Beijing’s headaches grow with property sector and food woes

     SinoInsight  1     

OUR TAKE
1. Local governments continue to ease property restrictions in an effort to resuscitate sales and help indebted real estate developers make repayments. According to recent statistics from Centaline Property Research Institute, over 140 real estate adjustment policies have been rolled out since the start of 2022. Also, more than 60 cities, including those belonging to the second tier like Zhengzhou, have issued various policies to stabilize the property market, including reducing down payment ratios, loan subsidies, and issuing housing subsidies for talents.

The relaxing of restrictions from November 2021, however, has not done much to reverse the situation more broadly. NBS data for December and February showed that with the exception of first-tier cities and a small number of popular second-tier cities, housing prices in 70 medium- and large-sized cities did not improve, an indication of poor demand.

The poor demand for property partly reflects China’s growing economic weakness. Chinese scholars and pundits have been identifying factors that are generating strong headwinds for the Chinese economy this year. In a speech at an economic forum on March 18, Professor Li Daokui, the dean of Tsinghua University’s Institute for Chinese Economic Practice and Thinking, listed three major short-term risks for the economy, including the Russia-Ukraine conflict’s impact on the global economy (high prices for commodities and goods, etc.), the coronavirus pandemic, and U.S. interest rate hikes.

Li added that the PRC would have to rely on infrastructure construction to achieve its annual GDP target. However, we noted earlier that government infrastructure investment is contributing less to economic growth while local governments are finding it difficult to find new projects to invest in (see here and here). In other words, Li Daokui’s “solution” to China’s economic woes reflects both China’s dire economic situation and Beijing’s lack of tools to reverse economic deterioration under the current circumstances.

2. The poor state of the Chinese economy and its impact on property sales can also be glimpsed from massive layoffs in the tech sector that occurred recently.

According to mainland media, Tencent is expected to lay off 10 to 30 percent of its staff, Alibaba 30 percent, and JD group about 10 to 15 percent. The Wall Street Journal reported that Tencent is planning to cut thousands of staff in some of its biggest business units in 2022, “including around a fifth of the staff at its cloud unit”; Alibaba is firing thousands of employees, “including at one of its grocery apps”; and Didi is laying off 2,000 employees from units, “including its core service,” citing people familiar with the matter. The Journal’s sources say that the layoffs are linked to “either China’s regulatory clampdown over the past year or the economic slowdown,” with some of the new cuts hitting 20 percent of staff in some business units, “higher than the single-digit percentage level of cuts common in annual restructuring.”

The huge layoffs in the tech sector appear to be impacting property sales. Yicai Global recently reported that there were 51,600 home auctions in Hangzhou on Alibaba’s Taobao auction platform as of March 8, the highest in the country. Alibaba is headquartered in Hangzhou.

3. Demographic issues are another factor affecting the sale of real estate. According to a Yicai Global report, recently released provincial demographic data reflected declining births and populations in 2021. Heilongjiang’s population growth rate was negative 5.11 percent, the lowest in the country; Harbin City local government’s lifting of property policy restrictions could have taken the shrinking population and its impact on home sales into account. All in all, seven of 21 provinces that recently released population data saw negative population growth. Meanwhile, births in Shandong Province have dropped nearly 60 percent over the past five years, while births in Jiangsu Province dropped below 500,000 a year in 2021, the first time in 44 years.

Housing demand has also been impacted by a decreasing rate of marriage. Per the Ministry of Civil Affairs data released on March 21, the PRC saw just 7.636 million marriage registrations in 2021, lower than the 10 million registrations in 2019 and 9 million registrations in 2020, and a new low since 1986.

The CCP authorities appear to be looking at relaxing population movement controls to rescue the real estate market in small and medium-sized cities. On March 10, the National Development and Reform Commission proposed in a document (“Key Tasks for New Urbanization and Urban-Rural Integration Development in 2021”; 2021年新型城鎮化和城鄉融合發展重點任務) the canceling of household registration (hukou) restrictions for cities with a permanent population of less than 3 million in their urban areas. While easing population movement could boost property sales on paper, the move could be less effective given the latest wave of COVID-19 outbreaks and “zero-COVID” movement restrictions, as well as China’s worsening economic situation in general.

4. The PRC’s property sector troubles and worsening economy will translate into rising political risks and challenges for Xi Jinping as he attempts to take a third term at the 20th Party Congress near the end of the year. Xi could attempt to deal with rising opposition to his leadership over growing failures through stepping purges and “self-rectification,” moves that may further political instability and endanger the regime.

     SinoInsight  2     

• Food security is a paramount issue for the country (國之大者);
• Safeguard “bottom-line thinking” for food security;
• Cultivated land is the lifeblood of food production;
• Farmland is farmland, and farmland must be fertile land;
• Comprehensively compact the responsibilities of local Party committees and governments at all levels for the protection of cultivated land. The central government will sign a farmland protection “military order” with all local governments to ensure strict assessment, lifelong accountability, and guarantees that 120 million hectares of arable land are maintained;
• Technology is the fundamental solution to food problems. Seed security is national security, and the PRC must be determined to develop the seed industry to ensure that it is self-reliant and self-improving so that China’s seed source is independent and controllable.

OUR TAKE
1. The Russia-Ukraine war threatens to unleash a global food crisis, with dire consequences for the CCP regime.

