When I sit down to speak with Eric Wo, Managing Director of Savills North China, he is dapper in a crisp white shirt and dark suit despite the heat of the Beijing summer. Traditional Chinese paintings and scrolls with ink-painted calligraphy adorn the walls behind him.

Eric Wo was born in Hong Kong and studied in the UK. He attended a boarding school in Wiltshire, before taking a degree at Southampton University. Diploma in hand, Wo returned to Hong Kong in 1990 and joined real estate company First Pacific Davies (predecessor of Savills) in 1995. A year later, Wo moved with the company first to Guangzhou, then Shanghai, then Beijing. In 2006, he was asked to set up Savills’ South West China division out of Chengdu, where he remained until he returned to Beijing in 2023 after being made Managing Director of Savills North China.

“That was a cold start when I was put in charge of the Chengdu office,  and our competitors were already in the market for over one year,” explains Wo. “It was a tough post and hard to survive because the market was not very mature in Chengdu at that time. And for Savills, it was also very challenging to find the right person for the role. Luckily, I started up from setting up the office, then I opened the business successfully, and I stayed in the post.”  

Wo’s role as MD of Savills North China is a culmination of three decades working in the same sector across the same region for the same company. He has witnessed the learning years of the 1990s, the boom years of the 2000s, the regulated years of the 2010s and the challenging years of the 2020s.

“From the 1990s to 2010, the market grew very fast. Beijing, Shanghai, Guangzhou, Chengdu… a lot of projects were built in that period in every major city across residential, commercial and retail [sectors],” Wo explains. “The market growth was so fast that people couldn’t cope. During that time, our biggest challenge was to find enough experienced staff to do the work because the speed of the building and new projects was so fast.”

International companies like Savills succeeded because they brought professionalism and best practices to China, Wo explains. However, by around 2010, a lot of local companies had caught up with the international companies and the huge profits previously seen were harder to achieve.

“Local companies learn fast, and our staff or staff from competitors went to local companies or opened their own consultancy firms, so after 2010, some of the professional works were taken by smaller local firms, ” he says.  The market competition had become even more intense, and to make Savills stand out against its local competitors, Wo focused on ensuring the company had not only the best business practices but also the best company culture. Wo believes that a great corporate culture attracts the best talent, which ensures Savills stays ahead in the race for excellence.

After the development boom in Chengdu started in earnest, the challenge for Wo was finding human resources as it was hard to get good people and train them quickly.

Like selling a product, recruiting into a company requires sales and marketing. Sales, Wo explains, is the way you recruit people and how much money you pay them compared to the next company. “Instead of hunting for good people, I thought, why not to get them to look for us,” he says. “Especially at the start of my business in Chengdu – I joined a lot of forums and conferences that enabled me to show to a large audience how we are thinking very positively, that we have a good company culture and deal with people fairly, and we are a professional service company in Chengdu.”

Wo explains that it’s not necessarily about paying your staff the most but ensuring that you are rewarding them properly for achieving results, providing them ways to better themselves through learning, development and having a route to promotion.

But for Wo, the most important thing is ensuring the team is happy. “People want to work happily. But happy doesn’t mean having parties all the time,” he emphasises. “People are happy when they are treated fairly and don’t have to deal with internal politics. If there is good internal management that keep internal politics at bay people work happily.”  

“Company culture and integrity is still an edge for foreign companies. It makes it easy to attract the best talent,” Wo says. “We need to develop new ideas and keep ourselves in advance of the market.”

Prior to around 2010, foreign companies had products or services that China didn’t have and therefore could sell these at a high margin. But with China’s rapid development, companies started to be able to produce similar products at a lower price, meaning the foreign companies couldn’t hang on to their margins as they did before. “Foreign businesses that want to do good business in China have to bring in the best services, the newest technology and really good professional products and services. Those with a 1990s mindset will not survive,” Wo says.

Around 2015, a lot of foreign developers and Hong Kong developers started to exit the China market due to tightening of real estate policies that made the sector less profitable. Instead, they were replaced by state owned enterprises or local governments who had no shareholders to please.

Wo and I discuss the more recent challenges: the Covid-19 pandemic, the economic slowdown, geopolitical tensions, and China’s real estate slump. Wo tells me he believes that the economy is a periodic problem, and it will settle down eventually.

