Loading

“The box is even blacker than usual,” says Nis Grunberg, a Chinese elite politics expert at the Mercator Institute for China Studies. “Business and everyone is lost at sea. They don’t know where the ship is going. Is this securitisation drive going on forever?”

Chinese President Xi Jinping’s security crackdown has been paired with an ideological campaign to bring the People’s Republic back to its socialist roots. It has been combined with restrictions on foreign investment and a centralisation of state power that has been unmatched since the days of Mao Zedong.

Yao Yang, the director of the China Centre for Economic Research said the country was entering “a new era” that would correct the capitalist problems it had accumulated since Beijing began its latest phase of liberalisation in the 1990s.

Yao said China was beginning a new 20-year period of readjustment. This one is off to a rocky start.

“Although necessary in part, corrective measures have gone too far, leading to a number of new problems,” Yao said in comments first published by the Sinification newsletter on Tuesday.

In Wenzhou, south of Shanghai, the problems caused by over-correction are writ large: business confidence has been hammered, foreign investment has fled, and properties stand vacant.

“The Chinese economy is on the decline,” said He Jingyu, a real estate agency manager in Wenzhou. “People know this in their heart and mind, but they can’t say it.”

Wenzhou is the birthplace of China’s real estate speculators. It is also where Premier Li Qiang, who will set the country’s economic target on Tuesday, made his name.

In 2002, aged 43, he became Wenzhou’s youngest party secretary. While he was there, he became close to Xi, then the head of Zhejiang, the south-eastern province where the city is located, sparking a two-decade partnership that would take the two of them to the top of the Politburo Standing Committee.

But in the years since, the speculators have disappeared. Like the rest of the country, so has their economic growth engine: property development.

“In its heyday, we would have 100 apartments for sale and 2000 people turned up,” says property sales consultant Li Helin.

The boom was driven by the “wizards of Wenzhou”, a group of wealthy investors who combined their savings in 2000 and began buying properties across China as the real estate market surged. By 2010, they had invested billions of dollars in property. Some of the speculators got out before the market tanked, others did not.

Loading

Now there are far too many apartments and not enough buyers. Wenzhou has endured the sharpest rise and fall in housing prices.

“New residential apartments are being sold at 20 to 30 per cent discount because developers try to reclaim funds as soon as possible,” said He.

Saul Wei Chen, a Wenzhou international wine trader, has seen the impact on his family.

“Take my parents’ house as an example, it fell from a peak price of 60,000 yuan ($12,814) per square metre to 17,000 yuan today,” he said.

More than 60 per cent of China’s wealth is tied up in housing, compared with 40 per cent in Australia and 29 per cent in the United States. The collapse in property values therefore has a far greater ripple effect through its economy. When prices fall, so does spending, creating a vicious cycle that Beijing has so far been unable to stop.

The real estate crisis has also disproportionately affected those Chinese who can afford to buy homes – the generation that became wealthy and educated under Xi and his predecessor Hu Jintao. Now, as China’s economic growth struggles and youth unemployment rises, this generation is increasingly sitting out job opportunities while waiting for more prestigious roles.

Migrant workers who get by on $1280 a month making shoes in one of Wenzhou’s many shoe factories say there is still plenty of work to go around – it is just that after years of rising education, younger and more urbanised Chinese do not want to do it.

“Some people are not willing to endure hardship and work hard,” said Gao Sheng, a 24-year-old migrant worker from Guizhou.

Loading

That disconnect is part of Xi’s rectification campaign now being implemented by his lieutenant Li, a market evangelist who has largely disappointed observers thinking he might be a counterweight to Xi’s dogged pursuit of Marxist control.

“Marketisation brings prosperity, but not all of its outcomes are in line with societal goals,” said Yao. “This is especially true in China under the leadership of the Communist Party of China.”

In 2021, Xi promoted his idea of “common prosperity” as a way of redistributing the gains made by wealthier people towards poorer workers like Gao.

But the public debate became so heated, led by the new generation of wealthy Chinese who feared they would have their money taken away from them, that it has seldom been heard of since, stalling the incentive to pursue broader reforms such as property tax.

“The party lacks a theory on the advancement of common prosperity in the context of a market economy,” said Yao. “It is unable to clarify the relationship between common prosperity and the protection of property rights and market principles on the other.”

That has left the country in an economic stasis. Ideology and security are now the dominant form of governance, putting local companies on tenterhooks. Foreign firms have also been put on notice through a securitisation drive that includes raids on companies and detention of executives on espionage charges.

“On the one hand, they say: ‘We’re open for business. We want American, and Japanese businesses here,’” US ambassador to China Nicholas Burns told 60 Minutes America last week.

“But on the other hand, they’ve raided six or seven American businesses since last March.”

The cumulative effect of the economic downturn and security fears ripping through international companies has caused foreign direct investment to drop to its lowest level since 1993.

In 2023, new foreign direct investment was 82 per cent lower than in 2022, according to data from China’s State Administration of Foreign Exchange.

Grunberg says the new security environment is something that every company that has local or foreign staff in China needs to confront.

“The reason I’m not entirely writing off investments in China is because companies will ignore that as long as they can make enough money,” he said.

Loading

For now, the downstream effects of the property market woes and its security crackdowns mean less money is flowing back to Wenzhou and the megacities that surround it.

Chen said customers who once bought 100 boxes of wine only bought 70 to 80 boxes last year.

“Those who bought more than 200 boxes before, bought only 100 boxes and those who bought 50 boxes at a time, only bought 10 to 20 boxes,” he said.

“The frequency of their purchases declined, the number of purchases declined and the volume of purchases declined.”

Grunberg does not believe the persistent economic challenges mean Li and Xi will suddenly change course at the National People’s Congress in Beijing on Tuesday.

Loading

“My best guess is that the leadership is convinced they just have to muddle through and bite down on the pain,” he says. “The top leadership believes that they have enough control, enough security apparatus, and enough ideological backing, that this is just a period of pain, and they will come out on the sunny side afterwards.”

Locals in Wenzhou are struggling to see the sunrise. “We can’t put hope in Li as the mountain is high, and the emperor is far away,” says He.

Get a note directly from our foreign correspondents on what’s making headlines around the world. Sign up for our weekly What in the World newsletter.