After accelerating gradually, the property boom ended with a bang. With residential land prices in June 2021 more than 30% higher than they had been the year before, the authorities tried to slow the pace of appreciation and ordered banks not to increase lending for residential real estate.
The directive had the opposite effect from what was intended. Credit rationing made it difficult for the largest and most leveraged developer, Evergrande, to meet its obligations. Subcontractors who didn’t get paid stopped working, and people who had bought apartments started to worry that they might never receive the homes they were paying for.
When the main selling season started in September, there were many more sellers than buyers. For a while, there were hardly any transactions at the advertised prices, and prices for both land and apartments are starting to fall. That will turn many of those who invested the bulk of their savings in real estate against Xi.
Evergrande has been placed in receivership, and other developers face a similar fate. The firm’s creditors soon started fighting to improve their position in receiving bankruptcy distributions. The courts took charge, and their first move was to protect the subcontractors, who employ some 70 million migrant workers.
It remains to be seen how the authorities will handle the crisis. They may have postponed addressing it for too long, because now people’s confidence has been shaken. Xi has many tools available to reestablish confidence—the question is whether he will use them properly. In my opinion, the second quarter of 2022 will show whether he has succeeded.
The current situation doesn’t look promising. Making matters worse, China also faces a serious demographic problem. The birthrate is much lower than the published figures indicate. Experts calculate that the actual population is about 130 million lower than the official figure of 1.4 billion. This is not widely known, but it will produce labor shortages, slow the economy, aggravate the real-estate crisis, and heighten fiscal strain.
The Revenge Of The Virus
China is encountering serious problems with COVID-19 as well. The Chinese vaccines were designed to deal with the original Wuhan variant of the coronavirus, but the world has been struggling with others, especially Delta and now Omicron. Xi couldn’t possibly admit this while he is waiting to be appointed for a third term. He is hiding it from the Chinese people as a guilty secret.
All Xi can do now is to impose a “zero-COVID” policy, which entails severe lockdowns at the slightest sign of an outbreak. But this is having a negative effect on economic activity and is inflicting severe hardship on the people who are instantaneously quarantined wherever they are. The authorities will not be able to silence their complaints for long.
After all, those complaints are bound to multiply. Omicron entered China mainly through the port city of Tianjin, which is 30 minutes by high-speed rail from Beijing. By now, it has spread to an increasing number of cities across China. It is no longer under control.
This development threatens to be Xi’s undoing. Omicron is much more infectious than any previous variant, although it is much less harmful for those who have been properly vaccinated. But, because Chinese people have been vaccinated only against the Wuhan variant, Xi’s secret is bound to be revealed, most likely during the Winter Olympics or soon thereafter.
The Winter Games are of course Xi’s prestige project, so the administration is going to incredible lengths to make the event a success. While the competitors will be isolated from the local population, continuing the effort after the Games are over makes little sense. City-wide lockdowns are unlikely to work against a variant as infectious as Omicron. This is evident in Hong Kong, where the outbreak looks increasingly serious. Yet the cost of zero-COVID is rising every day as the city is cut off from the rest of the world, and even from China.
Hong Kong highlights the wider challenge Omicron represents for Xi. He tried to impose total control but failed. As Omicron spreads, opposition within the CPC will grow stronger. Xi’s carefully choreographed elevation to the level of Mao and Deng may never occur.
It is to be hoped that Xi may be replaced by someone less repressive at home and more peaceful abroad. This would remove the greatest threat that open societies face today. Their task is to do everything within their power to encourage China to move in the desired direction.
George Soros is chairman of Soros Fund Management and chairman of the Open Society Foundations. A pioneer of the hedge-fund industry, he is the author of many books, including "The Alchemy of Finance, The New Paradigm for Financial Markets: The Credit Crisis of 2008" and "What it Means, and The Tragedy of the European Union."