The most important thing to consider when the economy is going through challenging times is to control costs, Wo says. “Previously, the aim was always to grow your business, but nowadays, the goal is to sustain your business and consolidate,” he says. “This is a great time to think of new ways to do business, new products to launch or new markets for geographical growth.”

For example, as the US and European economies slowed, China looked to open up new markets in the Middle East, Southeast Asia and South America.

“Look at extending your business without having to invest too much. Consider how to raise income or profit of the company little by little,” advises Wo. “And develop new products and new technologies – always be thinking one step ahead.”

Savills is involved in all elements of real estate apart from the construction itself. From planning a single building to an entire city block; pre-management consultancy and sales to leasing and project operations and management – the company provides a full service across the retail sector. Moreover, the company now provides a property, asset and business valuation service for those looking to leverage their equity stake, receive investment or list on a global market.

“There have definitely been ups and downs, and the market has changed quite a lot since Covid-19, but all our businesses have remained strong,” Wo says. The key thing, he advises, is that “in order to earn and survive, don’t think you can get quick money or easy money. You have to work harder than ever. This period will pass in a few years’ time and so we should prepare before the good times come.”

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“Enough is enough,” said Judge Linda Chan as part of her verdict, appointing New York-based management consulting firm Alvarez & Marsal (A&M) to carry out liquidation proceedings for the Guangzhou-based developer. A&M leaders said they would try to maximise how much of the company can be “retained, restructured, and remain operational.” Evergrande’s chief executive said his company would ensure that outstanding home projects are still delivered.

Evergrande, which has $300 billion in liabilities (equivalent to the GDP of South Africa), defaulted on its bond payments in 2021 and was unable to offer a concrete restructuring plan to offshore creditors despite 18 months of negotiations.

What comes next is the long and complex process of liquidation and restructuring, which is complicated by several factors:

• Evergrande’s vast real estate assets (around 1,000 projects) are mostly in mainland China. Therefore, their liquidation requires cooperation with Chinese courts in every city in which Evergrande has developments, as well as numerous government bodies. Previous cross-border liquidations instigated by Hong Kong courts have been challenging.
• Local governments in China may be unwilling to quickly sell the projects and hand over the money, and there is an added risk of social instability caused by incomplete or undelivered homes.
• The majority of Evergrande’s onshore assets have already been pledged as collateral to onshore creditors.
• Evergrande’s founder, Hui Ka Yan (Xu Jiayin in Mandarin) is being held under suspicion of involvement in “illegal crimes”, and its major subsidiary, Cheng Hengda Real Estate Group, is being investigated, which has limited the company’s ability to issue new debts and reach an agreement with creditors.

Commenting on the court’s decision this week, analysts have said that the news is unlikely to disturb Asian investors, as it was expected and is quite a unique case. As Focus has written before, while China’s property sector woes are serious, their potential impact on global markets should not be overstated, and China is highly unlikely to be facing a “Lehman moment” even if Evergrande collapses. Evergrande’s liquidation does, however, deal a fresh blow to the confidence of Mainland creditors and may increase the difficulty of its restructuring.

The verdict also deals a blow to the confidence of prospective home buyers and will deepen the trend of consumers not wanting to purchase homes from troubled (generally non-state-owned) developers. It could also lead to falling demand for construction materials and declining wages of employees in the property and government sectors if people stop investing in new homes.

It tells other struggling Mainland developers that the threat of liquidation is real and that China is serious about dealing with its property bubble. Debt restructuring certainly isn’t impossible; Business Insider reported that Debtwire data showed 32 developers in China managed to complete 42 restructuring processes worth $33.1 billion (£26.2 billion) between July 2021 and October 2023.

How China deals with the case will set a major precedent: Offshore investors will be keen to see how authorities treat foreign creditors when a company fails. Prompt recognition of the verdict by Chinese courts would boost Hong Kong’s status as a regional finance centre and a hub to invest in China.

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1. How to travel to China in 2022

Can you travel to China right now? The short answer is yes, but there are processes in place that you need to follow. Tom Simpson, CBBC’s Managing Director of China Operations and China Chief Representative, recounted his journey to China from the UK in August 2022 and shared important tips for those looking to do the same.

