Odd Lots x Search Engine

Hello, search engine nation, we have a substitute teacher today. I want you to be on your best behavior. This is not like one of those substitutes where they're going to put in a VHS tape and you're going to fall asleep. This is an episode of another show that a bunch of us over at Search Engine really love. We listen to it. We reference it in conversation. It's called Odd Lots. It's hosted by Tracy Alway and Joe Weisenthal to great financial reporters from Bloomberg. Here are the kinds of reporters who use the economy to talk about everything else in life, all the weird hidden markets that make the world such a strange place. And what's cool about the show is they're just both very brainy but also very curious. They ask real questions they have about the world and then let those questions guide them to all sorts of surprising places, dollar slice shops, the rise of private credit, the economic history of hunting, honestly their range is pretty incredible. Basically, if there's money involved, they want to understand how it works. I learn a lot listening. I think if you like what we do, you might like this show too. We're going to share one of our favorite recent episodes of you today. It's called How Chinese Real Estate Became the Biggest Bubble in History. I hope you like it. We will be back in two weeks with a two-part series that we've made for you. Here's Odd Lots. Hello and welcome to another episode of The Odd Lots Podcast. I'm Tracy Alloway. And I'm Joe Wyzenthal. Joe, we've talked before in reference to, I think it was the US real estate market. Yeah. There seems to be this weird thing going on with housing where it feels like policy makers or maybe people even are not sure what exactly they want it to be, right? It's supposed to be this social good, this affordable thing. We all can live somewhere that we can, you know, preferably a place we want to live in something that we can afford or is it effectively a giant piggy bank and investment vehicle, in which case we would expect prices to always keep going up. Yeah, right. I mean, my personal preference is for housing to be very affordable, very briefly. And then that time that I buy how to accumulate more housing. And then it stops being affordable. That's my, I don't, many people have different takes. I just want a very brief period of housing. Well, this is another thing about housing. It's very important that in that brief period, I don't lose my job. It's very important that in that brief period, my other investments don't go down. I just want a very brief period of housing affordable. But this is another thing about housing, which is like, historically, it is one of the few ladders to big wealth for the masses, right? We've all heard the stories about artists and so-ho buying a loft for like $500, and now it's worth $10 million. Correct. Good for them. The other thing that's interesting about housing, particularly when it comes to affordability, is that this seems to be a truly global challenge so people have lots of theories like, oh, it's because they didn't allow zoning and San Francisco or whatever. And it's like, maybe, but like, I think any question about housing affordability has to wrestle with the fact that this is a really global phenomenon. So it can't be some idiosyncratic thing. It does seem as though places where housing is more affordable, do not have particularly dynamic economies. So it's like, I know the people are like, oh, look how cheap Tokyo is. It's like a Yimbi success story. But like, they had a massive bubble and it's been deflating ever since. And that's not like Japan. Is it like some cutting edge of particularly any booming industries in this population? Japan's still pretty nice. I'm sure it's very nice. I'm not saying otherwise. It's just not clearly not where the action is. I'd love to go to Japan. She was like one of the nice places. And the other thing that's interesting about this, which is that they're all kinds of ills that sort of pit-devil, particularly the rich world these days. And then we look at China's like, oh, they have it all figured out. It seems like housing is a mess in China too. One of these rare, kind of like moments where we can shake hands of China as again, we're dealing with a lot of the same issues. Well, here's the thing. China is like the ultimate example of that tension between investment asset and social good, right? Because even in China, as you point out, there are affordability issues. And every once in a while, you see policy makers try to put limits on house prices in really expensive cities. But then when they start doing stuff that actually pops housing prices, everyone starts protesting, which is a rare thing in China. So that is the tension. I also find real estate speculation in China to be kind of, I thought they were communist. And I mean that on ironically. Like, where did communists get the idea of real estate? No, well, this is another thing because the social net starts going away in the 1990s. And so people have to do something with their money to have retirement income to get the houses and the old days used to be owned by the companies. They're more dormitories. And then when that sort of split apart, I don't know. Maybe our guest news more. Yeah, we do have the perfect guest. The perfect guest. Yes, we are going to be speaking with Mike Bird. He is of course the Wall Street editor over at the Economist and the author of the new book, all about this called The Land Trap, a new history of the world's oldest asset. So welcome to the show, Mike. Thank you very much for having me. Great to be here. I love Mike. We both love Mike. So we're excited. Also someone who spent some time in Asia. Yeah, I was there in Hong Kong as well. So knows the sort of global history of land. And I was reading your book and you go all the way back to like Babylon or Samaria. So very impressive. So why did you decide to look at land? It's a great question. I guess it started, I started my career in London and there's a huge thing in London about housing as there is here, people's lack of ability to afford it. I think it's even worse in the UK than the US because the culture of equity investing and all sorts of other things is so much weaker. But I guess I really got into it when I moved to Hong Kong because Hong Kong felt like London on steroids. The