Beijing hits the brakes on sweeping economic policies, U.S. lawmakers announce bill to counter China’s economic coercion & Beijing pushes mass paranoia about American spies -- China Boss News 10.25.21
Newsletter
The Big Story in China Business
Xi hits the brakes on sweeping economic policies as impact hits masses
Bloomberg analysts last week reported that Chinese President Xi Jinping is "dialing back China's economic overhaul" after signs that Beijing's policies were "hitting ordinary citizens with higher power bills, lost savings and -- if the economy continues to struggle -- potentially fewer jobs."
Bloomberg:
Premier Li Keqiang expressed caution a week ago, saying China needed to rethink the pace of the country’s energy transition as a power crisis threatened to keep factories in the dark and homes without heat during the winter.
By Friday the central bank finally spoke on the debt crisis at China Evergrande Group, saying the risks were “controllable” and lenders should keep credit to the real estate sector “stable and orderly.” That came shortly after Bloomberg reported that financial regulators told some major banks to accelerate approval of mortgages in the last quarter.
George Magnus, research associate at Oxford University’s China Centre told Bloomberg:
China is confronting now a confluence of rising structural economic headwinds. Stability and order will be craved above all things but within the context of a very defined political agenda. The Party cannot afford to have anything like Evergrande or inflation go off the rails.
Writers for Bloomberg also noted that Beijing's "pullback" reflected the "difficult balancing act Xi faces in overhauling the world’s second-biggest economy in a way that doesn’t cause too much pain for the nation’s 1.4 billion people, about 40% of whom earn just 1,000 yuan ($155) per month on average."
Bloomberg:
While it’s important for Xi to assert his authority ahead of next month’s plenum and next year’s Party Congress -- a twice-a-decade leadership reshuffle at which he’s expected to secure a precedent-breaking third term -- any economic downturn that leads to social unrest risks weakening his grip on power. Slowing the pace of change in key areas would allow Xi to ease immediate pressure without altering his broader plans to remake China’s economy.
Neil Thomas, Eurasia Group analyst for China and Northeast Asia, told Bloomberg:
Xi has a low tolerance for outcomes that directly cause a lot of ordinary Chinese to suffer, because that would create serious risks to political stability and party legitimacy. The key stakeholder that Xi is determined to protect above all others is the Communist Party itself.
The news came just a day before Lingling Wei at the Wall Street Journal reported that President Xi was facing mounting resistance to his property-tax plan from within the party.
Wei, Wall Street Journal:
Arguments against the tax, which would be levied annually on the value of a property, have flooded in since the ministries of finance, housing and taxation started to seek feedback to the tax proposal in the spring. Many officials contend that such a levy could crush housing prices, cause consumer spending to plunge and severely harm the overall economy.
The pushback on the tax is one sign that taking on a sector that perhaps more than any other defines modern China carries risks for Mr. Xi—of both alienating Chinese households and sowing dissent within the party.
More than 90% of urban Chinese families own their homes, and property-related industries account for nearly a third of the country’s output. Meanwhile, up to 80% of China’s household wealth is tied up in real estate; a drop in property values could make homeowners feel poorer and less willing to spend.
. . . Some retired senior party members also petitioned against imposing the new tax, saying they themselves couldn’t afford to pay any additional taxes. “So many people, including party members, own more than one property,” said one of the people familiar with the deliberations. “The tax proposal is becoming a potential social-stability issue.”
The Bloomberg and WSJ reports are excellent reminders of the limits to even Xi’s power. That said, I’m pretty confident Beijing’s pulling back is only until President Xi figures another way to achieve his objectives. News emerged last week that suggests he may have already found one. The Global Times reported that “China has decided to pilot test property tax levies in selected cities during the coming five years, to garner experiences before proceeding with formal legislation.”
Global Times:
Industry experts say a trial property tax could be tested by the end of this year in selected first- and second-tier cities that have hot real estate markets, most likely in Guangdong's Shenzhen, Zhejiang's Hangzhou, and the southern island province of Hainan.
China's central government, ever since 2011, has tried out levying the taxes on high-end private residential properties in Shanghai and Chongqing, two mega cities. Since then there has been much discussion of expanding the tests nationwide, though there has been little progress to date, as many local governments are reluctant to push for such a tax out of worries that the property taxation will cause property values to drop, and dampen market demand of land — a crucial source of local governments' revenues.
To implement a property tax in those cities would, indeed, be a mighty blow to the wealth of the local governments and business elites - especially if, as anticipated, it also floors home prices. To soften the impact, Shenzhen will probably receive additional state support for the development of AI and other advanced technologies, and Hainan will likely be promised a major state media push as a duty free shopping zone that would be sufficient to kill Chinese tourism abroad.
As for Jack Ma’s hometown of Hangzhou, however, where local officials with business links to the nation’s e-commerce tycoon are being investigated for corruption, I figure there won’t be much left over: The city that spawned one of China’s greatest commercial innovators will probably end up with nothing except a busted real estate sector. Why? Because Ma pissed Xi off, and that’s how PRC power heavyweights do battle.
For the rest of Bloomberg’s update, click here. For Lingling Wei’s piece in the Wall Street Journal, click here. For the Global Times report, click here. For an inside look at power politics in China, read Desmond Shum’s new book Red Roulette available on Amazon.
Keep reading with a 7-day free trial
Subscribe to China Boss News to keep reading this post and get 7 days of free access to the full post archives.