1 Key financial and economic affairs meeting puts regime crisis in the spotlight
On May 5, Xi Jinping presided over the first meeting of the Central Financial and Economic Affairs Commission under the 20th Central Committee. The meeting studied the construction of a “modern industrial system” and “high-quality development of the population” (i.e. the matter of China’s shrinking population and fertility). The meeting also reviewed and approved work rules for the Commission (中央財經委員會工作規則) and its office (中央財經委員會辦公室工作細則).
In a speech at the meeting, Xi said that the new Central Financial and Economic Affairs Commission should “further strengthen and improve the centralized and unified leadership of Party Central on economic work.” He added that the “modern industrial system” is the “physical and technological foundation of a modern country” and the real economy must be the focus of economic development. Xi also said that population development is a major issue related to the “great rejuvenation of the Chinese nation” and the overall quality of the population must be improved.
According to state media reports, some key points in the meeting about speeding up the construction of a “modern industrial system” include:
- Accelerating the construction of a “modern industrial system” concerns China’s ability to take a strategic lead in future development and global competition.
- New scientific and technological innovations such as artificial intelligence must be taken into consideration in constructing the “modern industrial system.”
- The focus must be on the real economy and preventing a move away from the real economy to the “fictitious” (i.e. financialization of the Chinese economy).
- Progress must be steady and gradual, and not hanker for what is “big and foreign” (貪大求洋; i.e. The PRC should not compare itself with foreign countries too much, especially when it is unrealistic for the regime to do so. Instead, development should be done according to the domestic situation and reliance on foreign imports should be reduced).
- Insist on promoting the transformation and upgrading of traditional industries, instead of exiting those industries on the excuse that they are “low-end.”
- Adhere to open cooperation and not doing things behind closed doors.
- Maintaining industrial safety is a top priority.
- Institutionally implement the main position of enterprises engaging in scientific and technological innovation.
- More emphasis should be placed on developing agricultural technology and breaking through the limitations of natural conditions such as arable land on agricultural production.
- Make good use of the advantages of the ultra-massive market (超大規模市場) and strengthen open cooperation between the industrial chain and the supply chain.
- Doubly cherish and care for outstanding entrepreneurs, and vigorously great artisans (i.e. train and groom national-level technical personnel).
As for population matters, the meeting acknowledged that China is seeing declining birth rates, an aging population, and regional population growth and decline divergences. The meeting then made the following requirements to promote population development:
- Strive to maintain “moderate” fertility levels and adequate population size.
- Support Chinese-style modernization with “high-quality development” of the population.
- Establish and improve the fertility support policy system to significantly reduce the burden on families.
- Stabilize the labor participation rate and improve the efficiency of human resource utilization.
- Implement a national strategy to actively address the aging population.
- Optimize the regional economic layout and homeland spatial system, optimize the population structure, and maintain population security.
State media reports of the meeting noted that premier Li Qiang is the deputy head of the Central Financial and Economic Commission, while Central Secretariat secretary Cai Qi and vice premier Ding Xuexiang are both members of the Commission.
Our take
1. Several details from the Central Financial and Economic Affairs Commission under the 20th Central Committee indicate that Xi Jinping wants himself and politics to be firmly in charge of the Chinese economy and its development. Put another way, Xi wants to ensure that the economy serves the CCP and regime security, and not the other way around.
Xi’s speech at the meeting called for “further strengthening and improving” the “centralized and unified leadership of Party Central on economic work,” a continuation of his ongoing effort to rally the CCP firmly behind his leadership. And while details have not been made public, the work rules for the Commission and its office that were reviewed and approved at the meeting, like the recently revised State Council work rules, almost certainly contained clauses that promote Xi’s political theories (“Xi Jinping Thought,” “Two Safeguards,” “Two Establishes,” etc.) and emphasize his paramount authority (定於一尊) in the regime.
Notably, none of the members of the Central Financial and Economic Commission’s leadership team are experts on economic and financial affairs. While Li Qiang was regarded as “business friendly” in Shanghai, he, Cai Qi, and Ding Xuexiang are known more for their loyalty to Xi Jinping than their economic or financial acumen.
2. The details of the meeting spotlight what the CCP believes to be the most pressing problems it needs to prioritize resolving (i.e. manufacturing, supply chain, and demographic issues) to survive its various internal and external crises:
- Beijing’s push to build a “modern industrial system” sounds like an initiative to address the migration of supply chains outside of China, as well as the growing pressure on PRC manufacturing and supply chains stemming from the “tech war,” “trade war,” selectively decoupling, and “friend-shoring” strategies pursued by the U.S. and its allies. Like “Made in China 2025” and other earlier policies, the construction of a “modern industrial system” is also intended to lay the foundation for the PRC to push for global dominance in the future.