housing was even more expensive. It was part of, I moved in 2018, you there Tracy. It was like the extraordinary bull run, like the absolute peak of the post 2008 surge in Hong Kong. And learning about how land was really expensive but also the government owned all the land and leased the land out and made money from the land, I found that very confusing. And it helped me to sort of dig into things. And I think it helped me to like start thinking about this as like a framework of how land works in different places and how you can use it and abuse it and whatever. And yeah, Hong Kong was a great place to think about that because it's such an example story of how bad things can get. So if you buy property in Hong Kong, what exactly are you buying? You are buying like, you're buying apartment, right? But you don't own the land. So if you say you're a real estate developer, right? You buy a land lease from the government. Like a 75 year, 1990 year land lease, they've clipped back and extended the terms the lease over time. But yeah, that's what you're buying. You're buying the right to use it for a certain amount of time. Does it ever just go away? Like other examples like, you know what? 75 years is up, not your land. There's a big problem. And in these places, in places like Hong Kong and Singapore, there is the difficulty of when lots of the land starts to roll over. When lots of the leases start to get at the end, the question of whether you just bow to political pressure and just give it to people, right? Just let people keep it. Or whether you kick them off and start again, whether you knock something down and rebuild, it's a big, difficult issue, yeah. Mozambique is the other country I know that does this, which is kind of funny. Also communist history there. Anyway, what role does housing actually play in the Chinese economy? So I think the best part of living in Hong Kong was learning how this relates to Hong Kong, right? So put in very simple terms. The 1980s, Gemini Mao is dead. Deng Xiaoping, consolidating power. And you're in a strange position where you have to start or don't want to start bringing in market forces into the economy. But it's pretty dangerous. He's got a lot of political opponents. You've got to step pretty slowly. And housing is one of the areas that's most difficult. China's housing at the time is pretty ramshackle and terrible. It's attached as Joe suggested at the beginning to like the industrial base. Like your employer houses you on a farm or next to a factory or wherever it is. But what China needs is urban, modern, residential housing. So Zhao Zhiyang, who's the premier of China later on and he's one of the sort of peak reformers in Deng's China, he credits this to a conversation with a Hong Kong real estate developer called Henry Fock, who said in a conversation with him where Zhao is explaining like, the difficulty of, oh, we don't have any money and we can't get foreign investment in. And Henry Fock said, but if you have land, why don't you have money? How can you not have money? And basically they started adopting on a small scale initially, the Hong Kong system. They started leasing out land to make money first one of these is in Shenzhen in December 1987. There's an auction, the Hong Kong government gives them the gavel to do the auction. The auction are for pretty small piece of land, but this is a symbolic thing because you know, it's a communist country and the Chinese government owns all the land. They haven't even at this point changed the constitution to make this legal. They're sort of experimenting just at the edge. And then slowly this becomes the main financing model. There's a big tax change in the middle of the 1990s that shifts this. But it's a really good way of making money, especially if you're the government and you own all the land. China owns that in a mainland for communist reasons, but it's actually a handover to some degree from Hong Kong. Actually, can I back up a few decades? What's the land reform? You always hear the people debating, you can always say, "Oh, then today is the two-debt land reform." This is really important. This is what else is. Oh, no, actually, land reform was not them. What is land reform? Yeah, I've got a chapter on this in the book and it was sort of towards the end of it, quite carefully worded. It's not upset the people that feel very strongly about land reform. And land reform. - Things you don't talk about on Twitter. - Yeah, yeah, yeah. - L. Asterisk and D. Rafford. - Absolutely. - The bots don't attack you. - The land reform is mostly middle of the 20th century phenomenon, and it's basically, there was a lot of economic thinking at the time. There's a guy called Wolf Ladishinsky, who was a U.S. Department of Agriculture employee, he was an economist, and he was an obsessive about land reform, which essentially is redistributing, really concentrated ownership of land to a large number of people, especially in the developing rural world. We're not talking about cities or anything here. And he went into Japan after World War II, bunch of other reformers, basically forced the Japanese government at the time to pass a land reform bill, which redistributed an enormous amount of Japan's agricultural land, this happens in Taiwan as well. It happens in South Korea. And there's a huge amount of attempts to do elsewhere to varying degrees across Asia and other parts of the world. Basically, it's by far the most successful in those three original countries. You try it in India, it doesn't work, you try it in Vietnam, at South Vietnam, it doesn't really work, you know? - I think one of the most depressing recurring themes on this podcast is the number of times there is some like sort of very successful project and industrialization or economic development. And then at the end, there's the disastrous, but it's only ever worked in three like East Asian countries, and we have no evidence that any of this works anywhere else. There's a problem with the solution that you cannot use. - Yeah. - Okay, well, the other thing about land in China and again, we're sort of fast forwarding back to the '90s. And we should talk about the Hu Kao system as well later on, but land has this really unique position, I guess culturally, socially and financially for Chinese people, right? Like everyone basically decides they want to be a