Foreign Policy

Property Disaster Underpins China’s Financial Slowdown

Welcome to Foreign Policy’s China Brief.

The highlights this week: China’s economic slowdown reflects its brewing real estate crisis, Beijing tests an orbital missile bombardment system, and a high-ranking official moves from Xinjiang to Tibet.

If you would like to receive China Brief in your inbox every Wednesday, please sign up here.

Welcome to Foreign Policy’s China Brief.

The highlights this week: China’s economic slowdown reflects its brewing real estate crisis, Beijing tests an orbital missile bombardment system, and a high-ranking official moves from Xinjiang to Tibet.

If you would like to receive China Brief in your inbox every Wednesday, please sign up here.

New Figures Highlight Economic Slowdown

Official economic figures released on Monday show that China’s GDP grew by just 4.9 percent in the third quarter. The painful slowdown comes as China grapples with debt concerns, shipping disruptions, and ongoing electricity shortages. The country’s real estate crisis is at the core of most of these problems. The industry has $5 trillion in debt, with multiple firms in trouble, affecting much of the Chinese economy.

Real estate has become the dominant investment in China because there is no property tax: That means zero cost for holding on to apartments as prices rise. Eighty percent of household wealth is now tied up in real estate, much of it rooted in the handover of danwei (work unit) apartments to private ownership in the 1990s. So is a large portion of corporate holdings.

Several Chinese cities have conducted pilot projects for property taxes, albeit at a low rate. In the past, such projects might have been scaled up to the provincial level before becoming national policy. But none of the property tax projects have gone anywhere because they face such strong resistance. The Wall Street Journal recently reported that President Xi Jinping himself wants to impose property taxes, but he faces pushback from across the political system. People fear economic disaster if the real estate sector falters.

A property tax would require a comprehensive register of owners, as analyst Martin Chorzempa pointed out this week. Most Chinese have an interest in opposing the idea. Such a list would be politically risky for officials whose own wealth is tied up in property, for example. If property taxes ever come to fruition in China, it could be the case that political clout allows people to stay off the register or avoid the taxes altogether.

It’s interesting that well-connected figures seem to be leaking to the Wall Street Journal, which has had a series of scoops from its China team in recent months. High-level officials usually abide by a code of silence toward outsiders, especially the Western press, as the political penalties for talking are extreme. The choice of outlet could indicate an attempt to signal to the Western business community that not everyone is happy with the expansion of state control—or it may be an attempt by those unhappy with Xi to build support against him.

There are two ways that things could proceed, in my opinion. The central government could retreat from the attempt to rein in the property sector, only increasing the public’s confidence that real estate is a guaranteed bubble—an investment the government won’t let fail. But that would create the chance of a more devastating crisis in the future by piling up more debt and making productivity more dependent on property.

Or Xi could use the real estate question to push other parts of his political agenda: the dominance of the central government, greater state control of all sectors, and the purging of potential contenders before his likely and unprecedented third term in 2023. In that case, the government could make real estate regulation into a political weapon, blaming economic slowdowns on corrupt officials and the West—and expanding the role of the planned economy even further.

Missile drama. Revelations that China tested a new hypersonic missile system in August have sparked a tense reaction from U.S. officials. The technology has the potential to deliver a payload from orbit, raising concerns. China has recently built up its nuclear arsenal considerably and has hinted at potentially abandoning its long-standing “no first use” policy. China has denied the reports, saying it tested a spacecraft system.

The U.S. nuclear arsenal is roughly 15 times the size of China’s, and Russia’s is even larger. (For two decades after the Sino-Soviet split, Beijing primarily feared nuclear attack from the Soviets.) As Jeffrey Lewis argues in Foreign Policy, neither the technology nor the idea behind the latest test are new. But it’s another move in what could become an expensive and dangerous arms race.

Tightening in Tibet. The deputy Chinese Communist Party secretary and security chief in Xinjiang, Wang Junzheng, has been transferred to become the new party secretary in Tibet. Wang has played a major role in overseeing state atrocities against the Uyghurs and other minorities in Xinjiang; he is the highest-level Chinese official to face Western sanctions. The move may presage tougher policies in Tibet, where coercive labor programs were recently expanded.

Tibet has always suffered repression, but it has not experienced atrocities on the scale of those in Xinjiang in recent years. Another indication that stricter policies are on the way is the growing insistence in English-language state media on using Xizang, the Chinese name for Tibet. Such rhetorical flourishes are common in state media. For example, during increased tension with Taiwan, there is extra insistence on terms such as “Taiwan island” or “Taiwan province.”

Fragile nationalists. A song by Malaysian Chinese artist Namewee and Australian Taiwanese artist Kimberley Chen satirizing China’s online nationalists has gone viral, racking up 8.3 million views in five days. The video for “Fragile/Glass Hearts” spoofs the tender egos of the online warriors who defend China’s honor by portraying them as a petulant boyfriend. Some of its more obscure references include cutting leeks (slang for the financial exploitation of the middle classes) and claims about Xi walking 10 miles as a youth while carrying heavy loads.

The song’s success is a reminder of an often-missed angle on China’s reputational damage in the digital era. The online brigading by Chinese nationalists has played a powerful role in turning public opinion in Southeast Asia and East Asia against Beijing—perhaps even more than the words of so-called wolf warrior diplomats.

Magnesium shortage. As global supply chains stretch and snap, the concentration of production in China—creating numerous vulnerabilities—has become more obvious. The latest example is magnesium, an element in aluminum alloys that are critical to the automotive industry. Eighty-five percent of the world’s magnesium comes from China, and 60 percent of that is concentrated in the city of Yulin, in the mining-heavy province of Shaanxi.

Power shortages across China have caused the Yulin government to impose sharp production curbs on magnesium processing, shutting down 70 percent of smelters and ordering the remainder to operate at half power. As with other materials, China both has abundant deposits of magnesium and has formed a complete industrial chain for its processing—something that will take time and effort to replicate elsewhere.

Controlling coal. China’s central government has indicated it will intervene to lower coal prices, which had reached record heights. The high prices led to many coal-fired power plants losing money on every kilowatt of power produced, sparking recent power shortages. The latest move caused coal futures to tumble, but supply problems are likely to continue.

The government has pushed coal mines to increase production, but flooding and freezing weather in Shanxi, another mining hub, and floods in Henan have slowed both mining and transport. Coal also remains the main source of heating for many in the north, where winter temperatures are setting in early.

Nationalist archaeology. Xi has issued a call for an archaeology with a Chinese ethos to “showcase the splendor of Chinese civilization.” There have been important archaeological developments in China in recent years, but Chinese archaeologists have often struggled with political impositions that demand a reductive and Han-centric narrative that contradicts the diversity of discoveries.

Beijing’s chief goal in such historical narratives is to create the fiction of a single, unified nation-state that held continuous control over territories such as Xinjiang, Tibet, and Taiwan.

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