The paper highlighted today is dense and the mechanics employed to get to the conclusions probably beyond the keenest (well, me anyway) of mortals. The summary though is intuitive and valuable. Videlicet?
China’s multi-year and now multi-decade property boom has come with costs to other parts of the economy. Previous studies, for example, have highlighted how college entrance has slowed in some areas because, at the margin, bright poor kids prefer to mix concrete and make now-money rather than get money-later qualifications. The long term implication from this inefficiency should be obvious.
In the IMF Working Paper from researcher Yu Shi flagged today he takes a look at how diverted capital and talent may have impacted the development of manufacturing and concludes China’s Total Factor Productivity (TFP) would have improved 0.5% per annum without certain resources channeled to property development. Considering the size now of China’s economy that TFP-loss is a very big number.
He suggests three remedies:
1) Liberalize further financial markets making it easier for more firms to obtain finance for real-estate development,
2) Reduce entry barriers to real-estate development (licenses, qualifications and et cetera), and
3) More progressively tax returns from real-estate investment and thus make it harder for non-specialist firms to justify committing.
If you’re an investor keep this note. The next time an investee company brags how smart they’ve been redeveloping adjacent land plots to their factory you should remind them that concentrating on the widgets would have almost certainly been to their (and your) greater long-term advantage.
You’ll find the conclusion from P.39 (if you dare to dive in!) in the full paper available via the following link Sectoral Booms and Talent Misallocation.
Happy Sunday