Mortgage Boycott Could Deepen Real Estate Crisis

Welcome to Foreign Policy’s China Brief.

The highlights this week: Why homebuyers are fed up with China’s presale mortgage system, U.S. Speaker of the House Nancy Pelosi prepares for a trip to Taiwan, and Chinese President Xi Jinping’s visit to Xinjiang reflects his growing personality cult.

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Welcome to Foreign Policy’s China Brief.

The highlights this week: Why homebuyers are fed up with China’s presale mortgage system, U.S. Speaker of the House Nancy Pelosi prepares for a trip to Taiwan, and Chinese President Xi Jinping’s visit to Xinjiang reflects his growing personality cult.

If you would like to receive China Brief in your inbox every Wednesday, please sign up here.

The Chinese real estate market was rattled this week when angry homebuyers threatening to stop their mortgage payments on unfinished projects gained traction on social media. More than 85 percent of Chinese houses are sold through presale—up from about 50 percent in 2005; mortgages begin months or even years before buildings are finished. Projects have only slowed since 2020, when the Chinese real estate market entered a protracted crisis and developers started to struggle.

Some buyers across China have refused to pay mortgages for unfinished projects for months now, but this week it coalesced into a group movement. A list that started with just 30 projects grew to more than 300 by last weekend. Mortgages aren’t as common in China as in the West: Only 18 percent of homeowners have one, and it’s more common to borrow money from extended family, who invest collectively in a property.

The movement against the presale system puts as much as $350 billion in payments at risk, and Chinese authorities have already moved to censor it. However, the crisis continues to feed on itself: As developers’ cashflow dries up, even more projects are being suspended, leaving more consumers angry and fearful that they may never be finished. The authorities are now leaning on lenders to bail out projects to help keep developers afloat.

But why are people willing to pay in advance for homes in China anyway? There’s no waiting list for homes, because there’s no shortage of stock; the housing vacancy rate in major Chinese cities runs between 15 and 25 percent. The reason so many homes are empty is because many people buy only as an investment. With no property tax and home prices climbing for decades, Chinese real estate has been extremely profitable. Some presales have been flipped even before the homes were built.

This trend held up during the boom years in China; at this point it makes less economic sense, but the notion that property prices can only ever go up exerts a strong grip on the public imagination. But homebuyers were essentially willing to be the main lender for the real estate sector when everyone profited. Now that the sector is in trouble, buyers aren’t ready to foot the bill anymore. The problem is that it’s not clear who else can.

Before this year, about 50 to 70 percent of presale funding was required to be held in escrow accounts controlled by the local government. (The regulations vary between different cities and counties.) But there was widespread collusion between real estate developers and local officials as a result, with governments sometimes using the cash to finance their own projects in return for favors for developers.

China’s central government loosened the rules earlier this year, both in response to the state of the industry and to try to break up some of this collusion. But the changes haven’t been enough, and nor have the rush of measures like rate cuts that authorities have pursued at all levels. Home sales plummeted in April and May, down 59 percent from the previous year. China’s major real estate developers are desperate for cash, and so are their suppliers.

However, China’s real estate firms are simply too big to fail. The wealth of the country’s urban middle class is invested in them. Property makes up roughly 30 percent of Chinese GDP. Price cooling measures kept failing in part because local governments feared the result even a small deflation of the property bubble could have and faced public pressure. Today, Chinese property prices are falling, but they’re being kept from falling faster by local government pressures on developers not to sell at too low a price point.

At some point it’s possible that the central government will take dramatic action, including de facto nationalization of parts of the real estate industry. For one thing, Chinese President Xi Jinping’s natural reaction whenever there’s a problem is to give the government more control. But even that will probably have to wait until next year. The energy of the party-state system is currently devoted to the internal positioning around the 20th National Congress of the Chinese Communist Party in the fall—and Xi’s almost certain third term.