- The CCP is focusing on artificial intelligence and other “new scientific and technological innovations” to develop the PRC’s self-sufficiency, escape the technological “chokehold” placed on China by the U.S. and its allies, and acquire leverage to make “Chinese-style modernization” (with PRC hegemony to follow) more attractive to other countries.
- By calling for “steady and gradual” progress in constructing a “modern industrial system” and not hanking for what is “big and foreign,” the Xi leadership appears to want to preempt some of the short-sighted actions that PRC officials could take to secure political achievements. For example, local officials could become overly reliant on imports as they pursue grand projects to build the “modern industrial system” without properly accounting for the local situation or the regime’s interests more broadly. Such projects could end up failing like the semiconductor “great leap forward,” or make the PRC more susceptible to Western “chokeholds” while not addressing the self-sufficiency problem and advancing Beijing’s broader industrial agenda on firm footing.
- The Xi leadership’s requirement to promote the “transformation and upgrading of traditional industries” also appears to be aimed at preempting local officials’ penchant for “one-size-fits-all” approaches to policy implementation, as well as the tendency of some officials to believe the CCP’s propaganda hype (like “Amazing China!” [厲害了, 我的國]). For instance, officials previously neglected labor-intensive, “low-end” enterprises while they pursued the latest political or money-making trends, be it environmental protection or the real estate economy. As a result, many “low-end” industries collapsed or left the mainland, worsening the unemployment situation in China. Therefore, Beijing now has to explicitly remind officials not to ignore the “low-end” industries lest officials again engage in self-sabotaging behavior that undermines the regime.
- Beijing’s appreciation of “outstanding entrepreneurs” and “great artisans” appears to be an effort to show the private sector that the central government still values them and their contributions to the regime, as well as an indirect acknowledgment of the various inefficiencies and corruption problems in the state sector.
- The CCP’s focus on developing agricultural technologies and agricultural production indirectly reflects China’s food crisis. Beijing is likely concerned that the PRC’s grain self-sufficiency issues (now about 70 percent) and “bumper harvests” propaganda could be exposed should geopolitical tensions and “selectively decoupling” between China and the West escalate further. Thus, the CCP has been promoting the “reverting forest to farmland” (退林還耕) over previous ecological policies that called for the opposite, and is looking for ways to safeguard food supplies now.
- The Xi leadership’s promotion of “open cooperation” and China’s so-called “ultra-massive market” seems like an effort to continue making the regime attractive for foreign investment. The CCP regime also appears to be countering global decoupling from China by calling for the “open cooperation” of industrial chains and supply chains.
- The CCP’s so-called “high-quality development of the population” appears to be its latest initiative to cover up the mistakes of its anti-natalist population policies over the past decades. Beijing is also looking to shift the spotlight away from China’s demographic problems and generate “optimism” about what the authorities will do to restore the regime’s productivity and competitiveness over the long run. However, we believe that the central and local governments have very limited financial capacity to support a pro-natalist drive and “significantly reduce the burden on families.”
- In considering the CCP’s recent rural property rights reform, it is possible that Beijing is looking to compel some in the peasantry to give up or transfer their land rights so that the authorities can find ways to reacquire rural land to better intensify agricultural production. Meanwhile, some in the peasantry could be encouraged to become migrant workers in economically developed areas or industrial hubs to boost the manufacturing labor force. In this way, the CCP is “improving the utilization efficiency of human resources,” “optimizing the regional economic layout and homeland spatial system,” and “optimizing the population structure” to “maintain population security.”
3. We believe that the Xi leadership will be hard-pressed to resolve the regime’s internal and external crises through the measures laid out at the Central Financial and Economic Commission meeting given the systemic shortcomings of the CCP authoritarian system. While the requirements made at the meeting attempt to account for the typical behavior of CCP officials, those at the local or grassroots levels will always find “countermeasures” that promote their self-interests while paying lip service to the policies of the “top” (上有政策, 下有對策).
For example, there are currently many videos circulating on Chinese social media complaining or highlighting “one-size-fits-all” efforts by local officials to comply with the central government’s “restoration of farmland from forests” initiative. Local officials have since destroyed green belts in cities and replaced them with farmland, destroyed farmers’ cash crops or cleared entire swathes of forests, and ordered the planting of rice in areas that are not suitable for cultivation. One video even showed efforts by local authorities to spread soil on top of concrete pavement or roads to create the impression that land cultivation is taking place, as well as spray green dye on top of barren land in what appeared to be an attempt to trick central government satellites into “seeing” that “farming” was being carried out. The bad habits of local officials will make it impossible for the CCP to resolve its political crisis and will instead create greater social conflicts.