Note that as China’s zero covid apparatus starts to wind down at the end of 2022, the requirements for quarantine, testing and health codes are likely to change rapidly, so be sure to check before making travel plans.

2. How does Xiaohongshu work and why is it so popular?

Often compared to Instagram or Pinterest, Xiaohongshu (or RED in English) helps users discover and buy luxury, fashion and beauty products. What is notable about Xiaohongshu is that it has created an environment that allows consumer hype to drive exposure rather than the brands themselves setting the narrative. Fans come to the platform to hear the real story on foreign fashion brands or to get the inside scoop on beauty tips and tricks with the products they use every day from people they can relate to. With the cost of media in China ever-rising, using Xiaohongshu as a sandbox to find your brand’s community in China is a savvy way to test the market in 2022 and beyond.

3. The best 2022 Beijing Winter Olympics advertising campaigns

The Winter Olympics naturally generated plenty of column inches at the start of the year, but Focus was interested in how businesses interacted with the event. For example, major brands like Coca Cola and P&G created advertising campaigns that incorporated local Chinese elements — a trend that is likely here to stay in 2023 — while others turned to brand endorsements from the biggest star of the Winter Olympics, Eileen Gu. What’s more, simmering international tensions meant that brands had to think carefully about the tone and content of their advertising, something that will continue to be a key consideration when interacting with the Chinese market. 

4. China’s real estate crisis explained

China’s real estate sector used to be a key driver of the economy, but the tide turned in 2021-2022 and now it’s starting to drag. Failure to regulate the sector in boom has left the country with limited options in bust, and as a result, in 2022, UK companies were beginning to be impacted because Chinese partners were defaulting on their payments due to cash flow issues.

In November 2022, the Chinese authorities unveiled measures to rescue the struggling real estate sector, including credit support for indebted developers; however, in the long-run, ambitious structural reforms concerning how the developers work with local government, state-owned banks, and their customers will be required.

5. Are Gen Z Chinese consumers getting tired of the guochao trend?

The term guochao (国朝), meaning ‘national trend,’ refers to a trend in which young Chinese consumers are increasingly interested in the integration of traditional Chinese culture and style with domestic brands and products. Since 2018, brands like L’Oréal, KFC and Oreo have attempted to tap into this trend by showcasing designs and collaborations inspired by Chinese culture. However, a slew of unpopular collaborations and product launches show that to successfully navigate the guochao trend going forward, brands need to showcase a deeper understanding of Chinese culture and the preferences of their target audience, rather than simply sticking Chinese design elements on product packaging.

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China’s property market accounts for around 25% of GDP. Analysts widely assumed that this, therefore, makes the sector too big to fail. They might be about to be proven wrong. The property market has contracted by as much as 7% year on year, causing real estate to have become a significant drag on the Chinese economy. Following the struggles of Evergrande, China’s second-largest property developer, late last year, more real estate companies have come to be swallowed by their ballooning debt. The co-chairwoman of Country Garden, another massive developer, has lost as much as £10 billion from her personal fortune in the last 12 months. The result is that developers are no longer building homes, buyers have started to hold off on paying their mortgages or entering the market, and the system has run out of capital. 

Background 

China’s real estate sector might be seen as a bit of a Ponzi scheme. The developers rake in hordes of cash from existing customers for properties that have not yet been built and then use that cash to fund the construction of homes for new customers, which is fine, assuming that confidence is high and all the cogs are turning. Should investors in the developer companies lose faith in their debt management, however, or the economic environment takes a turn for the worse, the model then starts to come under considerable strain. Real estate is also incredibly pro-cyclical: everything good feeds on itself in the boom, and everything bad feeds on itself in the downtime. 

Worse, there is little incentive to regulate the real estate sector in good times. High sales come with high demand and high borrowing, meaning that Chinese consumers, the banks, the developers, and, to a certain extent, the government, are all happy. Indeed, the only incentive to regulate during a boom is to reduce the damage a likely bust will bring. The Chinese government sought to introduce closer regulation last year when it implemented a “three red lines” policy to restore the real estate sector, but it has not been particularly effective — at least not yet.

