What does it take to rattle President Xi Jinping, arguably, the most powerful man on Earth?

A fire, two banners, and a few thousand social media posts.

Ahead of the 20th National Congress in Beijing, where Jinping will secure a third term as President, a rare protest erupted.

While not on the scale of the Tiananmen protests that happened more than three decades ago, the response to this protest was as urgent and strong.

As soon as the images began appearing on social media, censors swung into action, taking down posts, locking users out of their accounts, and in most cases, suspending the accounts altogether.

One of the banners, images of which made it to Twitter, read ‘We don’t want figureheads, we want to vote, don’t be a slave but a citizen'.

Since February 2020, when the world first came to know about the lockdown in Wuhan, Jinping’s story has been that of a king from a childhood classic.

The Emperor’s New Clothes is often read to children in kindergarten to instill in them an important virtue, that of speaking the truth even in the most difficult of times.

However, that virtue is absent in China today. Jinping, via excessive stimulus, can take down the real estate sector, via regulation, take down the business sector, and via lockdowns, take down the economy, and none shall bat an eyelid.

Jinping's Real Estate Boom: Building As If There Is No Tomorrow

China’s real estate story was a political fairytale. In the wake of the 2008 recession, a new power centre emerged and what many saw as the resurrection of an old civilisation.

The world was no longer looking at Europe and America as the twin engines of growth, and all attention was on China, in the hope that a cheap manufacturing market, an export-driven economy, and the convenient factory of the world with sweatshops and almost nil labour policies will bail out the world economy.

And thus began the Chinese infrastructure boom.

On the blog of Bill Gates, a mind-boggling statistic was posted in June 2014. The United States, in the last century, used 4.5 gigatons of cement, across hundreds of years.

The Chinese government used 1.5 times the quantity used by the US, but in three years, between 2011 and 2013.

The construction boom was visible everywhere, from high-speed railway lines to new urban townships and cities. The state owned enterprises were borrowing and building as if there was no tomorrow.

Between 2008 and 2018, China created more than 26,000 kilometres (km) of dedicated high-speed railway (HSR) lines. China’s HSR lines alone constituted 66 per cent of the HSR lines across the globe in 2018. Another 10,738 km were under construction.

In comparison, the next best was France with 3,220 km HSR lines in operation with 125 km under construction. There is also the legend of Chinese officials clearing out a village over a weekend for Disney to be able to build its theme park.

The Fairytale Turns Into A Nightmare With 'Ghosts'

However, there was a tomorrow, a painful one. Across the length and breadth of the mainland, ghost towns and cities started emerging.

Apartments where no one lived. Roads where no one travelled. Commercial spaces without businesses, and all this had a direct bearing on the revenues of the provincial governments.

By the end of 2015, together, China’s local governments owed $2.5 trillion in debt.

The debt by the local governments in the US had been accumulated across 200 years while in China, the same level of debt had been accumulated across 20 years.

Soon, the private sector developers were caught in the mess, missing out on dollar bond payments.

It started with Evergrande, one of China’s biggest real estate groups with over $330 billion in liabilities, and while a Lehman like crash did not engulf the company, the driver for China’s one-third economic growth is now paralysed.

Now, Beijing is ordering demolition of buildings using explosives. Citizens are protesting against mortgage payments, without worrying about their social credit scores. Apartments are being traded for watermelons.

As the ghost cities emerged, to push couples into making the purchase, developers were giving away a session with the wedding photographer for free, some were giving a one-plus-one deal on apartments, and some went too far, offering a plot to grow vegetables with every villa.

Several real estate developers are defaulting on their coupon payments, thus unable to raise more dollar debt to sponsor their projects.

In March 2022, some of these bonds were paying a 32 per cent yield, higher than what was in 2008, indicating the volatility in the sector. In the last few quarters, the quantum of dollar bonds issued has also come down significantly, compared to 2018 and 2019.

For Q1, 2022, the issuance was down by 97 per cent compared to Q1, 2021. The other worrying sign is the $13 billion payment in interest due for the next 12 months.

This has put pressure on Beijing to deploy LGFVs or Local Government Financing Vehicles. LGFVs are now being used to buy out lands from provincial governments at inflated prices, ahead of Jinping’s coronation later this month.

For H1 2022, the LGFV purchases were $57 billion, 70 per cent more than H1 2021. In July 2022, the year-on-year change in revenues from land sales for local authorities was down by over 30 per cent.

However, LGFVs, at best, can offer short-term aid to local governments, for even they are without experience and expertise in real estate.

Where Are China's Children?

The real estate market, driving one-third of China’s economic growth, is not plagued by the follies of the developers alone, but also the population.

