China’s economic development continues to have profound implications for the world economy and, as Canada’s gateway to Asia, for British Columbia. A previous blog looked at the increasing concentration of Chinese economic prosperity among the top-10% of the income and wealth distributions. These trends have been associated with significant changes in the composition of national wealth – away from agricultural land and toward housing and other domestic assets. Meanwhile, corporations continue to be mostly owned by the Chinese government.

National Wealth has Significantly Increased and Shifted Toward Housing and Other Domestic Capital

Chinese national wealth increased from 350% of national income in 1978 to 700% in 2015. Its composition has changed significantly over time (Piketty et al. 2017a). Whereas almost half of national wealth was in agricultural land in 1978, by 2015 agricultural land had been largely displaced by housing and other domestic capital assets as forms of wealth (Figure 1).

Figure 1: Housing Displaces Agricultural Land as a Store of Wealth
(% of national income)

Source: Piketty et. al (2017).

Housing (Structures) Ownership was Radically Transformed in 1998

The growth in housing assets requires some discussion. China’s housing stock was fundamentally transformed by privatization in 1998. Prior to 1978, most urban residents waited to be provided homes by their state-owned-enterprise (SOE) employers. A series of pilot experiments in privatization began in selected cities in the 1970s and ended with radical reform in 1998, when public housing was completely abolished.

The reforms permitted individuals to own housing structures and, for a fee, acquire transferable residential land-use rights for up to 70 years. The owner-occupier home ownership rate was only around 20% in the early 1990s, but after the reform it jumped to 80% in 2002 and to 90% by 2009 (Chen et al. 2016). However, private ownership of land is still prohibited: all urban land is owned by the State; all agricultural land is owned by the State or collectives (Zhang 2015).

House prices increased rapidly. They rose 161% between 2000 and 2010 (Chen et al. 2016). While housing demand rose sharply, housing supply increased incrementally (relative to the change in demand) and remained tightly controlled by local governments. There was no official mortgage market prior to the reforms. Its development since the reforms has been gradual. By 2009, only 27% of households purchased homes with a mortgage. Down payments are 30-40% or significantly higher, even 80%, in some cities. Without a mature mortgage market, the main way Chinese households could obtain a high-priced home in the private market was by allocating a very large proportion of their income to saving. Thus, China’s aggregate saving rate jumped from 38% in 1998 to 50% in 2009 (Chen et al. 2016).

Together, these developments contributed to Chinese net private wealth more than doubling as a ratio of national income over the roughly two decades since the housing system was privatized (Figure 2).

Figure 2: Chinese National Wealth Became Much More Concentrated
Among Households from the Late 1990s
(% of national income)

Source: Piketty et al. (2017).

Households in China dramatically increased their ownership of the national housing stock to almost 100% by 2015 (Figure 3). However, ownership gains in other asset classes were more modest. Private ownership of domestic corporate equity and other financial assets is just above 30% and 50%, respectively.

Figure 3: Private Ownership of Housing Increased Dramatically

Source: Piketty et al. (2017).

China’s Government Remains the Dominant Owner of Corporate Equity

The other major change in the composition on assets occurred in the ownership of corporate equity (Figure 4). The government steadily decreased its equity stake in Chinese corporations up until 2006, since when it has remained roughly unchanged at around 60%. Following the 1979 Law on Chinese-Foreign Equity Joint Ventures, foreign owners began to play a small role in corporate ownership. The proportion of foreign ownership has remained largely stable at a little over 10% since the mid-1990s. Meanwhile, Chinese households’ equity ownership share has reached a little over 30%.

Figure 4: The Chinese Government Remains the Dominant Owner of Corporate Equity

Source: Piketty et al. (2017).

Conclusion

It is worth paying attention to trends in asset ownership in the world’s second largest economy and most populous country. The picture has radically changed in recent decades. Although private ownership of land remains prohibited, in 1998, China abolished its employer-based housing system and moved to a private market for housing structures. Today, households own almost all of the country’s housing stock. However, their gains in the ownership share in other asset classes have been more modest.

Many advanced national and sub-national economies, such as British Columbia, have seen significant inflows of Chinese private wealth in recent years, into residential real estate and a few other assets.[1] China’s rapid growth, the concentration of economic gains among the top-10% of the population, strong institutionally-driven savings behaviour, and the limited ways Chinese households can deploy wealth domestically help to explain these secular trends.

References

Chen, B., Yang, X. and N. Zhong. 2016. “Urban Housing Privatization and Household Saving in China.” Paper presented at the American Economic Association 2017 Annual Meeting, Chicago, January 6-8.

Piketty, T., Yang, L. and G. Zucman. 2017. “Capital Accumulation, Private Property and Inequality in China, 1978-2015.” National Bureau of Economic Research, NBER Working Paper no. 23368.

Zhang, L. 2015. "Chinese Law on Private Ownership of Real Property." US Library of Congress, March 10.