More than 90% of properties sold in China in 2020 were off-plan, but the completion rate was just 60%. Predominantly middle-class mortgage holders are starting to complain. Furthermore, the real estate market is not struggling due to financial pressure on homeowners — it is the developers who are under the cosh. That is an awkward state of affairs for the Chinese government in a politically sensitive year in which President Xi will likely secure a third, unprecedented term. Middle-class mortgage holders could start to wonder whether the government, the regulators, and the state-owned banks that drive much of the country’s real estate activity, can actually deliver the better life they have promised. 

What are the options for the Chinese government?

Failure to regulate the industry sufficiently while it was booming has left regulators in an impossible position. Stepping in to pay people’s mortgages will only encourage more people to default on their loans. That could be very costly, stretching well into hundreds of billions of dollars. But bailing out the developers will only encourage them to continue the practice, which in Tibet, Qinghai and Guizhou is so severe that developers start six houses for every completed property. 

Covid is exacerbating the situation as lockdowns deter potential buyers from visiting and putting down an offer on properties, whilst mortgage payers still have to pay mortgages even if they have lost their jobs or experienced pay cuts. Unemployment is currently running at 6.1%, just shy of the 6.2% recorded at the start of the pandemic. It is plausible that the situation will improve after the Party Congress. The government could then begin to take bolder steps in rebooting the sector, which is not without risk as lots of people could lose a lot of money, or relax Covid restrictions, increasing consumer confidence. With state-owned money covering over so many cracks, not just in the real estate sector, however, it is hard to see how state intervention can be dialled down without triggering some inflation or social unrest. 

Ghost towns 

Beijing has announced plans to revive millions of stalled property developments by issuing loans worth up to £120 billion at rates of around 1.75% per year to plug the shortfall. It seems unlikely to work. Not only is such a figure a drop in the ocean, but it might also be considered a rather dubious use of public funds, taking into account that many of these unfinished apartments are in areas where people have no intention of living. The majority of potential buyers are seeking to move into the cities or generally eastward, but many of the apartments that developers have invested customer money into are located in western or northeastern China, where the local government has incentivised state-owned developers to revitalise the area, regardless of demand.

Ordos, in Inner Mongolia, is China’s most infamous ‘ghost town,’ but there are many others. Indeed, there is enough vacant housing in China to accommodate the entire population of Spain. That, in turn, puts pressure on prices, meaning that even if the government relaxed Covid restrictions and gave the property market the boost it needs, prices would probably not increase and provide the market with the greater liquidity that it needs. 

Impact on UK plc 

UK companies have already been impacted negatively by the slowdown in China’s real estate market. The oft-cited 25 to 29% of GDP that the sector contributes to the total takes into account construction, servicing, retailing, commodities and miscellaneous material inputs — all of which British companies in China are well placed to provide. Indeed, CBBC has already heard from British firms that have contracts with Chinese developers who are experiencing financial difficulty and, therefore, have had to default on payment. 

The CBBC View 

It is very likely that the regulators will get the current crisis under control; China’s property market is too big to fail. There are reports of the government instructing state-owned banks and the developers to come to some agreement under the direction of the Ministry of Housing and Urban-Rural Development. The problem is that this plan revolves around directing more state-owned money to solve the issue, which is not sustainable in the long term. Foreign creditors are not an option; they have already lost £10s of billions in Chinese real estate bonds, so, as the economist George Magnus argues, it will take a miracle to lure them back to China’s real estate market. Ambitious structural reforms concerning how the developers work with local government, state-owned banks, and their customers will be required, but the problem has become so severe that this is not without risk. A lot of people are going to have to lose a lot of money at some point in the near future. The question is who and what are the broader socio-economic repercussions of that.

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During the 21^st century, measures to reduce poverty whilst improving healthcare, pensions and social services (including education and housing) have all moved up the policy agenda of the Chinese state. The Chinese Communist Party has shifted its goals from economic growth to ‘economic and social development’ – no longer are they focussed just on raising incomes, but now want to also provide services and safety nets.

