China's billionaires

Forbes has put out its latest list of China's wealthiest men and women. Here is something that initially surprised me when I looked at who is on the list. We think of China as a manufacturing powerhouse, with growth being led by an undervalued currency and a phenomenal export performance. So you would expect that China's most successful business people come from tradable activities rather than non-traded sectors.

Yet the most common source of wealth among the billionaires is property, not manufactures. Five out of top ten richest individuals are in real estate, none in manufacturing. You go down the list and the same imbalance continues to hold.

Why?

I think because incomes from real estate are based on scarcity rents: you buy the right property at the right time, and you get rich very quick. No-one can dissipate your rents. But if you are in manufacturing, you have to compete not only with your international competitors, but also with copycats and imitators at home. So the rents from successful ideas get dissipated quickly. It's not that the overall gains are not large, and even larger than in successful property investments. It's that the innovators can hold on just to a small share.

So real estate creates billionaires; manufacturing creates a middle class.    

Comments

[hari]

Dani-

Forbes list identifies the billionaires as "property"
sector and not realestate, as you substitute.

There's reason for it because most of the property market actually developed in HongKong and moved to (Canton) Gauandong
and across the coastal region.

Forbes also identifies Hong Kong "origin" of some on the list. And property, in China, is mostly high rise apartment complexes, example HongKong.

I think the manufacturing sector will eventually takeover; it needs a bit longer term gestation period to be fully capitalized on the mainland.

A lot of initial input into manufacturing were transfers from HongKong and Singapore.

So your question may not be pertinent at this point in time in PRC development.

[Minivet]

Remember though, it's very difficult to get good economic information in China. A lot of wealth is deliberately hidden. Perhaps the people in real estate are just OK with having a higher profile.

[stedy]

First,you should know that many billionaires in china are not in this list.Maybe the Forbes can't estimate their wealth....like Rong Zhijian.

The second, many businessmen in manufacturing industry came from Taiwan, although Taiwan is part of China, but I didn't see guys like Guo Taiming....

PS:this list may be just base on stocks the billionaires hold. So , it's not quite valueable.

[R. T.]

You should be able to see the ex-ante distribution of returns from each activity in order to conclude if real estate indeed is the most successful business. I guess that the distribution of rents from real estate might be far more dispersed than the distribution of rents from manufacturing. As a consequence, real estate might include both the richest and the poorest individuals in the economy (conditional on initial wealth).

I think that real estate might present some anomalies that could help to explain such fact: low spread of know how, concentrated market power, big players, unusual legislation, etc.

[Chris]

Lots of good comments but my question is what value is the property owner creating and how does the market reflect that? People complain that finance speculators earn lots of money with little actual added value but it seems property owners are the worst of the lot.

[Hafiz]

Could it be possible that manufacturing is dominated by multinational instead?

Or state corporation?

[StevenT]

I think it's pretty obvious that "real estate creates billionaires; manufacturing creates a middle class".

Just looked at other developing countries such as Malaysia, Thailand, Vietnam and even Singapore and you'll find that the richest are those who invested in real estates and the middle class compose mostly of people working for the manufacturing industry. It's not to say that you don't become the wealthest if you go into the tech industry, but only a few will reach the top while the rest will most likely be upper middle class. Manufacturing jobs are what we call 'safe' jobs in contrast to investing and real estate where the risks are much higher.

[liberal]

"I think because incomes from real estate are based on scarcity rents: you buy the right property at the right time, and you get rich very quick. No-one can dissipate your rents."

I welcome the fact that a mainstream economist is able (unlike most of his colleagues) to draw such an inference.

But it's not exactly like Henry George didn't make these points over 100 years ago.

[liberal]

"Here is something that initially surprised me when I looked at who is on the list."

I should add that the fact you were actually surprised by this shows, in a nutshell, how corrupted economics has become.

[liberal]

Chris wrote, "Lots of good comments but my question is what value is the property owner creating and how does the market reflect that?"

The property owner, _qua_ land owner (viz, not as an investor in capital represented in improvements) creates _no_ value whatsoever, since obviously the land was already there.

This was clearly known to classical economists. There are some indications Smith knew it, even though he was working before Ricardo's theory of rent. John Stuart Mill clearly knew it: "Landlords grow richer in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title."

What's amusing is the contortions many (probably most, IMHO) modern neoclassical economists will go through to deny the justice and efficiency of land value taxation. That's probably due to a combination of most non-radical economists responding to incentives (viz, working ultimately in the pay of the wealthy and powerful) and radical economists working in the tradition of Marx (viz, refusing (unlike Dani here) to distinguish between land and true capital).

[tina]

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[robertdfeinman]

Isn't this an old lesson now being relearned? The goals in pre-industrial societies were to become landed-gentry.

One could argue that owning land at that time was equivalent to owning factories during the industrial age, but this is not true. The tenants of the land owner bore most of the risks. If the crops failed they still had to pay rent. Industrialists bear the risk directly.

Many wise wealthy families move their money into property so as to sustain their wealth over many generations. The Rockefellers are a good example.

A practical example: the TIAA-CREF insurance company has offered a real estate-based fund to its participants for the past decade. Here's the comparison:

Broad-based stock fund 6.95% average return over 10 years.

Real estate fund 9.83%.

The real estate fund has never had a down year and operates by buying and managing properties directly.

[brad setser]

I agree with the point about scarcity rents, even if it isn't a new insight. Land -- especially land that can be developed into apartments -- is intrinsically a scarce factor in China; ergo, there are large rents that some have captured. In china, where land is still formally owned by the government, a key "asset" of any property developer is also strong ties with the local government (tho that is true everywhere); the developer doesn't necessary have to pay market price for land that can be developed if the right hands are greased.

The other factor is low real interest rates and the enormous capacity to apply leverage in real estate. The profits on one successful investment can be geared up in round two, and in China over the past few years, prices have gone up and real rates down ...

[Dan]

There was a paper recently written by Xiaobo Zhang and presented at the AEA meetings in 2006 that talked about the existence of asymmetric property rights in China. I think this is a very good indicator of such a thing. China runs its country very much like a business, and they are very keen on foreign development (while not so much on land rights of farmers in the country).

Thus, growth in industries such as real estate would be expected. I am not saying this would come at expense of manufacturing, since manufacturing is also growing, it's just that very rapid growth is experienced by property owners.

[Derek]

Dear Dani,
I like your definition of the middle class: anyone who is not a billionaire!

[Michael E]

China's merchandise exports equalled US$ 762 billion in 2005. Impressive! But if you talk with Chinese entrepreneurs, they'll tell you that competition in manufacturing is extremely tough, profit margins low, and on top of that local governments have controlling shares in many companies.

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