Meanwhile, the Xi leadership has some ways to go in growing the real economy and de-emphasizing the “fictitious” economy. According to data from the 2022 business performance analysis report of Chinese listed companies (中國上市公司2022年經營業績分析報告) released by the China Association for Public Companies on May 5, the 5,079 mainland listed companies generated total profits of 5.63 trillion yuan in 2022. Of those companies, 129 financial companies had a net profit of 2.45 trillion yuan, accounting for 43.5 percent of all listed companies, as well as a profit margin of 24.9 percent. In contrast, the average net profit margin of companies in the real economy only accounted for 5.2 percent of the total. Moving the Chinese economy away from financialization and promoting the real economy is also a sensitive political problem given the influence of Party elites and other interest groups in the financial system.
2 Slumping property transactions in April another sign of China’s economic weakness
PRC real estate policy
April 25
PRC minister of natural resources Wang Guanghua said that China has “fully realized the unified registration of real estate” and that the unified real estate registration system is “basically taking shape,” according to state mouthpiece Xinhua. Wang added that the real estate registration law has been open for public comment.
May 8
The PRC Ministry of Housing and Urban-Rural Development and State Administration for Market Regulation jointly issued an opinion on regulating real estate brokerage services (關於規範房地產經紀服務的意見). The opinion made requirements in 10 areas, including strengthening the management of brokerage entities, reasonably determining brokerage service charges, strictly implementing clear price tags, and strengthening the protection of personal information.
The opinion also required real estate brokerage agencies to “reasonably reduce” the cost of housing sale and lease brokerage services. Real estate brokerage agencies are encouraged to implement tiered pricing according to the principle of “the higher the transaction price, the lower the service rate.” Further, the brokerage service fee shall be borne by both parties to the transaction.
The opinion stated that the manipulation of brokerage service fees is strictly prohibited. Also, real estate brokerage institutions shall not abuse their dominant position in the market to charge service fees at “unfairly high prices.”
According to mainland media reports, Wang Xiaoqiang, chief analyst at Zhuge Real Estate Data Research Center, said that about 90 percent of domestic second-hand property is sold through brokerage companies, and new house transactions are also highly dependent on brokerage firms.
April property data
The China Index Academy published a report on May 8 showing that the overall volume of property transactions in April decreased from the previous month but rose from a year ago.
- The volume of property transactions in first-tier cities fell 7.6 percent month-on-month and increased 187.9 percent year-on-year. The volume of transactions rose slightly month-on-month in Beijing and Shenzhen, and dropped in Shanghai and Guangzhou.
- The volume of transactions in second-tier cities decreased 38.2 percent month-on-month and increased 2.1 percent year-on-year. In particular, Wenzhou City saw a significant drop from the previous month of down 45.8 percent.
- The volume of transactions in third-tier cities fell 64.1 percent month-on-month and 27.8 percent year-on-year. Huizhou City saw the largest drop of the third-tier cities, or down 49.2 percent from the previous month.
The report also noted that the land supply in 300 monitored cities fell 19 percent year-on-year and 15 percent month-on-month. The volume of residential land available in those cities also fell by more than half, and both the overall transaction volume and price declined. Further, total revenue generated from land sales or land transfer fees dropped by over 30 percent when compared with the previous year.
- In first-tier cities, the land supply volume increased slightly year-on-year, land transaction volume and price doubled year-on-year, and total transaction fees doubled year-on-year.
- In second-tier cities, land supply and demand declined year-on-year, with the average transaction price dropping by nearly 40 percent year-on-year and total transaction fees falling by more than 60 percent.
- In third and fourth-tier cities, the land supply volume decreased year-on-year, the premium rate increased slightly when compared to a year ago, and total transaction fees dropped by more than 40 percent year-on-year.
In April, real estate enterprises mainly sought funding through ultra-short-term financing bonds and the financing scale dropped from the previous year. The total amount of non-bank financing of real estate companies was 72.82 billion yuan, down 5.4 percent year-on-year and 20.7 percent month-on-month.
Real estate firms fined for price cuts
On May 5, the Kunshan Municipal Housing and Urban-rural Development Bureau under Suzhou City issued a notice on its official WeChat group regarding two real estate projects in Kunshan City that had “disturbed the normal order of the real estate market and caused social instability” by substantially lowering prices without authorization. The notice said that the two projects were suspended from accepting online registrations for their property until the issue had been completely “rectified.”
Mainland media reported that the developers behind the two projects had reduced the price of units by about 20 percent to 25 percent. A real estate sales agent for one of the projects said that the discounts were still being offered even after the government imposed fines.
Mainland media also reported that 1,610 new homes were sold in Kunshan in April, or 977 fewer as compared to March (down 60 percent).
Our take
1. The property market slump in April shows weakness in China’s economic recovery even after Beijing lifted the “zero-COVID” policy. Various indicators suggest that the Chinese economy is continuing to worsen despite Beijing’s best efforts and there are serious demand problems. Declining real estate transactions and land supply suggest that the Chinese people are pessimistic about their personal economic situation and more broadly lack confidence in China’s economic recovery. Meanwhile, the central government’s real estate policies and their implementation by local governments could end up exacerbating the property sector crisis.
