Basically, if you look at an asset breakdown of personal wealth, real estate will account for 65% of all investments in China, while in other countries like the US or in the EU, that number is close to 20% (source: World Bank & Citibank's Investment Research and Analysis). Other than that, because of a reform on the tax sharing mechanism (in 1994), local governments are highly dependent on the real estate market, as 40-55% of their direct income comes from land sales and property-related taxes. That gives the government a very high incentive to keep property prices up and the real estate market booming.

I can email the report to anyone interested in it (sorry, can't just upload to the public here, I worked at Citibank once, could get me into trouble), just send an email to me ([email protected]) and remember to put HN on the subject.

Note, the central government doesn't want high prices, but the Chinese government is not entirely monolithic. "Heaven is high, and the Emperor is far away", is a common Chinese saying - people bend the rules when they can get away with it.

But yes, local governments get a lot of their revenue from land scales. If they are anything like Western local governments, they also get most of their bribes from developments (there are opportunities for zoning bribes, development approval bribes, building inspection bribes, waste disposal bribes, infrastructure connection bribes, and so on, depending on how corrupt they are).

Do you think that is valid comparison? (NB In many ways I hope it isn't as a crash like Ireland's on the scale of China would presumably be disastrous).

You can also see that with their investments in Australian real estate (where I now live). A lot of the apartments now being built are investment properties for Chinese buyers. In a lot of cases, the building is nearly sold out even before construction begins!

An oddly familiar pattern, and one that should give us pause.

Sydney in particular has a very tight housing market due to lots of people moving in but not nearly enough apartments and houses being built. This has kept prices up, but there will have to be a drop at some point. The only question is when, not if, and how much.

That sounds quite ominous - reminiscent of the property bubble here in the UK prior to 2008 (which was completely insane, but very tame compared to Ireland).

How is the rental market holding up there?

Luckily I don't work in the Sydney CBD, so my commute is pretty easy. :)

- China's construction industry is a force unto itself - important economically and a huge employer. Its hard to say 'stop'.

- As it said in the OP - property seems the simplest way to invest money. After all, can prices go down when they are already so low compared to the west?

- In the west we built in the 1960s at (what seemed then) a ridiculous pace, with new building typologies that were often terribly designed. Like us, they will be living with (or in) the consequences for the next 50 years.

- Various levels of govt are already trying to put the brakes on the worse kinds of speculative development, with some success. Aside from the already clear examples of 'bad investment' (like the ones you point out) - the brakes are already coming from other directions too.

Unlike Chinese workers, a Chinese apartment is never going to compete against a western apartment

People forget that China is a command economy. The government tells you where to live and what to do. If you want to live somewhere else or do something else you need to apply for permission from the government.

Cities like Ordos shouldn't make anyone blink. Once the government knows what it wants to do it will be filled overnight.

People in China are not told where to live, or what job to do. The government makes use of various macro-economic tools to steer the economy much more forcefully than in Europe perhaps, and perversely, the market forces (w/ Chinese characteristics!) are also fairly brutal and fast-changing, but people mostly choose their own professions and locations and in many respects, society behaves pretty similarly to the US/Europe.

Not directly, no, but the hukou system still exists, and the choice of living location is in some circumstances still heavily restricted.

I am in China right now. I lived in a ghost city just last year.

In a similar vein, I remember how weird it sounded to me when an american friend told me in texas there are such big malls that people go there for working out (running) indoors.

For example, a large force behind the housing bubble is the drive to increase local GDP, which is a vital promotion metric for local officials; another force is local bank executives' desire to pretty-up their promotion metric by pushing for more "safe" yet profitable loans. Construction companies are mostly just there to ride the train.

Also top party men are rotated from region to region regularly, so they only care about the local economy for as long as they are in tenure, typically 5 years. Whatever happens after that isn't their problem.

The guys who built those empty cities and super-malls moved onwards and upwards. You can always blame the guy who took over after you for dropping the ball, or the guy you took over from for passing you a dud.

Often, the economic rationale is simply the desire to create jobs (on the part of the government to stave on social unrest) and the desire to create profit (on the part of private enterprises that couldn't figure out how to be more innovative and so jumped on the bandwagon of the construction boom without seeing the risks).

As another comment notes, the government has realized this is a bad situation, and they're trying to put the breaks on it, but it's hard to do that and also enable a soft landing so that there's little or no social unrest. They're trying to shift from an infrastructure investment-driven economy to a consumption economy and an innovation economy, and the big debate is whether or not they have the right horses to be able to compete in that race.

Every tidbit you state is fully explained in the article's explanation of the lack of investment vehicles for middle and low income Chinese. When your bank account has a negative real interest rate, then real estate becomes a great vehicle for it, provided there is no crash. I suspect that the lack of non-government media in China causes many of the investors in these properties to have no idea that they sit dormant.

Did you know Ordos has higher GDP per captica than HongKong?

The same logic applies to the entire country's GDP, BTW: take out spending on construction, and China's GDP growth looks a lot less impressive.

http://en.wikipedia.org/wiki/Kangbashi_New_Area

Ordos City itself apparently has close to 2 million people, but there's a fully developed urban housing district designed for 300,000 which has only reached 10% occupancy since 2010.

http://en.wikipedia.org/wiki/Ordos_City#Economy

I think it's comparable to Dubai.

  > There are a lot of things I don't understand about 
  > China's economy

http://asiavalueinvesting.blogspot.com/2011/09/chinese-banks...

They've also built one of the longest bridge that only save like 20 minute of traffic...

http://www.autoblog.com/2011/07/01/china-opens-26-mile-long-...