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China’s GDP Surge Is a Facade Masking Highly Speculative Real Estate Investments

Is China leading a global recovery? That’s the question on the minds of many economists, politicians and businesspeople as China records soaring GDP growth in spite of depressed consumer spending in China’s traditional export markets.

This summer, the Chinese statistics bureau reported 7.9% year-over-year GDP growth for the second quarter of 2009, substantially higher growth than the doom-and-gloom numbers many economists predicted in late 2008, and a major rebound from the 6.1% growth recorded in the first quarter. GDP growth for the combined first half of 2009 was reported as 7.1%.

China’s apparently unflappable economy has led some in the U.S. to wonder what China is doing right, and what the U.S. is doing wrong. The New Republic’s Zachary Karabell compares the two countries’ respective stimulus plans, noting that “China's stimulus has exceeded expectations to date, while the U.S. response has been underwhelming.”

According to Karabell, “the two governments are not equally adept at managing their economies,” and China is outperforming the U.S. So, is China “winning” as Karabell contends?

As the economy grows at break neck speed, China’s commercial real estate market is also quickly emerging. The first real estate investment trust in mainland China is expected to be launched by the end of 2009. Four Chinese companies — Shanghai Zhangjiang Hi-Tech Park Development Co., Shanghai Jinqiao Export Processing Zone Development Co., Shanghai Waigaoqiao Free Trade Zone Development Co., and Shanghai Lujiazui Finance & Trade Zone Development Co. — are likely to jointly launch a 10-year REIT.

The REIT may raise 3.5 billion to 4.5 billion renminbi (RMB), the currency of the People’s Republic of China, roughly the equivalent of $512 million to $659 million in U.S. currency.

The proposed REIT will comprise 105 properties with a floor area of 1.4 million square meters. Rental income from the properties is estimated to be RMB 550 million (US $80.5 million) in 2009. Approximately 90% of the properties are industrial and have an estimated rental income of RMB 459 million (US $67.2 million), accounting for 83.2% of the total rental income.

The People's Bank of China and the China Banking Regulatory Commission will supervise the trading of REITs on the inter-bank market. The China Securities Regulatory Commission, the nation's top securities regulator, is working on rules to govern REITs' trading on the two domestic stock exchanges. The first REIT trading on stock exchanges is expected to launch as early as next January.

The numbers game

Let’s take a look at China’s GDP figures. Historically, China’s economic measurements have rightfully been the subject of substantial skepticism. In 2004, total GDP reported by China’s provinces somehow exceeded the national figure by a whopping (US) $334.6 billion. A rare fluke? No. The same thing happened with this latest round of figures.

The Financial Times points out that total GDP reported by the provinces for the first half of 2009 was once again higher than the national figure by some (US) $200 billion.

That discrepancy was no accident. The provinces and the central government both regularly massage economic statistics by manipulating the numbers, and by investing in projects designed solely to enhance the appearance of growth.

Even within China, there is a healthy cynicism toward official statistics. Wang Yang, the politically prominent governor of wealthy Guangdong Province, publicly criticized provincial governments’ “rush to drive up their GDP figures with backwards production forces” and large-scale projects that waste public money.

Wang noted that in some areas, local authorities overlook pollution for the sake of economic development and then turn around and record further growth by cleaning up the dirty industries.

Homegrown real estate bubble

Even if we take the GDP numbers at face value, China’s rapid growth is clearly being driven by investments that far outpace consumer demand and industrial capacity. The central government has been flooding state-owned banks with money, forcing them to lend to projects that may or may not be fiscally sound.

Caijing, China’s most-respected financial magazine, explains that of China’s 7.1% GDP growth in the first half-year, 6.2% “can be credited to investment, while consumption accounted for 3.8%. The net export business contributed a minus 2.9% to the growth rate figure.”

Infrastructure development is one major priority for the state-owned banks. China already has the world’s largest construction output growth rate, according to PMR publications. The sector is valued at (US) $480 million. Given the surge of investment in infrastructure, overall construction is expected to continue to grow by 9.7% through 2010 as China pours money into large-scale projects, with most of the money funneled to non-building projects.

Banks are also pouring money into real-estate construction, driving up asset prices and encouraging further speculation. Guangdong-based Time Weekly reports that since the start of 2009, “bank loans have reached 7.5 trillion RMB [US $1.09 trillion]. Most of the funds were invested into the real estate industry, which led to a housing price increase.”

Indeed, housing prices have almost doubled in many major markets, and some real estate companies in major cities are reputedly relying on bank credit for over 80% of their funding. In turn, the growth in real estate investment is pushing up overall GDP numbers.

China’s National Bureau of Statistics reports that investment in real estate in the first half of the year is up 11.6% compared with the same period a year ago, amounting to approximately (US) $250 billion in investment, with about (US) $181 billion in the commercial sector alone. During that half-year period, real estate development loans shot up 32.6%.

Some sober assessments are suggesting that Chinese stock and property markets could be overvalued by as much as 50% to 100%. Given the massive surge in investments and risky bank loans, if and when asset prices collapse, there is the potential for systemic failure in the real estate industry and in the banking sector.

Ultimately, China’s GDP growth is a rather convincing façade. Observers around the world can point to high numbers and speculate that China is the first major economy showing clear signs of recovery. In reality, those numbers mask shoddy accounting, uneven growth and systemic risk.

Whether or not Beijing can rein in spending and shore up consumption remains to be seen. In the meantime, the smart money is still on the U.S. economy.

Richard Gould is China correspondent for AlterNow, the corporate blog of The Alter Group, an office and industrial developer specializing in build-to-suit projects. Info at

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