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Asset allocation in China

Very different from the US, where financial assets represent a large portion of families’ wealth, for most Chinese families, real estate assets (residential) are the top choice and the most important part for asset allocation. According to a survey conducted in 2019, among urban families’ total assets, 59.1% is residential homes while only 20.4% is in financial assets[1],[2]. In a previous analysis on another series of data, housing asset represents 74.1%, 73.8%, and 72.7% of urban households’ total assets in 2010, 2012 and 2014 respectively[3]. Comparatively, in 2016, US households’ mean value of primary residence is only 24.4% of their mean value of total assets, while financial assets are around 42.5%[4].

For one thing, China’s A-share market doesn’t provide meaningful return over the last decade, compared with S&P 500. The chart below is from 2010 to 2019: the black line is CSI 300 Index, which consists of the 300 largest and most liquid A-share stocks, while the blue line is S&P 500.

Exhibit 2. CSI 300 and S&P 500 performance over from 2010 to 2019

In fact, among the 20.4% financial assets, the report said only around 10% (or 2% of total asset) is equity exposure, including stocks and mutual funds.

Meanwhile, housing prices in China is climbing steadily. Buying a home in top tier cities in China is like a leveraged long position in S&P 500 in the US, with lower risks and higher returns. Indeed, it would be comparable to a leveraged buyout deal – and millions of people are actively participating. According to some 2010 info, prices under RMB 30k per sqm[5] were common in Nanshan, Shenzhen; after 10 years, in the same district, new homes are priced at least at RMB 70k per sqm. Indeed, for the same community, prices can easily triple up.

The last decade’s rise is already on the back of a steady growth in the previous decade. In another study, Shenzhen’s housing price index rose from 1 to 3.65 between 2003 and 2013[6]. The same is true for other first tier cities – index increased from 1 to 4.43 for Shanghai, from 1 to 5 for Guangzhou, and from 1 to 7.6 for Beijing. Tier two and Tier three cities generally experience the same trajectory, with average growth rate a few points lower.

With a common 10x return and the ability to take leverage, residential real estate has become the most obvious, safest asset allocation choice with the best return profile for most people in China.

It is also worth noting that many high-quality companies in China, mostly in the internet industry, are not listed on the A-share market. Thus, they remain inaccessible to many people, further limiting their asset allocation choices.

[1] https://www.reuters.com/article/china-household-assets-0424-fri-idCNKCS2260VC (Chinese)

[2] http://pdf.dfcfw.com/pdf/H3_AP202004271378696212_1.pdf (Chinese)

[3] https://www.mdpi.com/2071-1050/12/7/2946/htm

[4] https://www.bostonfed.org/publications/research-department-working-paper/2019/trends-in-household-portfolio-composition.aspx

[5] https://sz.leju.com/news/2020-09-27/06456715630843769180881.shtml (Chinese)

[6] journals.uchicago.edu/doi/full/10.1086/685953

Urbanization and population

According to the World Bank, China’s urban population percentage increased from 36% in 2000 to 60% in 2019, or around 843 million[1]. Two largest cities in China, Shanghai and Beijing, have 24.3 million and 21.5 million residents respectively in 2019 (Exhibit 1).

in millions	2000	2005	2010	2015	2019
Beijing	13.64	15.38	19.62	21.71	21.54
Shanghai	16.09	18.90	23.03	24.15	24.28

Exhibit 1. Beijing and Shanghai residents growth over the past two decades

While the definition for a “resident” is to live for more than 6 month of a given year, two other metrics are “Hukou” and “actual population served / managed” – Hukou, the most conservative one, is a concept dated back to ancient China while the latter is newly disclosed. In 2019, measured by actual population served / managed, Guangzhou has over 22 million, Shenzhen has over 22 million[2], Chengdu has over 21 million[3]. Meanwhile, their official residents in 2019 are 15.3, 13.4 and 16.6 million respectively.

While Hukou population for Shenzhen is only around 5 million, the actual population is 4 times more. The gap seems to be a good proof for Shenzhen’s fast growth over the past few decades, and also implies an outsized demand for future home buying. As further discussed below, Hukou (or certain years of social security tax) has become the prerequisite to buy homes in certain large cities such as Shenzhen. Therefore, fundamentally, the long-term increase in buying pressure is from 1) among the actual population, those who would like to stay in Shenzhen, obtain Shenzhen Hukou and buy homes, 2) the constant increase in actual population managed / served, as Shenzhen continues to attract businesses and provides high-quality jobs.

[1] https://data.worldbank.org/indicator/SP.URB.TOTL?end=2019&locations=CN&start=2000

[2] https://www.thepaper.cn/newsDetail_forward_7843440 (Chinese)

[3] https://m.bjnews.com.cn/detail/159193229415528.html (Chinese)