Russia and Ukraine are major grain and fertilizer exporters. According to the Washington-based International Food Policy Research Institute, Ukraine and Russia’s share of global trade for sunflower oil, wheat, and barley was 72.7 percent, 34.1 percent, and 26.8 percent respectively from 2018 to 2020. Meanwhile, Russia accounts for 15 percent of global trade in nitrogenous fertilizers and 17 percent of global potash fertilizer exports, while its ally Belarus accounts for 16 percent of global potash exports.

War and sanctions will affect harvest (planting and labor) in Ukraine, global energy prices, as well as exports of grain and fertilizer from Russia and Ukraine. This will in turn affect global food and fertilizer supply, leading to food shortages and high food prices. Global grain prices had already soared in 2021 due to the pandemic and inflation, with wheat prices up 69 percent, corn by 36 percent, and barley by 82 percent, according to mainland media. Mainland media also noted that wheat futures went up 42.52 percent, corn futures by 28 percent, and soybean futures by 25.17 percent this year after the Russia-Ukraine war broke out, citing data from the Chicago Board of Trade.

A March 20 New York Times article noted that wheat prices were up 21 percent and barley 33 percent since the conflict began. Meanwhile, fertilizer is now three to four times costlier than it was in 2020, with “far-reaching consequences for farmer incomes, agricultural yields and food prices,” according to a March 24 Wall Street Journal report.

2. The PRC may not be directly impacted by Russia’s suspension of fertilizer to “unfriendly” countries given their “no limits” friendship. However, food shortages and high food prices stemming from the Russia-Ukraine conflict threaten the regime’s food security and economy.

China has to import large quantities of grain each year because it only has a 70 percent grain self-sufficiency rate. In 2021, China imported 165 million tons of grain (up 28 percent year-on-year), including 28.36 million tons of corn and a record-high 9.77 million tons of wheat, as well as 96.52 million tons of soybeans (down 3.8 percent year-on-year), according to cngrain.com. Also in 2021, Ukraine was China’s largest corn exporter, accounting for 30 percent of total corn supply (used mainly for feed).

On paper, the PRC appears to have prepared for the worst. China stockpiled more than half of the world’s grains in 2021, and is expected to have in the first half of the 2022 crop year 69 percent of the global maize reserves, 60 percent of its rice, and 51 percent of its wheat, according to Nikkei Asia citing U.S. Department of Agriculture data. Additionally, Chinese officials have boasted that China’s wheat stores can meet the consumption needs of the Chinese population for a year and a half, with no supply issues.

The PRC’s food stockpiles, no matter how large, must be replenished once exhausted. Rising food prices mean that China will use more foreign exchange when purchasing food internationally to stay on top of food security. Spiking energy costs due to the war would also greatly increase the cost of domestic food production and transportation, further burdening the average consumer and impacting the economy on the whole while affecting food supply. Beijing too has to deal with official malfeasance and unreliable data in determining the actual food supply; China may have far less food stockpiled than stated or projected after accounting for corruption and burning granaries.

3. The impact of official corruption and malfeasance on food supply cannot be underestimated. The fact that Xi Jinping and Li Keqiang have to urge officials to guarantee 120 million hectares of arable land and make statements like “farmland is farmland, and farmland must be fertile land” indicate that local officials are not taking food security seriously.

Local officials usually put their self-interests first instead of heeding the central government’s orders. Thus, granaries have mysteriously lit up in flames before inspection teams visit as officials cover up corruption, while fertile farmland has been ruined as officials look to convert agricultural property into more residential plots so as to boost local government revenue.

A Feb. 14 report by the state-run Economic Daily titled, “An Investigation of Arable Land Problems” notes that the amount of cultivated land in China is decreasing while the quality of available farmland is deteriorating. The report noted that the available arable land in some provinces have fallen below the government’s “red line,” with some areas seeing designated permanent basic farmland area shrinking.

The quality of China’s arable land has also declined. Zhu Daolin, deputy dean of the College of Land Science and Technology and director of the China Center for Land Policy and Law, told Economic Daily that China’s single-harvest arable land makes up 48 percent of the total, while 65 percent of arable land is in areas with less than 800 mm of annual rainfall. Tang Huajun, a scholar at the Chinese Academy of Engineering and technical committee director at the China Yangling Innovation Center for Arable Land Protection and Quality Improvement (中國楊凌耕地保護與質量提升創新中心), said that the average grade of arable land in China is only 4.76 on a 10-grade quality scale, with 1 being the best and 10 the worst. First- to third-grade arable land accounts for just 31 percent of China’s total arable land, with low- to middle-yield fields accounting for over two-thirds of the total.

The Economic Daily report also pointed out that food security tends to be ignored by local governments because it is a “long-term macro issue” with little relation to local economic development and GDP growth. Thus, high-quality arable land, especially that which is located in economically developed areas, often gets squandered for construction projects.

A review of Chinese social media indicates that Beijing’s recent orders to maintain arable land area have caused hardships for some farmers. Since late last year, some Chinese farmers have been complaining on social media about how they were forced to destroy fruit trees and plants (likely grown to supplement income) so that the land is ready for “re-cultivation” as local governments strive to meet arable land targets.

4. The CCP has long sacrificed the interests of Chinese farmers in keeping food prices low to prevent social unrest, while prioritizing the development of cities and industries at the expense of food production. These decisions are now returning to haunt the CCP amid rising food prices and looming food shortages due to the Russia-Ukraine war.

Political risks and crises will compound for Xi Jinping and the CCP should food prices soar out of control amid a worsening economy and a resurging pandemic. Deteriorating social conditions and growing unrest will heap even more pressure on Xi in a Party Congress year and invite his factional rivals to more boldly challenge him.