landlord, they want to own an apartment, even if it's not built, you see the ads in like newspapers, flyers, things like that, in a way that you don't necessarily see them for stocks or bonds, right? - Totally. I think there's a big cultural thing there. I'm never too sure whether I'm like a culture is downstream of policy or policy is downstream of culture. - Fair. - But they clearly is a big cultural impulse there, whatever it's driven by. I remember when I lived in Hong Kong, obviously not mainland China, but you used to get adverts pushed through your door and maybe like invest in the Northern English Riviera, right, there's housing and leads and Bradford to be bought as investment properties. This is a big thing. You didn't get those in leads and Bradford, right? If you live in the UK, you don't get those adverts. So yeah, it's a big cultural thing. It's also a big thing in the mainland, I think, because of financial repression. Basically, you can't invest long-term the equity market in China, right? It's a sideways game. It's a terrible way of compounding wealth. Bank accounts in general in China for a very long period of its modern history had like a real negative returns because of financial repression. So the question is, if you're saving a lot of money, where do you put it? And there's only really been one answer. It's been a completely rational thing for Chinese households to do that. You know, extremely high-saving households buying property after property. A lot of them left vacant. One of the things I say in the book is that China has the symptoms of both the housing shortage and a housing glove, right? It manages to get the worst of both worlds. Joe, you know what I call this? What? China's great ball of money. Yeah, that's right. It's all within the country, from asset class to asset class. So, okay, the stock market hasn't done well for a very long time. Rates on saving is a very low. How did like Chinese leaders feel about this emergence of a very speculative high growth, high return? At least during the good old days. Yeah. Before a few years ago, about the emergence of this industry, about this emergence of this sort of thing that's crucial for living and also becoming a major speculative vehicle. How's this a for living now for speculation? That's what people say. Yeah, I mean, I should say it's an incredibly useful way of building out a city. This tool is like super powerful if you're just starting out and no one wants to invest. It's a really good way of pairing, real estate development with infrastructure. You can pay for a lot of things. You can do it sort of expanding very, very rapidly. Plus you boost other sectors, right? Totally, construction, manufacturing. Employment build out, right? You don't have to do that much administration. It's fairly easy to do this stuff, right? So, there's lots of advantages to it. I think people start to see the problems even at the level of the central Chinese government in these sort of early 2010s, right? And you get this series of like whack-a-mole attempts to get the big ball of money, the big ball of credit out of the system. So the first thing you see is the Chinese leadership saying, okay, banks limits on real estate lending to developers, right? Which is what pushes them into the international bond markets where most of the Chinese property developers fund themselves, then you see the limits on borrowing from the bond market, which sort of come in and out during the 2010s and eventually sort of seriously limited in 2020-2021. But even then, you see Chinese developers trying to essentially borrow through pre-sales from ordinary Chinese households, right? Which is like, you give me all the money to build your house up front. I promise I'll get round to it, you know, not stating actually I've got 20 other projects that I've got to build with your money first. There's no escrow system here. So yeah, you do see the Chinese government sort of waking up to the problems, but it's like in any other country, you know, it doesn't have same sort of Western democratic politics, but how do you get off the train while it's moving, right? And they've tried with the three red lines and the campaign against the real estate development sector in the last five years and it hasn't got very well. You know, something I'm wondering about, you always hear about the CCP trying to learn the lessons of the collapse of the Soviet Union and they don't wanna have that fear and so they're very obsessed with this question of what brought the Soviet Union down. Do they spend much time looking at the collapse of the Japanese real estate bubble and the effect that that had on Japan as an industrial dynamo? - It's a great question. I'm not in direct touch on a day-to-day basis. My understanding was that they did, that this was a preoccupation of the Chinese leadership. I used to hear it a lot from people close to economic and financial policy making, that this was a serious consideration and it was why they didn't want to pop the bubble, which is essentially what the Japanese government and the bank of Japan did at the very end of the 1980s, early 1990s, they seem to have done that anyway. I mean, it is a fascinating thing. There's always this discussion of, you know, on autocratic regime can think in really long term, you know, they think in decades and centuries. But in this case, you know, there was a land financing model that China's local government's had which has been pulled out from under them. There was an asset class that Chinese households could invest in, which has been pulled out from under them. The government hasn't replaced those two things with anything particularly good. - We certainly know that they look at it now, right? 