Washington, DC, December 20, 2011 --  

China's cowed citizens are looking less docile all the time. Economic pressure in the coming year could end Chinese allegiance to their authoritarian leaders.

In the two decades since tanks and soldiers mowed down democracy protesters in Tiananmen Square, sending surviving activists to prison or exile, China's citizens have been a docile bunch. Placated by economic growth rates approaching 10 percent every year since the early 90s, the people have shelved ambitions of political freedom and focused on getting rich.

But this post-Tiananmen deal between the Communist regime and the Chinese population is looking shakier all the time. Earlier today, thousands of protesters blocked a Guangdong highway in Haimen, facing off against tear-gas wielding police in an attempt to stop construction of a coal-burning power plant.¹ Meanwhile, in the nearby village of Wukan, protesters remain in control after forcing authorities to flee the area. The rebellion started in response to the seizure and sale of land by corrupt officials, but escalated after an activist died in police custody.²

The list of recent incidents goes on and on. Two Thursdays ago, hundreds of protesters faced off against riot police at a bankrupt furniture factory in Zhejiang province.³ And earlier this month, hundreds of people rioted in the streets of Xian and overturned police cars in reaction to police's delayed response to the killing of a girl by a construction vehicle.⁴

While civil unrest is not new to China, incidents in recent years have been largely confined to rural areas with less affluent citizens, where authorities could easily contain the situation. What's new this year is that protests have spread to wealthy coastal provinces which have been the main beneficiaries of China's economic growth. These are the very people who are supposed to be placated by their increasing fortunes, and cowed into obedience before the authorities.

Perhaps the most concerning flashpoint for future unrest has been a decline in property values. Two months ago in Shanghai, luxury condo buyers broke windows and smashed showrooms of developers after learning that prices for additional units had been slashed by up to one third.⁵ One property agency reports that new home prices in Beijing were down 35 percent in November alone.⁶ More broadly, China's National Bureau of Statistics reported yesterday that 49 out of 70 large and medium-sized cities saw declines in value of new building units over the past month.⁷ A survey of potential homebuyers in Shanghai found that 80 percent expect prices to continue to decline in the next year.⁸

These numbers are the first hard evidence of a pop in China's housing bubble that analysts have long expected. Anecdotal reports of empty high rises in cities all over China suggest that that the crash could be large and potentially painful for China's urban elite, who have invested much of their savings in real estate. Given the opacity of the Chinese system, it is hard to predict how quickly investors will react to these declines -- especially if they believe reassurances that everything is okay.

Clearly, a collapse in the housing boom will bring down China's GDP growth rate. China's housing market was one of the beneficiaries of government stimulus during the financial crisis. Easy credit and official efforts to boost the economic growth rate pumped up this market during the past few years, making it a big part of China's growth. But now, this aspect of the country's economic development appears unsustainable.

A crash in China's housing market in 2012 would come at a particularly unwelcome time given that exports to Europe are expected to weaken significantly in response to large part of the Euro zone entering recession. This will make it almost impossible for China to keep its growth rate above the 8 percent that the government says is necessary to avoid social unrest.⁹ And given that this year has already seen a renewed Chinese appetite for challenging government officials in the streets, it might not take much of an incentive to get the masses to revolt.

Of course, none of the protests this year can be compared to the challenge to the Chinese government in 1989. Unrest has largely been directed at local officials, with protesters often making a concerted effort to express their loyalty to the nation's Communist Party leadership. But unlike the 1989 movement, which was led by students and intellectuals, this year's protests have erupted almost spontaneously by grassroots anger. In such an environment, who knows how quickly things may change if 2012 proves a bad year for China's economy.

Notes:

1. Boston Globe, Thousands protest China town's planned coal plant, December 20, 2011

2. The Telegraph, Wukan siege: Chinese villagers claim small victory with high level Communist Party meeting, December 21, 2011

3. Reuters, China unrest spreads to bamboo furniture factory, December 9, 2011

4. Financial Times, China to prepare for social unrest, December 4, 2011

5. Foreign Affairs, China's Real Estate Bubble May Have Just Popped, December 18, 2011

6. Ibid.

7. National Bureau of Statistics of China, Sales Prices of Residential Buildings in 70 Medium and Large-sized Cities in November, December 19, 2011

8. Forbes, China Housing Bubble Deflating; More Declines Seen In '12, December 19, 2011

9. Financial Times, Ibid.