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3MIX FORUM2019-05-30 11:01
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3MIX FORUM2019-05-23 11:35
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Prognostications 2020Ro Shroff
With the current impasse and fiery rhetoric in trade negotiations between China and the US, there is a lot of speculation regarding negative repercussions, slowdowns and hardships in both countries. The political intransigence on either side seems to be a product of personalities, national pride and one-upmanship. What follows is an encapsulation of several internal and industry forum discussions on how Politics and Economics affect businesses that deal with the immense China market in particular and others peripherally and what strategies can be adopted for survival or growth. These are unscientific prognostications based on industry research, published articles, editorials and intuitive analyses based on the school of hard knocks. They are certainly not meant to be definitive but intended to give a general guideline of what’s in store for doing business in China broadly and in other disparate parts of the world tangentially.
As everyone knows, Political stability and Economic growth are inextricably intertwined. Booming economies like the US are generally the result of stable political structures, notwithstanding the antics and petulance of the tweeter-in-chief. Both the US and China are relatively stable political structures and hence their economic expansions. The US today is a $22 trillion economy while China is a $14 trillion economy and catching up quickly. The interesting anomaly is that the US has a total (government, corporate and personal) debt of about the same amount as its GDP while China has a total debt of about 250% of its GDP ($34 trillion). So, what gives? The Chinese economy is controlled by the government as opposed to market forces and is based on the notion of continual growth and this has allowed it to maintain 6.5% growth for years despite frequent global slowdowns. This is manifested both by government backed institutions as well as the unregulated “shadow” banking system. In the longer term, it is also an ageing country, relatively prosperous at least for the urban population and within ten years China will become like Japan, saddled with insurmountable debt but also too satiated and unable to compete with hungrier economies.
As a design practice straddling both countries (3MIX, an Architecture and Design firm is based in Shanghai and Seattle), we are continually vigilant about the state of both economies and how that may affect our growth or contraction. Happily, despite all the mud-slinging and dire predictions, there has been little perceivable difference within the property development industry in China. On the contrary, we have seen a noticeable expansion and urgency in mega-projects, urban redevelopment and infrastructure and new projects seem to be pouring in with greater frequency. There is always the possibility of things going south and a global contraction, banks getting skittish, lending restricted and projects put on hold. But historically, at least in China, these have been three-month long slowdowns, followed by massive quantitative easing, less restrictive loans, government encouragement to reboot massive infrastructure and urban projects, more domestic consumption, crackdown on corruption and foreign investments and everyone essentially going back to their bad habits.
Our prognostication is that the Trade disagreements will succumb to the eventual checks and balances, some compromises, face saving opportunities and warmer relations once the rhetoric is tuned down and some key agreements specifically about intellectual property “theft” are resolved. With 2020 elections in the US fast approaching, a long drawn out trade war won’t bode well for the current US leadership and China can simultaneously ill afford depleting exports, higher tariffs and rising debts exacerbated by its massive investments in the Belt and Road initiatives. Meanwhile it will prevent any clamp down on the still frothing property market in which substantial fortunes have been invested by a large percentage of the population and risk any form of dissent and social upheaval. So, both economies and leaderships will define a new playing field, resolving some thorny issues, getting back to a normal but mutually suspicious relationship.
While China continues to grow and invest in massive urban redevelopment, taller buildings and new cities growing out of nowhere (notwithstanding the well-publicized “ghost” cities) the US economy on the other hand is expected to slow down after more than a decade of continual growth. However, West Coast cities like Seattle and San Francisco seem to defy those predictions and continue to grow exponentially, especially due to the continual expansion of the tech industry and the FANGS. Residential properties continue to teeter on the edge of affordability (one- bedroom apartments in Seattle renting for $2,500 a month) and the shortage of construction workers continues to inflate building costs upwards of $350 / sf. New York and Chicago also seem to be healthy and the $14 billion developments like Hudson Yards in NY come close to the routine mega projects in Asia. One thing however is certain that overseas money, especially Chinese investments in the US property market has trickled down substantially since its heydays in 2015 and the EB-5 program ($500,000 investment for Green Cards) has all but evaporated. The general prognosis is that the real-estate market in the US will peak soon and a period of stabilization will be imminent, although the complete dissolution of the economy in 2008 is not predicted due to stringent checks and balances in the economic sector in place.
Meanwhile other economies, especially India and the Middle East are confronting their own issues and inner demons. Saudi Arabia and the UAE, traditionally hotbeds of iconic and ego-driven projects, are mired in internal political turmoil, relationships with Iran and Qatar, and a growing population of expats from South Asia. The Dubai market has been in doldrums for at least a year with the property market losing 30% of its value. Several iconic and “announced” projects like Caracalla's Tower at Dubai Creek have been in a state of stagnation for over a year and the 1,000m Jeddah Tower seems stuck at 250m. The Dubai 2020 Expo may infuse some much-needed energy into the stalemate and the six-month long celebrations may thankfully turn the tide.
India on the other hand is gearing up for the results of the next elections and predictably a weaker BJP government. At a 7.2% growth rate, the country has been an anomaly on the global arena. A raucous democracy, India is an infrastructure deficit, environmentally polluted and racially divided country that continues to surprise pundits and nay-sayers about its consistent growth and a stable economic and banking system. Although miniscule by China’s standards (a GDP of $2.5 trillion), it is a vastly undeserved market for its 1.2 billion people. Mumbai continues to be one of the most expensive cities in the world to live but is currently saddled with a huge inventory of luxury residential properties that are routinely priced above $2 million. A new government or coalition may give a much-needed boost to the Real Estate industry and there are already signs of a rejuvenated retail and leisure-based segment along with commercial office buildings. But the country continues to be mired by corruption and bureaucracy, (although becoming more transparent and digital lately) and projects tend to move at snail’s pace, immensely frustrating global consultants and technology providers.
So, the upshot in all this is to stay vigilant, nimble and aggressive, all at the same time, if design firms and advisers are to thrive in these disparate markets. But taken as a whole, contrary to economic predictions, the going generally looks good, albeit a little bumpy, whether selling Tesla or design acumen and global sensibilities.
（NOTE: The opinions expressed here are soly author's own）
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