Real Estate: Force for Democracy in China?

The curious case of Chinese real estate continues. It is one of the engines of growth, but also an inflation enabler (see Ireland and US for earlier fantasies that ended badly)and a cause of internal dissent as the powerful prey on the poor and weak to secure ever more of the precious commodity. As Geoff Dyer writes in the Financial Times, this overreaching by developers in league with state and local governments has fostered a sense of entitlement and even courage in those who have decided to defend what they believe is theirs.

"Xie Jia believes she has just won a small but important victory for democracy. The 41-year-old chemistry teacher from the central city of Chongqing is head of a committee of local homeowners who recently staged a meticulously organised series of elections, and ultimately voted out the management company in their compound.

So fraught was the process that one neighbour had a finger bitten off. But Ms Xie is upbeat. “We had a few problems along the way, but this is a building block towards a greater level of democracy.”

This exercise in civic activism is not quite on the scale envisaged by Chinese bloggers inspired by the crowds demanding their freedom in the Middle East. Indeed, 22 years after students flocked to Tiananmen Square, online calls for a homegrown Jasmine revolution have gone largely unanswered, though they have produced a thuggish response from local security officials. The country lacks a large constituency of disaffected, Facebook-friendly twentysomethings hankering for regime change.

Rather it is the boom in the property sector, and the resulting political tensions, that will pose Beijing with some of the greatest threats to political stability in the next decade.

In many ways, property is the focus of the story of modern China. The double-digit economic growth of the past decade has been driven in part by the real estate explosion in more than 100 cities that has accompanied the process of industrialisation. It is also at the root of an apparent “super-cycle” of rising commodity prices that has lasted several years. Some observers see property as the country’s main economic vulnerability because of the potential for the growth of a bubble – “a treadmill to hell”, as Jim Chanos, the American investor, has put it.

Whatever the outlook, the impact on society has been profound. The move for tens of millions from government housing to new, privately owned apartments has proved an exercise in mass social mobility. It has offered them the chance to join the urban middle class and escape the social controls and scrutiny that come with state-owned flats.

Yet property is also the focus of a series of interrelated political conflicts – from the quiet, diligent activism of Ms Xie to the large number of violent protests involving poor farmers kicked off their land or tenants kicked out of homes to make way for new developments.

Resentment was evident last month at a vast rubble-strewn site on the outskirts of Zhengzhou, a large industrial city south-west of Beijing. The area was once lined with houses but these were torn down last year to make way for an industrial park. Four of the demolition crew were killed in a stand-off with residents who refused to leave.

According to the local government, which ordered the demolition, resident Liu Danao deliberately ran over the men. Those evicted, however, tell a different story. They say members of the demolition crew were smashing Mr Liu’s windows with iron bars, and that the accident happened as he was trying to escape.

Liu Mingxiu (no relation), a 72-year-old farmer born in the village long before it was absorbed by the city, says the scene was terrifying. “The local government leaders brought dozens of people, including armed police and plain-clothes police, with big trucks and bundles of shovels and bars,” he says. “We were shocked by the local government’s violent action. They should not treat local residents like this. The director of the local government just shouted, ‘Team 1, go, team 2, go’, and they started tearing down houses.”

HOUSE PRICE EFFECTS

An ‘excessively rapid rise’ that is creating a rift within the middle class

Presenting his annual report to China’s National People’s Congress on Saturday, Wen Jiabao pledged to “firmly curb the excessively rapid rise in housing prices”. It was a promise the prime minister has been making for much of the past year.

Indeed, it was at last year’s meeting of the political elite that the furore over rising house prices burst into the open. More than half of the proposals submitted by delegates were related to the cost of buying an apartment.

Weeks earlier, the authorities had shut down a popular soap opera that explored the lives of urban “wage slaves” struggling to pay their mortgage. “It has become the biggest political issue in China,” says Hu Xingdou, an economics professor at the Beijing Institute of Technology.

The sharp rise in house prices in many cities has started to create a cleft within the urban middle class, between a large group of winners who got on the property ladder early and have ridden the rising market and a smaller group of mostly younger people, especially recent university graduates, who feel shut out.

House prices have also become a lightning rod for anxiety about widening inequality. A researcher at a state think-tank produced a revealing report last year, which claimed that “grey income” not declared to the taxman is as high as Rmb9,300bn ($1,420bn), equivalent to 30 per cent of gross domestic product – much of which is funnelled into property speculation.

“Once government power is united with capital, the free competition of the market economy begins to be replaced by a monopoly of crony capitalism, leading to disparity in income and property distribution,” wrote Wang Xiaolu at the National Economic Research Institute.

As well as trying to reduce bank credit for housing, Beijing is relying on two policies to control prices. Local governments are being encouraged to build large volumes of public housing that can be rented to low-income families. And a property tax is being tentatively introduced in Shanghai and Chongqing for larger houses.

The holders of all that “grey income” hate the idea of a property tax, but the idea has long been considered crucial by reformers, because it could both reduce speculation in real estate and provide an income stream for local governments, which rely too much on land sales. However, according to Tao Ran at Renmin University, the tax is only one part of the solution.

It should be accompanied, he says, by land reform that allows farmers to sell their land directly to property developers. At the moment, only local governments can take over their land and they also decide the level of compensation.

“If farmers can sell their land directly, cutting out the heavy fee that goes to local governments, you can reduce the need for forced demolitions and cut the price of new properties,” he says.

