(Bloomberg) – Over the past few years, President Xi Jinping has curbed China’s biggest tech companies, shattered democracy in Hong Kong and locked down 26 million people in Shanghai to stamp out Covid cases.
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Yet he now faces a surprise challenge from middle-class homeowners who are watching their family wealth vanish with a sustained decline in the property market, which accounts for a fifth of China’s economic activity. Some 70% of household wealth in China is tied to property, far more than in the United States, making it one of the most sensitive political issues for the Communist Party.
For months, Xi has staunchly resisted over-leveraged Chinese developers, sparking a record wave of defaults that has spooked global investors and brought at least 24 major property companies to the brink of collapse. In the process, more than $80 billion was wiped from its offshore bond market.
But now ordinary Chinese are publicly revolting, with rapidly escalating boycotts on mortgage payments spread across at least 301 projects in about 91 cities. These landlords accuse developers of not delivering apartments they have already paid for: the value of mortgages that could be affected has ballooned to around 2 trillion yuan ($297 billion).
“Chinese buyers usually pool the resources of the whole family to buy a house,” said Alfred Wu, associate professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. “It’s a matter of life or death for them if their homes become negative assets.”
For Xi, the timing couldn’t be worse: he’s just months away from a once-every-five-year Communist Party meeting, at which he’s expected to win a third term. Moreover, he is also willing to trumpet that his policies are beneficial in achieving “common prosperity” for average citizens, part of the social contract that underpins the legitimacy of one-party rule in China.
Already, signs are emerging that Xi will seek pain relief. Bloomberg reported on Monday that China may allow landlords to temporarily suspend mortgage payments on stalled projects without incurring penalties, as part of a broader campaign to stabilize the market, which includes urging local governments and banks to fill funding gaps among developers.
“This is the first time we have seen this type of mortgage boycott in China and it has clearly caught Beijing’s attention,” said Chi Lo, senior Asia-Pacific investment strategist at BNP Paribas Asset Management. “It is crucial for Xi to preserve stability ahead of the 20th Party Congress.”
While the boycotts are affecting only a small portion of combined mortgage portfolios, the rapidly escalating protests have raised fears that wider discontent could erupt over falling prices and the stalling of projects.
Even if a short-term solution is found, longer-term risks remain for Xi. The 69-year-old leader sees unusually widespread social discontent as he seeks to quell over-indebtedness while seeking to stamp out Covid-19 cases, putting the economy on pace to fall well short of a growth target 5.5% annually.
On Tuesday, Premier Li Keqiang said slightly higher or lower growth rates were both acceptable as long as employment is relatively sufficient, household income is rising and prices are stable.
China has seen a series of online protests over social issues in recent months, including an increase in links to the pro-democracy anthem “Do you hear the people singing?” from Les Miserables during the Shanghai lockdown. The case of a mother-of-eight found chained by the neck sparked public outcry against the trafficking of women, and months later, footage of a violent attack on diners at a restaurant sparked a new wave of protests. anger with local authorities.
Many protests in China are “strategically self-limited” to achieve a specific outcome, such as recent protests over an alleged billion-dollar financial scam in central Henan province that resulted in some victims getting their money back, according to Zixue Tai, a partner. professor at the University of Kentucky who has researched social activism in China. Still, he called the wave of unrest “a sort of spontaneous release of pent-up popular resentment against the Xi administration.”
“Failure to confront the national regime directly has allowed these protests to continue until now,” Tai said. “From the perspective of the national government, it is probably safer to let the general public speak to an acceptable degree than to suppress the voice of citizens.”
The Chinese real estate market presents unique systemic risks. Once called “the most important sector in the universe”, the property sector is now reeling from a crackdown initially targeting a handful of indebted borrowers like China Evergrande Group. As more businesses collapse, pressure mounts on banks that support the industry and local governments that rely on land sales to generate revenue.
According to Travis Lundy, an Asian markets veteran and independent analyst on investor research platform Smartkarma, who has studied Chinese real estate companies in depth.
Authorities have repeatedly stressed the need to deliver homes to buyers, even as record delinquencies have brought the real estate sector to its knees. But the majority of boycotted loans are related to builder projects that defaulted, according to data compiled by CLSA, which estimates Evergrande alone accounted for 35% of the total.
“If thousands of owners think their biggest asset is in trouble, they could protest as individuals across China, creating a ‘systemic’ political crisis,” said Andrew Collier, managing director of Orient Capital Research. Inc.
The central bank is “dodging between support for the housing sector and isolated acts of pain to reduce the housing bubble”, he added. “It’s a dangerous dance.”
(Updates with Premier Li’s comments)
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