China Power

Chinese Dream Turning Sour?

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China Power

Chinese Dream Turning Sour?

Home ownership is meant to be part of the “Chinese dream.” But for many, real estate has become a nightmare.

There’s a famous Chinese aphorism often used to describe the dynamics of central-local relations in China: “The mountains are high, and the emperor far away.” Though the center’s information gap is narrowing – they are able to monitor local governments much more effectively than ever before – there’s still substantial freedom for local governments, which often leads to implementation gaps.

For example, in the past 10 years, local governments in China have ignored central policies on mine safety, environmental protection, and food/consumer product safety, to name only a few. The central government in many ways allowed and even created these implementation gaps through counterincentives such as a singular priority being placed on raising growth figures.

Since 2006 until now, the central government has certainly targeted rising property prices. However, until now, their policies have been less than ironclad – the policies were often reversed or loosened, and local governments had plenty of leeway to continue on their paths of rapid property development.

More generally, there have been a number of periods of overheating in China since reform and opening up, and each has been followed by austerity policies. The period 1992-94 focused largely on slowing money supply and restricting lending, while 2003-04 focused on slowing borrowing and restricting land supply, particularly in overheated sectors. The 2005-07 austerity policy cycle aimed to restrict lending and investment. In these cases, the policy packages were loosened as soon as slowing became apparent, and sometimes in response to local government complaints.

More specifically, in the autumn of 2008, the central government reversed previous policies and ordered banks to reduce mortgage and lending rates to help maintain housing prices. In 2009, restrictive policies were again in place.

Last autumn, the central government issued another set of cooling policies targeting the market. This time, however, it doesn’t appear that the central government will be following the same pattern of loosening for this period of overheating/high real estate prices, despite local government opposition.

Since last autumn, there have been a number of incidents of local government “rebellions” against central government cooling policies.  In October 2011, Nanjing and Anhui Province relaxed local mortgage rules and a city in Guangdong loosed purchase restrictions. In January and February, a southern Chinese city, Zhongshan, increased the price ceiling on residences, and Wuhu, in the east, announced a waiver of the deed tax and the subsidy of some home purchases. 

It’s important to note that these loosened policies lasted just days (and hours in some cases), ostensibly in response to central government pressure. Indeed, in a piece on MarketWatch, Shanghai Securities news cited a ministry official as saying that the Chinese central government would “show no mercy” and “absolutely” not let local governments “sing a different tune on housing policy.” In a number of public speeches in the last few months, Premier Wen Jiabao has reasserted the government’s policy several times. At the National People’s Congress this month, he noted that home prices are still “far from reasonable.”

So why is the central government taking such a hard line now? The answer is that rising real estate prices and rampant property development have very real consequences for social stability, a key priority of the central government.

In pursuit of development and investment, local governments illegally seize land, flouting laws ensuring adequate compensation to the displaced, sparking social unrest. These incidents are politically dangerous because of the legitimacy of the complaints and the broad popular support they attract. As noted in the Wall Street Journal, many protests (there were by some estimates 180,000 protests, riots and other mass incidents in 2010) are sparked by economic injustices such as land grabs and local corruption over land use. In November 2011, protests erupted in Shanghai after major developer Vanke announced it was slashing prices on new apartments, leaving those who had already purchased apartments facing a 20 percent price drop. The Wukan protests late last year were also sparked in part by villager concerns over local government land use.

The Chinese Communist Party is particularly concerned about ensuring that citizens can achieve the “Chinese dream” of upward mobility, which includes home ownership for the urban middle class. The financial research center at Beijing Normal University reported in 2006 that 70 percent of urban residents can’t afford to buy an apartment, based on average prices in eastern China.  Those who do manage to purchase an apartment become fangnu (“house slaves,”) a term that has come into popular use to describe people who will have to spend their lives paying off their mortgages. The New York Times commented on an emerging phenomenon in China where men are unable to find brides because they are unable to afford the purchase of their own apartment. These phenomena are already upsetting members of the urban middle class, whose support is especially important to the Party.

As the Communist Party approaches the leadership transition that will take place this autumn, and deals with the fallout of the Bo Xilai scandal (and related factional infighting), social stability is crucial to the Party’s prospects. There’s often a tendency for the central government to woo local government officials before the National People’s Congress in a transition year, in order to ensure their support.  However, the central government has persisted in tightening policies through this year’s People’s Congress, testament to the importance it’s placing on reining in land prices to maintain social stability.

Real estate is one policy area that the central government doesn’t seem willing to back off on.