages before it become wealthy,” but in fact, China’s population began to decline while urbanization is still underway. Reflect on the relationship between these factors—such a situation continues to be a positive force for China’s economic development and future modernization.
In this context, China has been stressing the need to accelerate urbanization in recent years. Even now, China’s policy is referred to as 城镇化 rather than 城市化. Though this may seem like a subtle difference in terminology, it historically carried significant implications in the past. Smaller cities and towns, with virtually unlimited land supply, were able to build homes, only to see their populations leave. Meanwhile, large cities, constrained by limited land supply, saw development stifled. This led to a surge in population and skyrocketing housing prices in large cities, creating a widening gap. This was a misstep in our previous approach.
Recently, some progress has finally been observed. For a long time, calls for urbanization had little effect. However, a recent document* emphasized the need to accelerate the urbanization, urging cities to integrate farmers and permanent residents into urban areas. True urbanization involves cities providing more public services to these new residents. If the urbanization accelerates, some positive adjustments could be seen in China’s economic structure, including increased consumption and a renewed demand for housing.
*The document is “Thoroughly Implementing the Five-year Action Plan for the New Urbanization Strategy that is People-oriented”深入实施以人为本的新型城镇化战略五年行动计划, aiming to raise the percentage of permanent urban residents to nearly 70 percent in the next five years.
In this regard, it must also be acknowledged that the untapped potential that still exists in the Chinese economy. Moving from an urbanization rate of around 60% to 80% — just imagine the possibilities that holds. However, with this growth, urbanization will inevitably bring about its own set of challenges. While it’s crucial for large cities to attract more people and encourage their development, the country must also be prepared to address the urban maladies that often accompany such expansion.
To address these challenges, including the potential new issues brought by accelerated urbanization, one key strategy lies in the development of urban clusters. By focusing on urban clusters within a region — connecting large, medium, and small cities through efficient transportation — the urban challenges faced by large cities can be mitigated. This approach fosters synergy among cities of different sizes, allowing the region to accommodate a larger population, enabling more people to embrace urban lifestyles, and ultimately driving further consumption and development.
Why can urban clusters foster synergy among cities of different sizes? For example, within a one-hour living radius, large, medium, and small cities can mutually support and enhance each other. Smaller cities provide additional space for large ones, while larger cities can extend their public services, such as healthcare and education, to smaller ones. Living in a smaller city shouldn’t mean lacking access to quality medical care, educational opportunities or public transportation. This creates significant capacity to accommodate a larger population. Furthermore, the expansion of public services will drives the growth of public consumption, which is a significant component of overall spending.
We often focus on private consumption, but in countries around the world, the share of public services within the service sector tends to grow as the economy advances. The increasing need for public goods drives the necessity for public institutions to play a significant role in this process. It doesn’t matter whether these providers are government agencies or other institutions. Take the Federal Reserve, for example - though not a governmental body, it is a public institution that plays a crucial role in the economy. The underlying logic is the same.
China needs to stimulate other forms of consumption through the development of public services, which in turn will advance the urbanization. People often ask whether there is still room for government investment. The answer lies in the gaps China still faces in public services and social security, as well as in the public infrastructure, particularly in schools and hospitals. Hospitals in China remain overcrowded, and many other public services are underdeveloped, presenting clear opportunities for further investment and growth.
So, there’s a concept called China’s potential growth rate. The key challenge is how to fully unlock this potential.
According to analysis, China’s potential growth rate is not low. While it may not reach the heights of around 7% seen in the past, a 5% growth rate is still within reach. Naturally, factors like global upheavals, U.S. containment, and barriers to globalization must be considered. Many also believe that achieving such a high rate might be difficult — that would be the actual growth rate under optimal conditions, rather than a guaranteed outcome.
If policies are well-crafted and focused on unlocking this potential — through measures like institutional reforms and further high-level opening up - China can continue to grow. By doing what needs to be done and leveraging its capabilities on a global scale, the country can maintain momentum. After all, China is still a developing country.
In development economics, disparities often drive growth by providing the motivation to strive and catch up. Per capita GDP of China is just over $12,000 - so the country must be careful not to overestimate its position. To put it in perspective, the US, for example, has a per capita GDP of over $70,000.
Economists, by rule of thumb, might suggest that a relatively high growth rate is achievable given China’s current stage of development and the potential to leverage latecomer advantages. However, instead of merely boosting confidence, it’s crucial that the country fully recognizes this potential and take deliberate action to tap into it. By doing so, it can create an environment where more enterprises are able to achive greater growth.
Once again, congratulations to the Guandian Organization and to the forum for its success. I hope everyone leaves this event with valuable insights. Thank you all. ■
The newsletter is written by Yuzhe He, the founder of Gen-Z Glimpse. The personal newsletter solely reflects his perspectives, NOT those of others.
If you spot any errors or have feedback, please don’t hesitate to respond or send your comments to Yuzhehere@hotmail.com.