China's Socialist Economy With Landlord Characteristics

Chinese leaders pacified the urban citizenry by turning them into an army of real estate tycoons and landlords--precisely the class of people who were shot en masse when the communist party seized control of the country 70 years ago. Thirty years on from June 4, 1989, wealth generated by expensive concrete cubes stacked into the sky on state-owned land and financed by state-owned banks has proven to be an effective balm for taming a restive population.

In April, the Peoples Bank of China released a financial survey of 30,000 urban households conducted in 2019. A summary of the results by 21st Century Business News showed that the average urban family in China had assets of 3.179 million yuan (about $454,000), debt of 512,000 yuan ($73,000), and a fat net worth of  2.89 million yuan ($381,000).

Source: Peoples Bank of China 2019 urban family financial survey.

The average asset value of $454,000 for urban Chinese families is not that far behind the U.S. average of $792,000 (for 2016) reported by the Federal Reserve Bank's Survey of Consumer Finances. However, averages do not reflect the finances of a typical family in either country since the concentration of wealth in the richest households skews the average in both countries. The median asset value was $233,000 for Chinese urban families--higher than the $189,000 median reported for U.S. households.

How did Chinese families get so rich? Mainly by investing in real estate. Housing accounted for 59 percent of asset value owned by urban Chinese families. In fact, housing is pretty much the only sure path to wealth for the average person in China. The Peoples Bank of China survey reported that 96 percent of families were home owners. According to the survey, the average family owned 1.5 houses. Thirty-one percent of families owned 2 houses and 10.5 percent owned 3 or more houses. Personal experience suggests that these extra houses are mostly rented out, so these statistics infer that about 40 percent of Chinese urban residents are landlords.

Source: Peoples Bank of China 2019 survey of urban family finances.

In another reflection of the importance of real estate, average family assets were off the charts in China's two biggest and richest cities--Beijing and Shanghai--both with sky-high real estate values. Beijing families had average assets of $1.27 million, and Shanghai families had $1.15 million--about 150 percent above the national average. Two other pricey provinces adjacent to Shanghai--Jiangsu ($724,000) and Zhejiang ($687,000)--were 50-60 percent above the national average. Families in the bottom two regions, Jilin ($202,000) and Xinjiang ($182,000), had assets about 15 percent of the average in Beijing. Interestingly, assets owned by families in Tianjin--an urbanized/industrialized port city adjacent to Beijing--were less than half the value owned by their Beijing neighbors.

In comparison, the average home ownership for U.S. families reported by the Fed's survey was a much lower 64 percent. A Boston Federal Reserve study of the Fed's survey reported that housing accounted for 30 percent of U.S. family assets, and financial assets made up 40 percent. Fourteen percent of U.S. families owned two or more homes, far less than the 41 percent of urban Chinese families owning multiple homes.

The Peoples Bank survey found that 56.6 percent of urban Chinese families have debts. In parallel with the dominance of housing on the asset side of the balance sheet, home mortgages accounted for 75.9 percent of the debt. A higher proportion of U.S. families have debt (77 percent), but mortgages also account for 75 percent of U.S. family debt.

Today's elderly benefited from the gifting of state-owned apartments that kicked off the housing boom in the 1990s when they were in their prime. Today's young folks have to come up with massive down payments and take on hefty loans to get into the game.

The top 20 percent of urban Chinese families (ranked by debt) have 61 percent of the debt. Young families headed by people aged 26-35 years old are the most likely to have debt (73 percent), while those over 65 are the least likely to have debt (25 percent). The amount of debt by age group was not reported. 21st Century Business News commented that middle-aged and young families are under heavy debt pressure, while older households were most inclined to invest in risky assets like asset management products and trusts. The paper commented that some families with few assets are at risk of insolvency. Most mortgages are borrowed from banks, but family businesses and those with few assets often borrowed from informal lenders.

Source: Peoples Bank of China 2019 survey of urban family finances. 

The wealth distribution is skewed in both China and the United States. The top 10 percent of urban Chinese households control 47.5 percent of family assets, and they are dollar millionaires with average assets of over $2 million per household. The middle 20 percent of urban households control 10 percent of assets, an average of about $235,000 per family. The lowest 20 percent of urban households owned less than 3 percent of assets, but their average asset value was $59,000.

U.S. data show that the share of assets  held by the top 10% of U.S. households rose from 55 percent in 1989 to 64 percent in 2019, but that's not surprising for a capitalist country. While the family wealth distribution in urban China--47 percent owned by 10 percent--is less unequal than in the United States, it's almost the same as it was in the United States in 1989. What's the point of having a socialist economy if wealth accumulation by the rich is not that different from inequality in one of the world's paragons of capitalism?

Moreover, the degree of inequality in China is greater than the survey indicates because it excludes rural people and rural-urban migrants, and it captures less than 30 percent of China's assets.

If the home ownership rate is 96 percent and families own 1.5 houses on average, who exactly is living in all those houses? They are rented out largely to migrants from the countryside and other cities. Nearly all migrants live in rented rooms or dormitories provided by employers. An older survey with a broader sample found a lower 85-percent home ownership rate for urban Chinese families. The distribution of wealth in China would be even more skewed if the rural and migrant population were included in the statistics.

The biggest share of China's real estate wealth was generated by expropriating rural land. Villages were often paid compensation based on the value of grain crops the land could produce. Then the land was reclassified as urban land, and high rise buildings worth millions were constructed and sold off.

This survey covers only a sliver of China's national assets. Another survey by the Chinese Academy of Social Sciences found that family assets were only 30 percent of China's total asset value. Banks had 30 percent, nonfinancial enterprises had 28 percent, and government had 12 percent of assets. Families have minimal stakes in the other 70 percent of China's assets since they own few stocks or bonds. These are de facto owned by the tycoons and communist party functionaries who run them.

Financial assets accounted for only 20.4 percent of urban Chinese family assets--about half the share held in financial assets by U.S. families. The survey said that 58 percent of financial assets were owned by just 10 percent of families. Factories, equipment, shops, and other business assets accounted for about 13 percent of Chinese family assets. In addition to having a larger share of their wealth in financial assets, U.S. families also had a larger share of business assets (23 percent) in their portfolio--10 percentage points more than urban Chinese families.

Assets in China--some owned by families, most owned by...

Nor do Chinese families have any ownership of the land underneath their dwellings--all land is owned by the state. The dollar-value of dwellings should also be adjusted for the tiny size of the units, nuisances of plumbing and elevators that don't work, dirty or crumbling exteriors, and hours-long commutes.

It was not mentioned in the survey, but one of the most popular ways of utilizing this great wealth is to sell one of the houses to raise cash to educate the family's child overseas. The education typically takes place in North America, Australia, the UK, or New Zealand, with plans for the offspring to take up permanent residences in one of the English-speaking bastions of capitalism, and hopes of family visas for parents down the line.