Why China's Property Sector Could Be Worthless, One Day

Jan 1 2014, 7:24pm CST | by

Why China's Property Sector Could Be Worthless, One Day
Photo Credit: Forbes Business

Some believe that China’s property sector is a bubble ready to be burst, citing scores of empty construction structures built for the sake of stimulating economic growth. Others believe that there is no bubble in China’s property sector, saying the country’s huge population and large flow of people from the countryside to cities will help demand catch up with supply.

Irrespective of which side one is on in this debate, China’s property sector may be worthless one day, if pollution continues at the same rate. Younger generations will opt to leave the country rather than move into polluted cities, depressing demand for real estate, and aggravating the problem of excess capacity in the sector.

China is the world’s top producer of carbon dioxide, the chief greenhouse gas- a status that isn’t expected to change any time soon, as China’s government is part of the problem rather than part of the solution.

To be fair, China’s pollution is, in part, the result of the country’s rapid industrialization, a problem every industrialized country faced at one point or another. This means that the problem could go away as the country eventually transitions from an industrial to a service-based economy.

In the meantime, the Chinese government has placed the fight against pollution on the top of its agenda. “Energy conservation and environmental protection is a long-term strategy as well as an urgent practical option for China, ” stated China’s Vice-Premier Li Keqiang at the climate change summit in DurbanSouth Africa.

Indeed, China has developed a comprehensive environmental policy similar to that of the world’s second producer of carbon dioxide, the US; and it was the host of last UN’s conference on climate change.

The trouble is, however, that in contrast to the US and other advanced economies– where the polluters are private companies — in China, by and large the polluters are government companies—State Owned Enterprises (SOEs) and Town Village Enterprises (TVEs).

This means that the government, as owner and manager of these enterprises, is part of the problem it is called upon to address.

Furthermore, SOEs and TVEs are “units” rather than true enterprises. They provide employment for unionized workers and financial support for local schools and hospitals. This makes any government action against these corporations too costly for the communities they serve — and eventually non-enforceable.

Compounding the situation is the country’s one party system, which places all three constitutional powers in the hands of the same group, turning the government into both the regulator and the regulated. This unusual and conflicting role makes it very unlikely for a polluter to be prosecuted, be afforded a just and fair trial, or be sanctioned.

The bottom line: Bubble or no bubble, China’s property sector is at risk of turning worthless, if pollution continues at the current rates — and if young people opt to leave the country rather than to live in polluted cities.

Source: Forbes Business

 
 
 

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