'Cause we had Richard Koo on the podcast a couple of times and we know that deflationary spiral caused by real estate collapse is kind of a topic du jour over there. Talk more about the three red lines, 'cause this is something, I remember, they came out when we were both in Hong Kong and you could see why policy makers were doing it. And to some extent, you know, okay, house prices came down and there's less new builds and things like that nowadays. But they also seem to kind of flood them, right? - Yeah, totally. So the three red lines were basically the Chinese government identifies the real estate developers as the tool through which they're gonna cool the housing market down. And they come out with the three red lines which are three different metrics of debt to cash and other sort of debt metrics and they basically say if you violate one or two of these, you can maybe keep borrowing only to refinance all debt. If you're green on all of the three red lines, you're fine, right? If your metrics are okay, keep borrowing, go for it, but none of them are at this point. And if you have three red scores on the red lines basically, if you're violating all of these, no borrowing even to refinance, right? You've got to pay down debt. Now, these companies are some of the most insanely structured financial vehicles in history, right? They can only expand through extremely rapid, debt-driven growth, right? The model is such, you know, if you're ever grown and you're paying like a 15% interest on your borrowing, you've got to keep borrowing to expand, right? It's not a good idea, but you've got nothing else, right? - It's a funny thing about Evergrande also is the diversification into a bunch of other things. I remember again in Hong Kong asking someone, like we should do a graphic of China Evergrande's all their different businesses, right? Because it would be really interesting. And it took like three weeks to make. And when it came out, it was almost unreadable because there were just so many of them, like, split out. - You know, it sounds like we work. I mean, that was a company that had diversified into literal wave pool business. And about a hundred other things. So, and we also just an insanely complicated, leveraged organization that was a multi-billion dollar unicorn now is worth a bag of free does. We mocked when they bought Faraday Futures, the US EV company. And we all mocked, right, Evergrande saying, we're gonna be an EV company. - Honestly, no idea. - I'm like, maybe if the three red lines hadn't come in, we'd be like-- - They do seem to be this personization of Chinese companies. We're on a long enough timeline. They're all becoming EV companies. Like I do was a great article in Bloomberg earlier this week multiple. vacuum cleaner companies in China that are now releasing EVs. So I guess I'm going to say that their argument was always like, you know, where do you put your car in the car park in the estate that you live in? You built that? It was still a vertical immigration. Yeah. They believed in it. But basically, yeah, they bring the three red lines in. The real estate development set to begin contracting very rapidly. The most indebted companies get into trouble almost immediately. But also some of the companies that people thought were pretty safe. The borrowed at pretty low rates are getting into trouble fairly quickly as well. You're sort of country gardens, China, Vancouver, like they're all getting into trouble quite quickly. The way I think of it is that basically the Chinese government attacked the sector that had grown up to intermediate between the households and the local governments, but they didn't change anything about the incentives for the households of the local governments. The households still need to invest. The local government still need money from somewhere. And these companies were just making that arrangement work for those two sides. I see. And destroying them does nothing really causes a lot of distress, construction, activity drops. Lots of people aren't going to get the homes they invested in through the pre-sale system, but it doesn't really address the actual core driving forces. Talk a little bit more about the local government finances and what it is about land that is particularly important. Because there are other ways that local governments could theoretically taxes all that stuff. I was never sure what the driving, if the driving force was at the sort of Beijing national level, or if it was the local governments that, you know, first started doing this because they're like, "Oh, here's a way to make money and develop and look good in Beijing's eyes." And then Beijing just kind of went with it. So I would trace it back largely to, as I said before, you know, people started experimenting with land auctions, land sales from 1987. It starts to get more popular in the early '90s, but it's 1994 when they changed the tax and spending system, the distribution of spending and tax responsibilities between the Chinese central and local governments that really sort of hammers it at home. So traditionally China, people's Republic, quite decentralized in terms of revenue and spending obligations. Local governments did most of the tax raising, they did most of the spending. The central government told them there were certain things they had to do, but they did it all fairly independently. And then, in 1994, they switched the system. And the central government says, "You could raise a rep, but we'll take most of that." Right, yeah. "We'll tell you how much you get back of that." It became a much more centralized system. And overnight, the local governments were left with huge spending responsibilities, those don't change, but only making sort of 60 or 70 percent of the money that they needed to fund them. They stumbled through the 1990s trying to find ways of doing this. There's lots of sort of flagrantly illegal administrative fees and fines placed on things. This actually gets them in trouble because it's very politically sensitive. There's rural Chinese residents being absolutely rinsed for anything. The local governments can get their hands on. And they land on land, basically. They see the land auctions, which are off-balance sheet revenues. They do not count for the purposes of being remitted to Beijing in the same way that normal tax revenues do. And they say, "Right, okay, that's it. That's what we'll do. We'll raise money." And you see the proportion of income, rise and rise and rise very aggressively through the late 1990s. From a pretty sort of residual amount that was useful for land allocation, it wasn't mostly useful. The beginning for raising money and it becomes the main fund raising tool. And then they're in the trap. The land trap. Has any country ever successfully gotten out of this type of situation? It depends on what you mean by success, depends on what you mean by success. Without a massive collapse or without a period of very long stagnation, which seems to be what China