In May 2021, Beijing allowed couples to have three children, given the fertility rate in China was only 1.3 per woman. For Japan, it was 1.36 in 2019, and in the United States, it was 1.7.

However, what is haunting Beijing right now is the fertility rate, around 6.0 during the 1960s and 1970s, as the country gets older before it gets richer.

The real estate demand was also driven by the population considerations in many homes.

Panic-stricken parents were now investing in apartments closer to schools to ensure easy scheduling for the children. Some parents are going as far as investing in apartments right around their marriage, hoping that a school will come up in the area by the time the child is born.

The Chinese Communist Party (CCP) wanted to arrest the speculation around apartment prices, ensuring that the balance between demand and supply was retained. Too late, unfortunately.

The Communists Come For The Corporates

The population consideration had another victim, the education sector. In one of the memos in 2021, the party hinted at banning academic tutors from making any profit.

Immediately, the booming $100 billion industry, fuelled by capital and led by the three giants — TAL Education, Gaotu Techedu and New Oriental Education collapsed by more than 75 per cent to around $24 billion.

Today, the share prices of all three groups are done and dusted, with two trading at less than $5 each. As per Beijing, the regulation was to help families plan more children.

But the crackdown was not restricted to the education sector alone. The spree began with Jack Ma’s Ant Group whose initial public offering (IPO) was suspended a few days before listing.

Crackdown against Didi, China’s Uber-equivalent then followed as the company prepared for foreign listing. Meituan, one of the biggest food and retail delivery services, was then under a probe from Beijing for poor worker conditions and anti-monopoly practices.

The gaming sector was not spared either as CCP felt the virtual sector undermined the communist principles.

Shut It! Shut It! Shut It!

However, in retrospect, the crackdowns were nothing compared to the Covid-zero lockdowns that followed, triggering mass resentment and economic paralysis. The rationale behind these lockdowns remains unexplained.

Officially, China, since the start of the pandemic has logged in a million-odd cases. India’s number, with almost the same population, was more than 44 million.

Thus, even today, China’s population is without any natural immunity, and it is feared, that without lockdowns, the number of deaths could be very high.

China today continues to impose mass testing, contact tracing, and quarantines for passengers coming from foreign nations.

The debatable Covid-zero strategy, as per the government, is to prevent 50 million cases and a million deaths.

For the last two years, Chinese propaganda has focussed on the successful control of the virus, comparing the country to the United States where deaths have exceeded one million across two administrations and other western nations.

Jinping wants people to believe that the lockdowns are the only way for survival.

The vaccine penetration is another problem. Compared to 92.8 per cent in Japan, 94 per cent in the US, and 99 per cent in Australia, only 84 per cent of the elderly population have been vaccinated entirely in China.

To make matters worse, a peer-reviewed study has concluded that the immunity guaranteed by the Chinese vaccine is far from sufficient, and an outbreak could result in 1.6 million deaths.

The study, published in Nature Medicine, predicts over 110 million cases if the Covid-zero restrictions were removed.

Western companies manufacturing in China are now looking at dented revenues for 2022.

Tesla, Toyota, and Volkswagen have revised their projections for the current year as delay in the delivery of key raw materials disrupts their production.

Tesla’s Shanghai plant, usually shipping out close to 60,000 cars a month, was only able to produce a little over 1,500 cars in April, given it was shut for three weeks. Toyota, due to the supply-chain disruptions has already cut its revenue forecasts by 20 per cent.

Tired of lockdowns, companies are now looking to diversify their supply chains. The most recent example is that of Apple, moving AirPods and Beats production to India.

Out Of Tricks

Jinping’s biggest challenge, today, is domestic growth. The rare protest in Beijing was an indicator of what the population felt, and while they are silenced by force, a sustained period of slow growth coupled with lockdowns could test Beijing's political resolve.

While the official growth target for 2022 was 5.5 per cent, the forecasts now are for 2.8 to 3.2 per cent.

Against Q2, where growth was of 0.4 per cent, Q3 growth is expected to be around 3.4 per cent.

Going forward, Jinping’s biggest challenge will be to reopen the economy, but this time, unlike 2008, he does not have the luxury of real estate spending, nor can he rely on endless exports to beat the slowdown, and then there is the prevailing threat of Covid virus waves, warranting shutdowns.

At a political and economic tipping point, Jinping is growing desperate. The question is how long can China lose for Jinping to win?

This is the second article in a four-part series ahead of 20th National Congress of the Chinese Communist Party where President Xi Jinping will secure a third-term.

Also Read: Part I-The Great Dictator: Xi Jinping’s Decade As China's President

Chinese Markets

Traitor And Dictator: How President Xi Jinping Is Losing China

The Case For A Defence Cess Along With Economic Stimulus: It Will Send Strong Message To China

Get Swarajya in your inbox.