Friends in China

I met couple of old friends, who have been spending more than a decade in China last Sunday. I learned that there is a huge divergence between the economic performance of the coastal and inland regions and based on the anecdotal evidence, the inland provinces are faring much better than coastal provinces. Coastal regions, which accounted for around 60% of sales, have dropped to current 45%, according to a friend that worked for Qingling Motors.

I heard comments about residential property demand, as second-tier cities look more promising with government offering monetary subsidies to home buyers rather than building economically affordable housing for them. An absolute increase in supply will be largest in cities such as Shanghai, Guangzhou, Beijing and Tianjin. I was told there is some investment opportunity in tier 2 cities like Chongqing. In January this year, this province sold 5,000 units per week and in February 2009, a new record was created at 7,000 units per week. The city will see some 8 million people moving to the city centre from the Three Gorges Dam area while the average home price was RMB3,400/unit and family income was RM4,000.

Key reason for the optimism is the infrastructure investment with central government’s emphasis on people’s livelihood rather than traditional infrastructure. Today, China is in the middle and late stage of industrialization and its urbanization is accelerating. The rich provinces like Beijing, Shanghai, Zhejiang, Guangdong, Jiangsu that have the resources to invest heavily all recorded investment growth lower than the national average in 2008 and now the strongest growth has been seen in inland provinces. Infrastructure and industrial facilities of these provinces are well built – room for large scale investment is very small. In contrast, the inland provinces are just in the early stage of industrialization and urbanization – therefore there is more room to build.