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Golden Rule of Doing Business in China: “Follow the Government.”

Saturday, April 2nd, 2011
Mr. Novak

Mr. Novak with Dr. Singh in his office in Seoul

Many of us wonder, what is the most important key while doing business in China? Well, Theodore Justin Novak, Senior Associate Director of the Investment Department at DTZ in China has the answer for you. The key to success in China is simple. “Follow the government” and “localize.”
Novak, leader of the institutional sales team of DTZ, visited South Korea as a guest speaker for the 2011 Asia Pacific Financial Forum. DTZ, the real estate adviser listed on the London Stock Exchange in 1987, has been operating in China as the first real estate advisor to enter country in 1993. In Greater China DTZ operates 18 offices, and Novak is responsible servicing fund managers, institutional investors and bankers at the company’s Shanghai office.

“In terms of real estate market investment, it is important to follow the government,” said Novak. “Look at where the government is spending their money.” Giving an example of the Beijing-Shanghai high-speed rail system, he said if investors looked at locations where the government built the train stations; the investor could have gained from identifying locations where the Chinese government was spending their money on “growth,” which holds true on all future rail line expansions.
Novak said it is also important for investors to remember that China operates as a planned economy, and should make investments in line with government policies. 2011 is the starting year of China’s Twelfth Five Year Plan, which aims to accelerate the reengineering of the economy China. Novak said according to this plan, “the government is focusing on the country’s development moving from East to West” and the country is “focusing on the redistribution of wealth,” as well as “shifting from a reliance on government investment to spurn growth towards domestic consumption.”
For potential investment cities, Novak picked Chengdu and Chongqing. According to Novak, as Chengdu and Chongqing develop as the hub for economic growth in western China the areas surrounding the hub will develop as well.
 According to China’s DTZ research, in 2011, China’s economy will continue to see around 9% of positive growth, and due to agricultural reform, increase of rural wealth is expected. Also, continuing investment in urbanization and domestic consumption and infrastructure projects will boost the economic activity.
 As for the response of Shanghai’s real estate bubble Novak said, “Shanghai is expensive. Yes. But I don’t think there’s a bubble to break.” In Shanghai, the demand is still more than the supply. Grade A office rents in 2010 increased by 15% and expecting a 15% increase this year.
 “We will see more growth in the second tier cities such as Wuhan and Changsha,” said Novak. DTZ estimates that the retail market in the first tier cities has “reached a maturity,” and the “retail sales remain strong” in second tier countries.”
 Also, due to the property tax in Shanghai and Chongquing with a series of nationwide market control policies, price rises have been curbed. In the long term, according to DTZ, the residential market is expected to see a “healthy growth in prices.”
“Future of real estate in China will be more local,” said Novak. Localization will be also important since the players who are really dominating the real estate market are locals.
 “Foreign institutions will be depending on growing their business locally and relying on local capital, which is more competitive in terms of cost of capital.”

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