Xi Jinping’s cunning housing crisis The CCP wants to turn peasants into scientists

With the imposition of his “three red lines” regulations in 2020, Xi Jinping called time on China’s epic real estate boom. For the previous two decades, real estate had played a huge part in China’s economy, matched only by exports to the West. But Xi brought an end to housing as an asset class.

For Xi China’s building binge had a single purpose: to urbanise the nation. And now China has enough. Since 2004, 12.7 billion metres of housing have been built in China. In 1999, 65% of China’s population was rural; by the 2020 census, that proportion had dropped to 39%. Hundreds of millions of people moved into new houses, sometimes in entirely new cities.

In pursuit of this state-mandated goal, vast private building companies emerged and made their fortunes, including Evergrande and Country Garden. China’s GDP soared, not only due to the building boom, but also because new urbanites started to spend money. Rural subsistence farmers generate virtually no GDP: they plant crops, consume them and occasionally buy fertiliser. By contrast, urbanites buy washing machines and TV sets, they take trains, work at companies and eat dinner in restaurants. As of 2023, Shanghai’s per capita GDP is 190,000 RMB (around 26,000 USD); the average for rural China, according to government statistics, is around 20,000 RMB (around 2,750 USD). By embracing modernity and turning peasants into urbanites, China created infinite reserves of GDP.

Now this process is almost complete.

China’s colossal property developers will suffer as a result. But in the eyes of China’s government, they are disposable. They’ve served their purpose. Before last month’s Third Plenum, some speculated that China would revive its housing market by inverting the three red lines and somehow giving investors cash from the magic money tree. No such luck. Although Chinese leaders do want to continue the process of urbanisation by, for example, reforming the Hukou system, they have no interest in pleasing property tycoons and investors. In an effort to prevent out-of-control urban growth along the lines of Tokyo or Seoul, the Chinese government retained the Hukou system — in which Chinese people are entitled to education or medical care only in their hometown — during the boom years. As urbanisation has slowed, the system is gradually being abolished, with the intention of encouraging a few more rural dwellers to move to the cities.

China officially plans to reach 75% urbanisation, so there are still more than 100 million people left to go. But Xi is keen to retain that rural population: they preserve the nation’s food security and traditions, and tend to China’s wild spaces. At the same time, the overriding goal of the CCP is to create the conditions for the optimum number of healthy, highly-educated, middle-class Chinese. When India’s population exceeded that of China last year, the Chinese Ministry of Foreign Affairs said that the quality of the individuals, not just their quantity, was relevant. This comment alluded to the sense that in the globalised economy, one highly-educated STEM engineer is worth 10, if not 100, peasants; while China’s total population isn’t growing, the population of middle-class urbanites is, and that is the population relevant to latest goal: turning China into a sci-tech superpower. And now, these new urbanites must start inventing semiconductors.

Some of the property developments that were unfinished or unsold when Xi blew the whistle will become affordable housing in line with the Singapore model. Housing values have stopped rising, leaving urban middle-class families whose assets are tied up in houses — which make up 59% of household wealth, compared to around 25% in the US — feeling hard done by. But despite the hit to China’s economy, Xi Jinping continues to insist that houses are for living in, not for speculation. If China’s middle class don’t like it, they can book a flight to Ecuador.

It’s worth pointing out that these urbanites are still rich relative to their countrymen: imagine if the government magically made London house prices stop rising. They’d be pretty unpopular in London, but for the excluded and resentful, this policy would be a winner — especially if it meant their children could go to work in London.

This could also affect the so-called “lying flat” generation. Right now, given that 96% of Chinese urban residents own their homes, the young can afford to be picky about working. Many of them choose not to. After all, they don’t need to pay the rent. Right now, renting your home is marginal in China; but in the years to come, it is bound to become much more widespread. When homes were an asset class, you didn’t need to rent them out; their value doubled rapidly, and being a landlord is a lot of work. But if house prices aren’t guaranteed to increase, the assets need to work to generate returns. And so will the youngsters.

When the CCP first decided to wind down the property boom with regulation, fears spread that China would face its own Lehman Brothers Moment. But for now, it has not materialised. The 2008 financial crisis engendered a long-term loss of faith in the economic system among Chinese policymakers and ordinary Americans. Just as the populist politics of Donald Trump are arguably a consequence of the Global Financial Crash, so are those of Xi Jinping. In cities such as Shanghai and Guangzhou, middle-class families who expected the value of their homes to continue rising forever are unhappy. And we are yet to discover whether this managed deflation, so different from the explosive shock of 2008, will erode the government’s credibility in the medium term.

Meanwhile, urbanisation has changed China forever. For the longue durée of Chinese history, Chinese society was overwhelmingly rural and agricultural; it is only extremely recently that peasants have become a minority. The new Chinese city, generic in form, which satisfies most human needs in a functional, basic way, has introduced a massive number of humans as consumers, potential scientists or investors, and historical actors. As to the results? As former CCP leader Deng Xiaoping said of the French Revolution, it is too soon to tell.