The Party’s shift appears to be aimed at enhancing its legitimacy by realising ‘a moderately prosperous society’, and at reducing the protest and dissatisfaction that might threaten ‘social stability’. As China’s economic growth rates slow, attention has turned to quality of life along with concerns about the problems China will face as its society ages. There is also a commitment to China’s national development and a view that improving China’s economic and social health enhances its global status and influence.

The evolution of social policy since the 1990s

During the 1990s the Chinese party-state focussed on economic growth and state enterprise reform and, as part of this, reformed health insurance and pensions for urban workers – primarily the state sector. It also introduced means-tested income support and programmes for laid-off state enterprise workers to prevent urban protest (a particular concern in the years following the Tiananmen demonstrations of 1989).

But following the Asian Financial Crisis of 1997 and China’s entry into the World Trade Organisation in 2001, the focus began to turn to rural areas and the non-working urban population – now seen as a source of untapped domestic consumption and demand. The party-state introduced rural income support and pensions as well as cooperative medical schemes to help rural residents with their healthcare costs. It also introduced basic health insurance for the urban non-working population, made a commitment to a minimum of nine years of free education for all children, and announced major health care reforms.

Impressive achievements

China has seen huge reductions in extreme poverty, introduced universal entitlements to health insurance and pensions, and ensured steadily rising social services expenditure. Now categorised as an ‘upper middle income’ country by the World Bank, only 1.4 percent of the population lives on the international poverty line of $1.90 per day (2011 Purchasing Power Parity), a fall from 67 percent of the population in 1990. By 2010, China had extended health insurance and pensions across the entire population – for the first time establishing entitlements for rural residents. According to the OECD, public social spending in China has risen from 6 percent of GDP in 2007 to 9 percent in 2012. China’s government spending on health, education and social safety nets also increased in both real terms and as a share of total government spending over the decade to 2017.

Only 1.4 percent of the population live on the international poverty line, a fall from 67 percent of the population in 1990

Substantial problems remain

Despite the progress, China’s social problems are still enormous and social services remain problem-ridden. According to the latest World Bank data, from 2015, on the upper middle-income poverty line of $5.50 per day, 31.5 percent of the population remains in poverty – 430 million people. The quality of health care, education and housing varies enormously both within and between rural and urban areas – largely the result of fiscal decentralisation and policies that benefit the middle classes.

The quality of health care, education and housing varies enormously both within and between rural and urban areas

Public spending on health insurance and pensions, meanwhile, remains highly regressive, meaning that the most generous insurance schemes provide for the well off, and the least generous for the poorest in society. For example, from 1999 to 2006, although the number of people participating in publicly financed health insurance (mainly for employees in government and public institutions) was falling, this scheme still accounted for about 40 percent of the total government health budget. Meanwhile, overall public social spending remains considerably lower than the OECD average of 22 percent of GDP.

China has also set the goal of reaching rich country levels on indicators for infant mortality, maternal mortality and life expectancy by 2030

Ever more ambitious goals

Under Xi Jinping, the Party has continued to set ambitious goals. It aims to eli­­­minate absolute poverty by 2020 (using the national poverty line of 2,300 RMB per annum, or about a dollar a day). It has also set the goal – by 2030 – of reaching rich country levels on indicators for infant mortality, maternal mortality and life expectancy. It is pressing forward with primary care reforms in health and is introducing IT in education and has recommitted itself to increasing the quantity of affordable housing – something that has been promised for over a decade but not yet delivered on. It has also begun to tackle the very difficult problem of merging locally administered health insurance and pension schemes to reduce the divisions between urban and rural and increase mobility.

Achieving these ambitious goals and pushing through next-stage reforms will not be easy. The Party is mobilising both public and private sector firms as well as local governments to eliminate absolute poverty, and this goal looks achievable. But other initiatives will require substantial public investment and effort if vested interests are to be overcome. This is particularly evident in the health and real estate sectors, where local governments’ revenues tie them to such interests, making reform particularly difficult. Since Xi Jinping’s supporters argue that he has amassed power precisely so that he can tackle vested interests, social services may be an important test of the leadership’s commitment and ability to use their new powers for the public good.

Professor Jane Duckett is Edward Caird Chair of Politics at the University of Glasgow and Director of the Scottish Centre for China Research. Follow her on Twitter: @j_duckett.

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