is in now. I would say, basically, no. And funnily enough, I actually think one of the best cases for relatively rapid returns and normal sales after 2008 in the US, specifically. You can tell how few cases there are that I'm using for the great recession. This is the best one. It's like, this might be the best outcome for a number of different reasons, but yeah, that might be the best outcome. There are places that didn't get into the trap in the first place. Right. That seems to be the ideal, probably. I've obviously never been to mainland China. All of the China news that I consume is on propaganda that makes it on to my Instagram reels that shows all these incredible futuristic cities and robots doing everything. A hundred percent of my China news consumption makes it look like paradise on earth. Again, because I only consume propaganda. Is it actually stagnating? I will say I can't claim to have been to mainland China for years now. I think it is. I think the long-term threat from undermining what was really right at the middle of the Chinese development model for a very long time and not replacing it with anything has been really dangerous. You've seen this effort as investment in the real estate sector has dropped and dropped and dropped to drive it into the manufacturing sector. But the reality is that the manufacturing sector as big as it is in China isn't big enough to productively absorb all of this investment. This is the question. Can the Chinese manufacturing sector just be so dominant that it just offsets the decline of real estate? And your analysis is no. My analysis is no. Chinese economy is too big. I would say. And two big means that the domestic real estate market is absolutely gargantuan. Right. The thing you're trying to replace is enormous. And there's only so many biosphere products in the rest of the world. And this is why you see, I think, the anti-involution campaign. Right. Trying to get consumption up. Exactly. The pressure against it. Because the sort of consequences, the negative consequences are already starting to display themselves. And we're really like three years into this really big push to drive the investment into manufacturing. And it's showing those problems in a way that it's a real estate much longer. I don't think it can be a like for replacement. Wait. Talk more about real estate and productivity. Because this is something that I didn't really internalize until I read the chapter in your book, The China chapter. Yes. So there is a lot of really, really interesting research about real estate in China and what it's done to productivity. So if you think about it from the perspective of we're going to get into a banking argument that's already going to get me in trouble as well in terms of the amount of credit you can have. But if you think there's any constraint on the amount of credit, which obviously in China there is, there are actual like targets and limits. It's still a fairly state-oriented system in lots of different ways. And the resources going to one part of the economy means they aren't going to another part of the economy. And in China's case, this means employment, it means material investment, it means steel and concrete and copper and everything else. The real estate sector in general, in the long run, I think has pretty low productivity. You can build constructively in places where housing's really in demand, but there's only so much you can get out of it. And you're not making news stuff. No, totally. Certainly in China, what has happened and what was certainly happening during the run up to the three red lines policy is you saw a lot of productive entrepreneurial and innovative activity instead going into real estate. We talk about Chinese real estate developers having lots of arms. Every big Chinese company was trying to run a real estate company on the side during the 2010s. Right? Because there's so much money to be made. Why not? Why not do that as well? And there's really interesting research room. You see at the IMF talking about how individual Chinese entrepreneurs would go into real estate over time because there's so much money to be made. And it is productivity destroying, especially if I think you're in a state-oriented financial system where you're not probably going to see like a 2008 style crash. This is where you see the consequences come through. Ah, it's interesting. You know, I'm thinking about that line in the sopranos where AJ tells his son he's like, by real estate, they're not making any more of it. Whether China, that's not really true. Like AI artificial islands exist, be again in the artificial islands, literally a drop in the ocean. Yes, or somewhere, you guys heard somewhere. But more importantly, again, if the mainlining consumption of Chinese propaganda, I always see these things like this used to be a desert. Now it's this beautiful, like, farmable land and there's greenery here. Like, whether it's China or elsewhere or the history of land, like, it's not really that fixed. They're always find new ways to sort of create habitable land. That's what it used to be human. I think there's two things that one is like actual reclamation, which is like, we've probably added like a, by the way, I think that's the most powerful word in English language, reclamation because it's like, it means turning watery land into land. Yeah, but the implication is like, we're reclaiming it. We are reclaiming what used to be art. I think that's such a powerful word reclamation. Like, Francis Bacon sort of things, very like, you know, man's dominion. Yeah. It's like, what this land that we can't live in was only a, we were temporarily embarrassed unable to buy the land. In the grand scheme, it's always good to do land reclamation where you can, but there's really not very much of it. Okay. I think the more interesting way that you can create more land in the way that I think of it is more like, if you think of land as a, like a commutable, reachable area, then we've always a transport land, right? It's like the Bronx wasn't useful land a hundred and fifty years. A couple of years ago, and now it's extraordinarily expensive land because you can get into the productive center of New York. Right. And that's actually one thing that loosens the sort of trap conditions around land over time. You see this in the U.S. like, during the early 