Pelosi heads to Taiwan. U.S. Speaker of the House Nancy Pelosi will reportedly travel to Taiwan in August, following up on a visit delayed by COVID-19 in April. Beijing has voiced the usual upset about the trip, but tensions around the island are steadily growing. The United States is increasingly vocal about its commitment to Taiwan, and Beijing is increasingly annoyed about it. Taiwan’s residents now overwhelming oppose unification with the mainland and increasingly embrace an exclusively Taiwanese identity.

One of the potential dangers from official visits like this is that Chinese discussions cast Taiwanese resistance to Chinese imperialism as a result of U.S. plotting rather than Beijing’s own human rights abuses, public relations failures, and threats. That raises the odds of radical action—from an attempt to economically choke Taiwan to full-on invasion. But the odds of a major crisis this year seem slim: The Chinese leadership has far too much else on its hands.

Xi lauded on Xinjiang visit. The personality cult around Xi has stepped up another notch ahead of the Party Congress later this year. A visit to Xinjiang this week—his first in eight years, and his first since the Chinese state began a genocidal campaign of repression there in 2017—was marked by scenes of emotional crowds in state media. Although propaganda visits with compulsory attendance and praise are a mainstay of Chinese leadership, recent coverage of Xi has been particularly image-oriented.

But repeated foreign coverage of the atrocities in Xinjiang has had some effect on language—and possibly policy—in Xinjiang, including an effort to create an acceptable image for tourists to a new emphasis on cultural assimilation and nationalism instead of the language of cracking down on terrorism. With Uyghurs unable to leave the region or speak freely, it’s unclear whether it has made a difference in everyday life; programs such as forced sterilization and slave labor show little sign of slowing down.

Chip failures. Lu Jun, the former head of the so-called Big Fund, a 130 billion-yuan ($19 billion) investment firm set up in 2014 to boost China’s semiconductor industry, is under investigation, it was announced last Friday—a move that will inevitably lead to arrest, trial, and conviction. Lu was president of the China Integrated Circuit Industry Investment Fund, which was key to China’s goal of reaching 40 percent domestic semiconductor production by 2020. (The actual figure achieved was just 6 percent.)

Lu is one of several officials who have been purged who have links to the powerful China Development Bank, where he spent 15 years. It’s also possible that he will be an internal scapegoat for the failure of the domestic semiconductor goals. To be sure, China is still investing heavily in the sector, including a second Big Fund established in 2018—but throwing money at the problem hasn’t solved it.

Youth unemployment crisis. Youth unemployment in China hit a record high in recently released June figures. Nearly 1 in 5 Chinese workers between the ages of 16 and 24 is unemployed—nearly double the pre-pandemic number. That’s a shocking figure in a country that usually suffers from labor shortages, thanks to a shrinking working-age population. China was already graduating too many people for the job market before the pandemic hit; lockdowns and economic slowdown have worsened the problem.

Yet migrant unemployment is probably a bigger social risk than that of recent graduates, who are already relatively invested in the existing structures of political and economic power. From personal conversations, Chinese analysts are aware of the role that high levels of youth unemployment played in the Arab Spring and similar uprisings, which have concerned the Chinese Communist Party in the past.

Didi fined. The troubled Chinese ride-hailing service Didi is set to get a record-breaking fine of more than $1 billion for privacy violations—which may be the conclusion to the investigation into the firm after it listed on the New York Stock Exchange without official permission. The end of the investigation would open it up for a second listing in Hong Kong, Beijing’s preferred option. But Didi still seems like a bad bet; its reputation is damaged, local governments now favor regional competitors, and China’s zero-COVID policy has seriously reduced road travel.

There’s been some hopeful commentary that the slowing of regulatory action marks the end of the government crackdown on the technology industry that began in 2020. But as with any crackdown under Xi, there may be periods of relative tolerance, but the machinery of control will inevitably circle back around.

The easy ride Chinese tech once enjoyed—and the growth and innovation that came with it—are likely gone for good. Firms have to live with suspicious regulators applying ever-shifting rules, and foreign investors are finally catching up with the political risk and seeing better options elsewhere.