A Tale of Tier 3 Cities

ATaleofTier3Cities KennethRogoffandYuanchenYang WP/22/196 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2022 SEP ©2022InternationalMonetaryFundWP/22/196 IMFWorkingPaper WesternHemisphereDepartment ATaleofTier3Cities PreparedbyKennethRogoffandYuanchenYang*† AuthorizedfordistributionbyKoshyMathaiSeptember2022 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Thispaperprovidesnewestimatesofthehousingstock,constructionratesandpricedevelopmentsbycitytierinChinainordertounderstandwhereimbalancesmightbeconcentrated,andthe implicationsofanysignificantcontraction.WealsoupdateestimatesofthesizeofChina’srapidlyevolvingrealestatesectorthrough2021,allowingonetolookattheinitialimpactofCOVID-19,aswellasextendingtheanalysistoincorporateurban-expansionrelatedinfrastructureconstruction.WearguethatChinaoverallfacesimbalancesbetweensupplyanddemandforhousingstock,buttheproblemissignificantlydeeperoutsidetier1cities. RECOMMENDEDCITATION:Rogoff,Kenneth,andYuanchenYang.2022.“ATaleofTier3Cities.”IMFWorkingPaper2022/196,InternationalMonetaryFund,Washington,DC. JELClassificationNumbers: F39,G01,R3 Keywords: China,RealEstate,MacroEconomy Authors’E-MailAddress: krogoff@harvard.edu,yyang6@imf.org *TheauthorswouldliketothankBoLi,KoshyMathai,NinaBiljanovska,JuliaFaltermeier,andNiels-JakobHansenforusefulcomments. †TheviewsexpressedhereinarethoseoftheauthorandshouldnotbeattributedtotheIMF,itsExecutiveBoard,oritsmanagement. WORKINGPAPERS ATaleofTier3Cities PreparedbyKennethRogoffandYuanchenYang Contents I.Introduction3 II.TheOverallSizeoftheHousingSector5 III.RealEstatebyCityTier7 3.1CityTierClassification7 3.2EstimateofHousingStockbyCityTier8 3.3HousingPricesbyCityTier13 IV.HousingSectorVulnerabilitiesinTier3Cities15 4.1PopulationOutflowsfromTier3Cities15 4.2UnfinishedBuildingsPervasiveinTier3Cities16 4.3DebtAccumulationbehindtheConstructionBoom16 4.4HousingSectorVitaltoEconomyandEmployment17 V.InfrastructureDevelopment19 5.1InfrastructureInvestment19 5.2TheHigh-SpeedRailways20 5.3TheNewInfrastructurePushinResponsetoCOVID-1921 VI.Conclusion22 References23 AppendixI.SizeofChina’sRealEstateActivity26 AppendixII.ProjectionsofUrbanHousingDemandfrom2022–3527 AppendixIII.ListofDataSources32 AppendixIV.AdditionalFigures36 FIGURES 1.HousingStockEstimation11 2.TotalHousingStockbyCityTier(millionsquaremeters)12 3.HousingPriceChangebyCityTier14 4.PopulationGrowthbyCityTier15 5.HousingUnderConstructionvs.HousingCompletedbyCityTier16 6.Constructionvs.ManufacturingSectorDebtLevels17 7.BreakdownofInfrastructureInvestment19 8.High-SpeedRailwayPassengerGrowthvs.ConstructionGrowthRate20 TABLE 1.RealEstateActivityOverGDP(domesticcontentonly)5 INTERNATIONALMONETARYFUND2 I.Introduction Thispaperprovidesnewestimatesofthehousingstock,constructionratesandpricedevelopmentsbycitytierinChinainordertounderstandwhereimbalancesmightbeconcentrated,andtheimplicationsofanysignificantcontraction.WealsoupdateestimatesofthesizeofChina’srapidlyevolvingrealestatesectorthrough2021,allowingonetolookattheinitialimpactofCOVID-19,aswellasextendingtheanalysistoincorporateurban-expansionrelatedinfrastructureconstruction. Inearlierwork(RogoffandYang,2021,2022),wedemonstratedthatnotonlydoestherealestatesectorinChinaconstituteanexceptionallylargepartofitseconomybyinternationalstandards,butthatafterdecadesofbreak-neckpacedconstruction,thereisariskthatithasalreadybecomeoverbuilt.Thatis,foralltheattentionpaidtotheoutsizedshareofrealestateandconstructioninChina’sGDP,themorefundamentalissueisthatthesectorhasbeenracingaheadforseveraldecadesnow,somuchsothatChinaalreadyhas,orisnearing,comparablesquaremeterspercapitaofhousingtomanywealthyadvancedeconomies.Ifrealestate investmentisrunningintodiminishingreturns,theimplicationisthatthesectormayneedtoshrinksignificantlyoverthecomingdecade,potentiallyexposingvulnerabilitiesinfinance,governmentrevenue,andemployment.Recently,marketpressuresonChineseconstructionfirms,includingEvergrande,underscoretheseconcerns,thoughonemustbecautiousininterpretingtheunderlyingcauseswhich,forexample,canreflectshort-termpolicytightening. Afundamentalquestion,however,thathasonlybeentouchedonintheacademicliterature,ishowtheallocationofhousingandconstructionimbalancesextendsacrossdifferentregions,andhowthismightmatterforanysubsequentadjustment.1Mostearlierresearchhasconcentratedeitheronnationalaggregates,oronthelargest“tier1”and“tier2”cities.2 Hereweshowthat,infact,theproblemofexcessrealestatestockandcontinuingoverbuildingisparticularlyacuteintier3cites,andthattheproblemextendsmorebroadlytoinfrastructureaswell.Despiteprojectionsofdecliningpopulation,andsignificantpricedeclin