20th century, you saw New York, for example, loose and a lot of its problems with housing in real estate because sudden it was like the outer boroughs you could populate full of people and they could work in Manhattan still and that was fine. And that was a bit like creating multiple New York's worth of land to attach to it. Oh, here's where we can talk about the hookout system because that ended up being precisely a limiting force on this dynamic. Yeah, absolutely. And I think that that feeds into the whole question of the Chinese welfare system and the fact that Chinese households are driven to invest so aggressively in land, right? If your welfare is linked completely to the place where you grew up and you become a migrant worker and you go and work somewhere else, then you're going to want to invest very aggressively either in real estate where you can in the place you move to or in real estate at home. It's essentially like a sort of savings technique more than it is. Again, in China, it feels like the land use and the land as an asset are more divorced from one another than anywhere else. You can see this in the rental yield data, right? Rental yields in China, rents in China are not expensive. Even in, you know, the really popular cities, they're not expensive at all. So that sort of gap. And the hookout system really feeds into this by essentially it's another force driving Chinese households to invest more and more and more. Sorry, I don't totally understand. Explain a lot of the what is the essence of the system? What are the constraints of played and then clarify like how it how the incentives therefore are to acquire more. The essence of the system basically is that you have a welfare system that is linked to the place where you're registered as a household. It's usually the place where you grew up, right? So you're able to get all sorts of different ordinary welfare state things based there only. And if you move for work, it doesn't matter, right? So you're not eligible if you're a migrant worker to all of those things in Shanghai, for example. And these things are really, really. So you can move there. You can move there. But you really be sort of literally a second classes. Yeah, absolutely. So this is without huge amounts of external migration or with almost no external migration. Really, China has been able to create the system that lots of other parts of the world have with very poorly paid migrant workers turning up who don't have many rights in the place they're moving to. These are the people doing the construction jobs that people doing a lot of the low paid work. I don't know if this still happens. But I remember in the 2000s, if you early 2000s, if you walked around Beijing at night and looked in the windows of some of the restaurants, the waiters would be sleeping on the table because most of them came in from the farmland didn't have access to housing. So kind of crazy. Yeah. Yeah. People who are sort of more on the immigration restrictionist and in the US will often say things like, you know, the US has actually fallen behind on productivity because we have this endless supply of cheap labor with diminished rights. Had we not had that, that would have forced US firms to do more capital deepening, maybe invested robots, et cetera. It's interesting because we think of China as a very advanced industrial nation. And yet your description of that makes me think that story doesn't really hold water. Totally. And I understand why people concentrate on that element of the Chinese economy. It's like the most exciting, interesting bit. And you don't need to downplay in any way the advanced manufacturing and the sort of hyper futuristic elements of it to say that that doesn't represent the overwhelming share even Chinese industry, right? Which is relatively low productivity, relatively low return. It's at scale, but it's not enormously like futuristic. And certainly once you get out of the manufacturing industry, you are going into the standard East Asian development model, whether service industries, productivity is absolutely awful, right? Really, really poor service productivity. So yeah, I think it's the two things are true at once, right? It's large and it contains multitudes, but it's not most of the story to me. Do you see any signs that Chinese people are starting to, I guess, move into other assets like equities, probably not bonds, but we know that government has been trying to stimulate the entire economy. And I think they've been pretty clear. They've been trying to lift various asset prices, not housing. Well, now they're doing housing as well, actually. But do you see any signs that people are starting to change their minds on something like Chinese equities? I think to make the Chinese equity market really work, you would have to make a series of deep political decisions about the way China's run, that I think they probably won't make, which is basically things like Jack Maul when he got really slapped down, right? Basically, you need to allow that sort of behavior, right? You need to allow the innovation, you need to allow the entrepreneurs to sort of go nuts. You can't have all of these restrictions around. We don't want the young people playing video games, and we want it to be driven into this kind of robotics and not that kind. And all of those sort of limitations are going to, I would say, prevent that from happening. There's too much political activity that a Chinese company has to do. What about just like the hyper competitiveness? I mean, people say, well, there's hundreds of EV companies in China. Most of them are going to fail, and yet you read about new launches. I don't know, like this is one of those stories that I really like because it feeds all my biases. So therefore, I'm sort of very skeptical of it, but I've probably repeated. It's like, oh, like China's stock market hasn't done well because they're too good at capitalism, because it's too competitive, because they really get it. They're really competing. It's driven all this abundance and so forth. Like, is there something to that that like the reason Chinese equities haven't done well is because with such intense competition, with the provinces all having their normal champions, that none can really sort of capture something that might reflect sort of monopoly rents. I think there's definitely