- Over-reliance on real estate for too long to drive domestic growth
Chinese local governments relied on selling development rights to developers too long in order to fund local growth. The result of this was that developers believed that they had an unending flow of Chinese families who would want to own property in cities in order to raise families, and that these families would treat their urban homes as a savings account which would appreciate by at at least 10% annually. This resulted in a property oversupply and has directly led to the difficulties which China Evergrande has run into. Now the government realizes that this policy lasted for too long, but needs to deflate the bubble slowly instead of letting it explode.
You can read about this policy from this 2012 answer[1]
- High property costs drove up family costs too much
The flip side of rising property costs is that it made overly expensive for people to marry and then have children. For younger Chinese, buying a home and marriage are not seen as milestones to becoming adults; they are seen as financial traps which are an enormous burden. Combine this with the growing independence of young women and their income opportunities, the growth in social sub-groups such as LGBTQ, and you have less and less younger Chinese who want to marry and own homes. Why should they saddle themselves with a mortgage for 30 years when all they need is a place to eat and sleep? For many of them, it makes no sense.
- The one-child policy lasted too long until 2015
I have written about this previously on Quora, but the Chinese government made a terrible mistake letting the one-child policy last until 2015. The one-child policy should have lasted until 1995, or 2000 at the latest, not until 2015. Now, the Chinese government is having trouble convincing Chinese to have bigger families, not because of restrictions on the size of families, but the cost of raising and educating an extra child is too high. The result of this is that the Chinese government is now resorting to desperate measures to lower the costs of raising a child such as turning cram schools into non-profits, etc. While these are dramatic changes which may have some effect in the short-term, my prediction is that they will not be enough to make dramatic changes.
- Over-reliance on outdated KPIs for Party officials
The Chinese Communist Party has relied on quantitative KPIs (key performance indicators) to measure the performance of Party officials on the province, municipal and village levels. Those who performed well were promoted, while those who did not were not promoted.
The problem with KPIs is that they measured quantity, but did not measure quality. General Secretary Xi Jinping has recognized that this is a problem, but has not shown any systematic attempt at reform.
The upshot of this system is that China has over-invested in real-estate development and infrastructure development, which is the exact opposite of the problem the US has. Unoccupied real estate becomes debt; the only question is “who is going to carry the debt?”
My prediction is that since real estate ownership costs are too high for many couples, while rental costs are low, more and more Chinese will realize that it makes more sense to rent homes than to buy. Most Chinese bought real estate believing that home ownership represented security, which meant freedom in knowing where they would live in their old age.
I believe that this is an outdated concept which will change soon.
- Understanding that Chinese social structure is changing
Overall, I believe that the Chinese government under the Chinese Communist Party has done a good job over the past forty years. However, Chinese society is dramatically changing in ways that no one could really have predicted. Some of these changes:
- Chinese are becoming more individualistic as they choose different lifestyles. LGBTQ are no longer anything strange in Chinese society, and most people have no trouble accepting them. The biggest challenge they have is among their own parents, who want grandchildren. But now, they are becoming more accepting of their children choosing not to have children.
- Some wealthy Chinese are moving away from the cities, and are moving into the countryside. Real estate over-supply drove urban development, but not everyone wants to live in the city.
- Mobile phones have changed consumer spending habits. Why buy and own stuff when most young people are happy taking care of immediate needs which they can order and have delivered within one hour regardless of where they are? This means that for younger Chinese, owning things is an unnecessary inconvenience.
- The Chinese definition of family, which is the fundamental unit of Chinese society is changing. Many younger Chinese decide to NOT have children because leaving a blood relative is less important than it used to be. Why insist on children when they can leave their legacy some other way?
Overall, I find it ironic that western politicians insist on “changing China” when Chinese society is already changing. All the changes I have listed are undercurrents in Chinese society which are powerful and active, and do not conflict with the Chinese government’s official narrative for China and Chinese society.
In the coming decades, future Chinese leaders will have to deal with and recognize these very substantial changes in Chinese society. I have every confidence that the Chinese people will have the wisdom and resiliency to make these changes in their own way.
Footnotes
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