2. The year-on-year increases in property transactions in April are quite substantial in some cases (especially in first-tier cities) because there were still lockdowns in China in 2022. However, the month-on-month declines indicate that demand for property is generally poor across the board.
From the land supply and transaction data, there are still some development prospects in first-tier cities, while the outlook for cities in the second-tier and below are very pessimistic. The situation becomes bleaker considering that local governments are selling less land now as compared to a year ago (when “zero-COVID” was in full force) even though the central government has been expanding credit and releasing more liquidity into the markets this year. This partly suggests that local governments could be generating even less fiscal revenue despite the lifting of lockdowns, and the risk of municipal investment bond defaults is going up.
Meanwhile, the drop in the financing scale of real estate enterprises indicates that developers are not optimistic about long-term investments. Instead, developers seem to be focusing on securing funding through issuing ultra-short-term financing bonds to increase their liquidity and avoid defaults.
China’s real estate slump is also reflected in second-hand home prices in second-tier, third-tier, and fourth-tier cities. According to a report on China’s third- and fourth-tier cities by Guolian Securities (三四線地產草根調研見聞) published on April 17, the second-hand home price index for 70 large and medium-sized cities showed that prices for second-hand homes in second-tier cities fell by 5 percent overall from June 2021 to February 2023, while those in third-tier cities declined by 7 percent overall. In particular, the average price of second-hand homes in Guangxi’s Liuzhou City declined by 38 percent while those in Hebei’s capital city of Shijiazhuang fell by 17 percent.
Falling home prices indicate that the wealth of Chinese residents is shrinking. According to the 2022 China wealth report (中國財富報告2022), the total wealth of Chinese residents reached 687 trillion yuan in 2021, of which home assets accounted for 69.3 percent (market value of homes nationwide was 476 trillion yuan at the time). A 5 percent drop in home prices would lead to the evaporation of 23.8 trillion yuan in wealth. With the wealth of Chinese residents declining more broadly, China is now seeing what Beijing has acknowledged as “insufficient demand.” Worsening personal economic situations for Chinese residents would in turn increase financial risks and social instability.
3. The CCP’s effort to regulate real estate brokerage services and go after brokerages who charge “unfairly high prices” is a classic attempt by the authorities to “blame” China’s real estate crisis on a third party instead of taking responsibility for its long-term economic and policy mistakes that created the crisis. Similarly, the CCP faulted the education and training industry for spiking up the cost of education and making it harder for couples to have more children as part of an effort to deflect attention away from its failed pro-natalist policies.
Meanwhile, the CCP authorities will have access to all property data in China by “fully realizing the unified registration of real estate.” This will lay the foundation for the authorities to collect property tax in the future. Savvy property owners who are aware of the implication of the “unified registration of real estate” and who own multiple properties could start selling off their excess real estate to avoid paying future taxes, which would in turn put further pressure on home prices.
4. China’s unfolding real estate crisis is the cumulation of several factors, including population decline, policies stemming from Xi Jinping’s “houses are for living in, not speculation” approach (including the “three red lines” limits targeting highly-leveraged developers), three years of “zero-COVID” restrictions, and overall deteriorating economic conditions in China. The phenomenon of developers selling project units at reduced prices even after they were punished by the local authorities for doing so in Suzhou’s Kunshan City suggests that increasing Sino-U.S. tensions and the relocation of supply chains from the mainland are also adding to the real estate crisis.
Kunshan, which is administered by Suzhou City, is known as “Little Taipei” because it receives a lot of Taiwanese investments and at one point had over 100,000 Taiwanese people living in the area. Taiwanese companies support 30 percent of Kunshan’s GDP and aided the city’s development from a small agricultural county into one of the more developed prefecture-level cities in China. The boom or bust of Kunshan has long been regarded as a barometer of China’s manufacturing and foreign trade situation.
The escalation of Sino-U.S. and cross-Strait tensions, however, appears to be driving Taiwanese investments and people away from mainland China. According to mainland media reports, there were just 36 new Taiwan-funded projects and $114 million in new Taiwanese investments in Kunshan in the first quarter of 2023, compared with an average of 50 projects per quarter (down 28 percent) over the past three years and an average quarterly investment increase of $581 million (down 80.4 percent).
Meanwhile, Taiwanese media “Business Today” (今日周刊) estimated that a third of Taiwanese businessmen in Suzhou have left the city. The remaining two-thirds have not left due to various factors that make it tough for them to do so, but they are transferring most of their production capacity out from China and leaving their factories behind.
The Suzhou-Kunshan case suggests that China’s real estate crisis will intensify as Sino-U.S. relations deteriorate, supply chains migrate, and foreigners become more inclined to move out of mainland China.