Mr Liu says he his still waiting for compensation for his house, six months after it was destroyed. With his wife, son and seven-year-old grandson, he is squatting in a disused family planning clinic with no running water.

Similar stories became common in Beijing and Shanghai early in the past decade as the pace of urban development picked up. In one famous case, two pensioners who refused pressure to leave their central Shanghai house died after a gang of thugs hired by the demolition company set it on fire in 2005.

Today, such events are a nationwide phenomenon. In the past couple of years, there has been an epidemic of violent confrontations over forced demolitions as the urbanisation drive that has accelerated in the past decade has spread away from the coast, boosted by the massive stimulus programme that began in late 2008. The demolitions are behind as many as 65 per cent of large protests in rural areas, according to research by the Chinese Academy of Social Sciences.

“Local governments in inland areas are becoming much more aggressive,” says Professor Tao Ran of Renmin University in Beijing. But people “are also mounting more resistance. After seeing this boom over the last decade, they realise that their land is something they can make money from.”

In January, a 38-year-old woman was killed by a digger in Henan province, north-central China, as she protested against a construction project. In November, a man in the north-east set himself on fire during a stand-off with a demolition crew. One citizen has set up a website called Bloodstained Property Map to chart the incidents. It uses Google maps to mark violent evictions, and provides background information and media links. So far, there are nearly 200 incidents on the map, with regular additions.

“When I say that new housing is being built right now on land covered in blood, people know what I mean,” the site’s founder, who prefers to remain nameless, told Chinese media last year. “Media coverage can gradually fade out, so we need a new way to constrain the problem.”

In January, Beijing introduced rules designed to reduce the pace of forced demolitions. Local authorities must provide reasonable compensation and alternative accommodation, and ensure safety during the exercise. Yet there is scepticism about whether local governments will comply, in part because many rely on property sales for much of their revenue. An official in the southern Jiangxi province with the pen name of Hui Chang summed up the mood when he wrote on his blog last year: “Without forced demolitions, there is no New China.”

The rash of such conflicts has become one of the chief symbols of rising inequality, both within cities and between urban and rural areas – a cause for ever greater disquiet among the leadership in Beijing. However, as Prof Jeff Wasserstrom of the University of California, Irvine, points out, the underlying cause of these protests differs from those behind Tiananmen Square.

“The protests in 1989 were, in a sense, about how to modernise the country,” he says. “Today they are more about the social costs of modernising so quickly.”

The race to repossess land usually has one of two motivations – to make way for new factories or to clear space for high-rise housing developments for sale to the urban middle class. Even when such compounds are built, different and more subtle forms of political pressure build up.

Decked out with red lanterns for Lunar New Year, four-year-old Xinyijing compound in a western suburb of Chongqing contains a dozen 30-storey skyscrapers that house 2,180 families. Homeowners’ committees are being formed in many of these compounds to represent the interests of the new property-owning class. They are very different from the old neighbourhood committees – one of which exists at Xinyijing – the lowest level of local government in the cities, and the eyes and ears of the Communist party bureaucracy.

Until the end of last year, the compound was managed by a subsidiary of the developer, a large and politically powerful state company. However, residents started to complain about poor security, the condition of the elevators and the fact that there were fewer green spaces than they had been promised. So Ms Xie and her homeowners’ committee decided to take advantage of new rules in the city allowing them to vote out the management company.

After soliciting opinions and staging public discussions on the issue, residents held an election. The result was that 65.5 per cent of households voted to kick out the management company. The rules are complicated, however, and the decision needed also to be approved by households representing a majority of the compound’s square metres. This hurdle was cleared by the narrower margin of 51 per cent.

Three businesses applied for the contract, one of which was selected after yet another compound vote. However, when residents went to the office of the old management company to collect keys, a fight broke out – which is when the finger was bitten off. (“It took forever to find it,” says one neighbour.)

“Democracy can be a painstaking process,” says Ms Xie “But what we have done here is a symbol of the progress that the Chinese people are making.”

The effects of the push for greater participation in neighbourhood management can reach far beyond individual compounds. Three years ago in Shanghai, where homeowners’ committees have flourished, people living in a suburb next to the planned extension of the city’s Maglev high-speed rail line organised protests that led to the project being cancelled.

“I think it is indeed fair to see homeowner activism as a sign of middle-class people pushing for more accountability,” says Benjamin Read at the University of California at Santa Cruz. But he cautions that the government is averse to organisations that lie outside its control, and that the committees are often seen as a threat by powerful local developers with strong political connections. As it happens, Chongqing and Shanghai have become the first cities to experiment with a property tax, a potentially vital source of revenue for cash-strapped local governments but one that will increase demand for more accountable government.

In most of these disputes, the complaints are highly localised. “I don’t blame the central government for what we have been through. It’s the local government that doesn’t implement good policies and I think they are to blame,” says Mr Liu, the Zhengzhou farmer.

Ms Xie and her homeowners’ committee, too, are far from anti-government rebels. When asked what they think of Bo Xilai, the Chongqing party boss who has been encouraging a Maoist revival, they put up their thumbs in approval. His drive to prosecute corruption in the city has made him a favourite of the new middle class.

Nevertheless, such conflicts underscore the complex nature of the challenges confronting Beijing. The danger posed by urban development is not only the creation of a property bubble but also of widespread political conflict.

“This is a very distorted model of urbanisation that cannot go on for ever,” says Prof Tao.