'Owning a home will give me a sense of belonging." This simple statement of community gets at the heart of what is desired universally by most human beings: a home to call one's own.
This is why property and real estate markets are intrinsic to every country. These markets are also intrinsic to capitalist economies. Real estate is a driver of wealth creation and financial innovation.
As I wrote last week, the United States is at the forefront of this innovation. At times, this innovation goes too far and creates problems. As I was participating in the Wharton China Business Forum this past weekend, I could not help but think of that country as a place where we can see the benefits from property ownership potentially change the nature of its society.
China has recently taken the next major step toward freeing the reins on capitalism and unleashing Adam Smith's "invisible hand." A new law on property is going to be passed this fall at the Chinese Communist Party congress. While there have been delays on the language of the law and unprecedented public criticism, this will be a seminal event for the country.
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This law addresses the concerns of the new 200 million middle-class Chinese who are property owners and want to know if their assets are secure. This is a core tenet of capitalism: private ownership of the means of production. In this case, the means is real estate.
For some time, the Chinese have been protected against seizure of goods that they own such as clothes, cars and iPods. This has not been the case in real estate. The most protests in China have occurred over the seizure of land by the government. The enormous appropriation of land from farmers with little or no compensation has fuelled anger in rural areas and angst in urban regions.
However, the law will do much more than address these issues. It should unlock tremendous asset wealth and increase the efficiency of its distribution in China. Should farmers be given the right to own the land they farm, this will allow combining of property. This means more efficient scales of production and increased output.
For individuals, this means they will be allowed to more freely invest in real estate without worry over losing the property. This should eliminate some of the inefficient methods of acquiring real estate and should mean for more accurate valuations of the properties themselves. It's supply and demand 101.
Moreover, the change in the property laws should bring big changes in financial products as well. It's estimated that home ownership in China is 80 per cent compared with 69 per cent in the United States. Think about what can happen should these owners be allowed to borrow against the value of these properties.
A massive change in personal consumption could evolve the country from an economy based on exports to an economy based on domestic spending.
Also, think about this money being allowed to flow to more productive and varied uses in China. Instead of the state being concerned about providing the capital for nascent businesses, the private sector can not only generate the money, but also absorb the risk of doing it. And the profits. This environment is dynamic, yet stable and efficient.
To me, this is the true promise of China as it continues to inch further from centralized economic decision making to the decentralized capitalist "invisible hand."
Andrew Busch is global foreign exchange strategist with BMO Capital Markets and author of soon-to-be-released World Event Trading. This column first ran in GlobeinvestorGOLD.com.
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