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China stores 70% of its wealth in real estate. Now, the property crisis is forcing investors to reconsider their favorite means of savings

December 2, 2021, 11:00 AM UTC

A residential development called Sunshine Peninsula, in Guangzhou, a metropolitan port city on China’s southern coast, is billed as a modern, seaside escape. Ads for the 5,000-apartment complex depict a glitzy waterfront neighborhood with palm-tree–lined boulevards and European-style gardens. 

The first phase of the apartments—around 1,300 units—launched in August and sold out almost immediately, according to a sales manager who would give his last name only as Liu. But construction stopped in September as the company behind it, Evergrande, China’s largest and most indebted developer, ran short on funds. This site that’s frozen in time—construction cranes suspended in air, buildings wrapped in scaffolding, plots of brown dirt awaiting plush green sod—captures just how suddenly Chinese consumers realized that the value of real estate, the nation’s favorite means of savings, wasn’t always going to go up. 

China is a nation of savers, and real estate is where the country stashes its money. A boom in homeownership over the past two decades has funneled an enormous share of China’s household wealth—70%—into real estate, according to Loomis Sayles. In the U.S., that share is 35%. 

Now, Beijing—recognizing China’s dwindling population growth, slowing urbanization, and inflated home prices—is trying to wean the property sector off the debt that fueled its rise and, in turn, reduce the economy’s reliance on the property sector and related industries, the largest contributor to GDP at 30%. The effort is starving developers of funds, leaving projects like Sunshine Peninsula in limbo and adding urgency to Beijing’s campaign to hook citizens on other means of investment, such as its domestic stock market. Home sales and housing prices are starting to tick down after years of spikes—early signs that Chinese citizens may be rethinking the role of their homes as trusty piggy banks. 

China’s savings rate is one of the highest in the world. It surged alongside the country’s growing economy and rising income levels to peak at 52% in 2008, according to the World Bank. It’s now at 43%, far higher than the U.S.’s 18%. China’s lack of a social safety net like Social Security and its former one-child policy—which designated one kid to care for two aging parents—encouraged workers to save. 

As China’s savings rate has climbed, so too has its rate of homeownership, which hit 90% in 2017 and hasn’t budged since. In urban areas, 96% of all households own at least one home; 20% own at least two, according to the People’s Bank of China

In China, owning a home is synonymous with “security for retirement,” says Iris Pang, chief China economist at Dutch bank ING. And for years, real estate was a reliable investment strategy. Home prices in China have skyrocketed in the past two decades. 

One Chinese homeowner surnamed Hong bought her first apartment in Shenzhen’s Nanshan district in 2002 for $161,447. It’s now worth $3.6 million. Her second apartment, in the city’s Futian neighborhood, worth $627,000 in 2007, is now valued at $2 million.

“As a middle-class person working a standard job with a run-of-the-mill salary … saving my salary would never be enough for living, a family, and for retirement,” she says. “There’s simply no other way to grow my money than to put it into property.”

The notion that real estate was a risk-free place to park money helped fuel China’s urban sprawl. Buyers would pay upfront for yet-to-be-built apartments that, often, they never planned to live in, providing developers with the equivalent of interest-free loans. Roughly 65 million of China’s homes—enough to hold the population of France—are empty. 

Debt powered China’s build, build, build culture too. Beijing sought to reel in borrowing in August 2020 by introducing the “three red lines”—or balance sheet conditions, such as debt levels versus cash flow, capital, and assets—that developers must meet to borrow more. Evergrande, with $300 billion in liabilities, was among the few firms to breach the requirements. 

70%

Share of Chinese household wealth in real estate. Source: Loomis Sayles

Beijing added to Evergrande’s woes this year by directing banks to slash mortgage lending and funnel capital instead to manufacturers that can support the government’s goal of reaching technological self-sufficiency.

Banned from borrowing and facing a sales slowdown, Evergrande flirted with default in September, causing investors and homeowners to worry that the unfinished apartments would never reach completion and that fully constructed homes would sell at discounts.  

In a few weeks, the crisis undercut the long-held belief that China’s home prices would always rise. In September, new-home prices in China fell 0.1% from the month prior—the first decline in six years—and dropped another 0.3% in October.

The small dip was a big deal, particularly for local Chinese officials who rely on land sales to generate revenue. Local governments’ land transfer revenue surged from $7.9 billion in 1998 to $1.3 trillion last year, according to China’s Ministry of Finance. Chinese media reported in November that at least 21 cities have enacted price floor controls to limit a market slump.

96%

Share of China’s urban households that own a home. Source: PBOC

China’s property assets are now startlingly “less attractive” as an investment, says Bruce Pang, head of macro and research strategy at China Renaissance Securities. Home sales by value in China tumbled almost 17% in September from a year earlier, according to a Bloomberg analysis of National Bureau of Statistics data. The country’s top 100 property developers recorded a 32% dip in home sales in October from the same time last year, according to the China Real Estate Information Corp., a property data provider. 

Real estate is no longer as safe a bet as it once was for China’s savers, that much is sure. What’s still unclear is whether alternative means of investment in China are any better.

China’s capital controls largely prohibit those in the mainland from moving money abroad. The rules have kept mainlanders from easily investing in some of China’s most successful and profitable companies like Alibaba and Tencent, which have listed on exchanges in Hong Kong and New York, says Michael Kelly, portfolio manager and global head of multi-asset at New York–based PineBridge Investments. 

The volatility of China’s domestic stock market, meanwhile, has turned off domestic retail investors since its modern inception 30 years ago. Only 7% of Chinese individuals are invested in domestic stocks, compared with 56% in the U.S.

43%

China’s 2020 savings rate. Source: World Bank

In recent years, the government has introduced capital market reforms to open up new investment avenues.

In 2019, Beijing launched the Shanghai STAR Market—its version of a Nasdaq-like exchange that offers easier funding for innovative tech firms and presents another opportunity for retail investors.

China’s financial regulator last year scrapped foreign ownership limits on financial institutions and insurance companies, clearing the way for international money managers to offer mutual funds and other asset management products to a country whose collective wealth equals $19 trillion. 

In September, China launched its long-awaited Greater Bay Area Wealth Management Connect Scheme, which gives Chinese investors living in nine cities in southern Guangdong access to wealth management products from Hong Kong and Macau banks. 

Chinese investors seem to be following Beijing’s lead. 

BlackRock became the first foreign asset manager to launch a mutual fund in China in September; it raised $1 billion and closed a week earlier than expected with 110,000 investors. Overall, mutual fund sales in China are growing. In the first half of 2021, money managers sold a record $248 billion of newly launched funds. KPMG estimates that China’s asset management industry will reach $5.6 trillion by 2025—up from $3.6 trillion in 2020—to make it the second-largest market behind the U.S. 

Infographics by Nicolas Rapp

Since July, daily trading volume in mainland China A-shares on the Shanghai and Shenzhen exchanges—where retail investors account for 80% of turnover—has held above $155 billion, double the daily average in 2019 and 2020, according to financial data provider Wind.  

Hong, the Shenzhen homeowner, says she started trading more during the pandemic and is happy with the “decent” returns she’s made.

Still, China remains in the “early-growth stage of building disposable income that can meaningfully migrate from the one asset class,” such as real estate, to more sophisticated forms of capital market investment, like stocks, bonds, and other securities, says Michael O’Rourke, chief market strategist at brokerage JonesTrading.

More time is required for such a big shift in investment behavior, says Kelly. “Fortunately,” he adds, “everything happens faster in China.” 

A version of this article appears in the December 2021/January 2022 issue of Fortune with the headline, “China hunts for an alternative piggy bank.”

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