Home price falls threaten China’s capitalist communism

While all eyes are on Italy, the world’s second-largest economy is showing signs of trouble. China, this curious mix of communism and capitalism, is running out of steam – and ideas. Unless the Chinese government finds new ways to stimulate its economy, it might find itself facing the world’s biggest revolution.

News spread around the internet earlier this month about protests by Chinese homeowners against falls in home prices.

Buyers who had paid full price for units at a residential project in the eastern Chinese province of Jiangxi attacked the developer’s sales office after discovering that it offered discounts of up to 30% to new buyers, according to a report in the South China Morning Post.

Protests also took place in suburban Shanghai, where the same developer cut prices on another project by 25%.

“People are so used to rising prices that it never occurred to them that they can fall too,” the paper quotes an economist at a local brokerage as saying.

And that is the problem. The protests highlight the peculiarity of China’s hybrid model of capitalist communism – or communist capitalism, whichever you prefer. It tries to reconcile two ways of life that are essentially irreconcilable.

Under communism in the Eastern European model, prices were dictated by the state and usually went up in a gentle, controlled pattern. Supply was also controlled by the state. Obviously, in time this created the notorious shortages of various products.

The same was true for property – a family was usually entitled to buy a single property, and its price was decided by the state.

China decided to “open up” its economy without doing the same for its political system. It has some form of free pricing and market speculation, and this has allowed people to pour their wealth into property, pushing prices higher and higher.

(With interest rates in China and in most Western economies falling for more than a decade, you can see why most people in both regimes opted to put their lifetime savings into property.)

People living in communist societies are used to the idea that the state will “take care” of them. It’s the price they pay for the loss of freedom of speech, of movement (some Chinese cities still restrict residence rights) and other freedoms that people living in democracies take for granted.

Therefore, when capitalist mechanisms (such as price discounts to boost property sales) come into conflict with these expectations, trouble follows. People expect the government to deliver ever-increasing home prices, because the communist party paints itself as the country’s only decision maker.

But sometimes even the communist party risks running out of ideas. The Chinese economy has been slowing down, albeit at a moderate pace. The International Monetary Fund (IMF) expects it to expand by 6.6% this year – still a brisk pace compared with 4.7% for emerging markets as a whole.

Whether the slowdown accelerates depends on US President Donald Trump’s trade war with the rest of the world. Analysts at Oxford Economics looked at the effect this has on Chinese equities:

China can maintain the illusion that it is the near-perfect mix of communism and capitalism for a while yet. But the recent protests against falling home prices highlight the trouble for a government that does not have a political opposition: the onus is on it alone to ensure the people are happy. China may be a dictatorship, but its people are not completely without power.