something to that in a way. When I think about that, I would say it's true when you're subsidizing the competition. It's not true competition in general. Right. It seems crazy to me to say like net bad if everyone's getting like cheap inputs with lots of competition, but the provinces still do have a role in subsidizing either implicitly or directly in subsidizing their national champions. When she says, yeah, that we want to make spark plugs a big priority for the next five years, they all go, yeah, they still do that, right? They scramble to find their local spark plug maker. I think there's lots of like American examples and examples elsewhere in sectors where people said, oh, it's too competitive. No one will ever achieve it. The Uber is a good example. People said this would never work. It does work, right? So there is a scale that you can build where I think you develop a value even in the market with this really competitive and really sort of low entry costs. But you won't do that if every other, imagine a world with Uber, but where every other rideshare company was aggressively subsidized every time Uber got above a certain market cap, then yeah, you wouldn't have Uber at a certain market cap. I'm really curious because again, the book goes through, it's not just China, it goes through all sorts of land models, but what was the most interesting one that you looked at? Not only does it go across different ways that different countries treat land across the world, it also goes across time like 3000 years worth of human history. Yeah, I should emphasize 21 listening. I was really interested in the China stuff, but it's not at all. The two most interesting to me, one of which because I live there and I think it's the most unusual and fascinating real estate system in the world is Singapore, which has defied in many ways a lot of the limitations that other countries have seen. And one of the first parts of the book, which is colonial America, where there were all of these efforts to turn land into money, right? These colonists get to a place where they have essentially to them infinity land, it just keeps going on and on. They don't know where it stops. It seems to be relatively fertile and good and more people turn up, but have shortages in cash and labor and everything else. And as all of these efforts to turn land into money with public and private land banking projects, I found all of that like absolutely fascinating. It's not actually something I knew very well before starting to research the book. Yeah. So Singapore and colonial America. What is it about Singapore that makes it? I actually, I don't know why I sort of assumed they did the same 99 year land lease. This is the most interesting thing. They start off with all the inherited things that Hong Kong starts off with, you know, up until the middle of the 20th century, the cities have run on very, very similar lines. Hong Kong goes off in one direction and Singapore goes off in another and the Singaporean direction is basically how do you maximize home ownership permanently? How do you have a sustainable model for making sure people can still afford to come in? So what they have is this bizarre public private system. I say bizarre. It's very impressive where the government owns most of the cities land, not all of it like in Hong Kong, but most of it. And they have the Housing and Development Board that builds housing estates. They then sell the units in the housing estates to Singapore in systems. You can only own one. You can't own multiple and rent them out. The restrictions on how long you can hold them before, but there's an internal market. You can only sell them to the Singaporean systems and permanent residents. The amount of building is done to make sure that everyone can afford to come in. Did they really divorced usage from speculation? Totally. They divorced usage from speculation and a place that I think most people think of as very capitalistic free market, low tax is basically decided. This asset class, land and real estate, this is something different. We're doing a different thing with this. The normal force is simple. There's so much international money. Sensor of capital and trade flows is rich. They do commercial REITs though in Singapore. They do. I remember this because when I was in Singapore, I saw the ticker symbol on this side of a few buildings. It's like you could invest in this. But anyway, yeah, but the residential real estate, and they've done this in, again, they decided land was different. They have a thing called the Land Acquisition Act, which really allowed them to strip a lot of people of their land extraordinarily low prices through the 60s, 70s, 80s. It's allowed them to do something very, very different. I don't know whether most countries can sustain the idea. that capitalism works for everything but not land and what's just going to be one Singaporean senior politician describes it to me as piracy what they did in the in the 70s and 80s pennies on the dollar basically demanding people hand over this land so it could be housing for Singaporeans but it has worked very well. Okay so China probably cannot pursue the Singaporean model at this point right but why can't they institute like a stronger social safety net so that the burden of saving for retirement for health emergencies things like that doesn't always necessarily fall on the citizens and therefore they have to invest in highly speculative assets. Yeah they should is the answer there seems to be huge political opposition to doing this at the top of the Chinese Communist Party and it's bizarre again because you taught some of my Richard Kuh and it'll give you it'll explain why if you don't do this this is the consequence right Japan is the consequence long term stagnation it's gonna be really difficult they should do all that and maybe they will be sort of drummed into it eventually because I think the alternative is both stagnation and lots and lots of trade friction with the people you're exporting to as we've already seen. Right because it's not just the U.S. is it everyone's sort of no one there like got to be a lot of countries that are not real no one's totally happy with it it's a weird it's a weird mix because for some countries it's like if you're not going to make some of these items right if you're a country that's simply not going to make EVs then why should you care about getting the really cheap EVs but everyone's got something to be upset about in Southeast Asia it was always steel when I was there everyone wants to have their own local steel sector and they don't like the Chinese dumping of steel in Indonesia they don't want like cheap Chinese direct to consumer merchandise coming in because it messes with their small and medium-sized businesses I guess for most of these countries the difficulty is do you want to pick a fight with the Chinese government it's not an obvious question like it is in the U.S. I guess I just have one last question and you know the sort of Singapore example is what reminded me like land is weird like the idea that you could have a capitalist system except for residential land a lot of people actually kind of think that you hear what is the georgists right and they think like no land is special and we need to have these like special taxes on ownership and yeah we love free markets but again maybe because there's always so much land they're not making much more of it etc maybe there really is something to do it's sort of unfair like I get born in the year 1980 and I already a bunch of people already own the land around me which doesn't really seem fair it's like I was just born where's my chance I have like we're never going to go to the pure Singapore model but are there things that we could do with the tax system that would like sort of further hammer home the idea that residential land is for living yeah I think there's dozens of different things you could do but I mean one of the big things is that the legacy of Henry George and the politicians in municipal America that really loved Henry George is that America has relatively high property taxes anyway you can do all sorts of things with property taxes to lean more of the value on the land rather than the structures right yeah lots of states lots of cities have done this I think it's going to be increasingly important in the future because what you're going to get is increasingly people inheriting homes from their parents when you can't afford them and then that main store of wealth is about whether your parents decided to buy in the right place at the right time I talked to a lot of 70 year olds who'll be like well I picked my two bedroom flat in 1973 and yes I bought it for three and a half dollars but it's mine that's going to be a lot less tenable I think when it's handed down wealth so yeah there's there's loads and loads of things and Henry George is in the book the political consequences have George's and fell apart in there too all right Mike Bird thank you so much for coming on all thoughts congrats on the book thank you very much Fabian Joe that was really great and I genuinely the book is great yeah I love talking to Mike once again I'm just like isn't he been like on the internet as much as we have how do you how did you write a book of this time I don't understand how anyone writes a book especially a very serious book on a very big meaty topic but I just really while tweeting constantly while tweeting he tweets a lot speaking of promise yeah it's like it would be one thing if you were never online he's online as much as I am okay you know you ask that question about whether or not Chinese cities are actually futuristic yeah I have an anecdote on this point I think I might have said it before but China is the place where I went to both the most impressive bathroom ever in like a highly futuristic luxury shopping mall in Beijing and also the worst one ever in my entire life which was in a rural a rural village vivid detail no I was basically a hole in the ground right yeah terrible China it's a land of contradiction thank you thank you for highlighting the cliche no I thought like it did it always did seem very interesting it still does that like there's so much speculation that happens in China and I always found that to be a little weird I also just find the idea of like buying a property but it's actually really you're not buying it early buying the property for like 75 years to be a little weird but on the other hand that kind of exists in New York yeah yeah and in the US like look we pay property taxes and perpetuity which means to some extent that when you own something you are paying a permanent rent to use it and if you stop paying that rent then you could theoretically lose it so maybe it's less weird than I thought it is actually we should do more on a Singapore specifically like but also you know like I'm not sure to your point in the very beginning whether people actually want the divorce between usage and speculation yeah I just think that for the several of the last decades people didn't have to choose you got to live and you made a lot of money I think it's very hard to get off the train once it's kind of rolling right yeah that's the problem that we're seeing in China and now they're trying to walk this very fine tight rope where it's like we don't want to make everyone incredibly poor but we also want to depress housing and the importance of housing in our economy in order to boost manufacturing and productivity this is why again my proposal affordable housing for one year oh yeah then it goes back to being really expensive all right well you can suggest that Joe yeah I'll run on that I'll run on that I'll run on that platform all right shall we leave it there yeah this has been another episode of the All Thoughts podcast I'm Tracy Allaway you can follow me at Tracy Allaway and I'm Jill Wiesenthal you could follow me at the stalwart follow our guest Mike Bird he's @Birdyward and check out his book The Landtrap a new history of the world's oldest asset class follow our producers Carmen Rodriguez at Carmen Arman Dash will benefit a Dashbot and Killbrooks and Killbrooks from our AdLots content go to Bloomberg.com/AdLots with the daily newsletter and you can chat about all of these topics 24/7 in our discord discord.gg/AdLots And if you enjoy all thoughts if you like it when we talk about the world's oldest asset then please leave us a positive review on your favorite podcast platform and remember if you are a Bloomberg subscriber you can listen to all of our episodes absolutely add free all you need to do is find the Bloomberg channel on Apple podcast and follow the instructions there thanks for listening to us.