By Kalpit A Mankikar
The optics of angry investor protests sit-ins at various offices of one of China’s largest real estate companies, Evergrande, and clashes between protesters and law enforcement have given credence to the idea. that this was a huge challenge for the Chinese Communist Party. Beijing cannot let a good crisis go by.
The company has become one of the most indebted entities with a burden of US $ 300 billion, which has decimated its credit rating and its share price. In its wake are unfinished residential buildings and over a million home buyers who have partially paid for their properties. These developments also sent shockwaves through the Chinese economy with a 9% drop in Chinese stock prices – a new low since the 2008 global financial crisis – and stock markets around the world.
At the start of his mandate, President Xi Jinping defined his priorities in the fight against pollution, inequalities and financial risks. He felt that significant progress was made over the first two, but the challenge of cleaning the Augean stables of debt remained. The legacy of debt is closely linked to the Chinese economic model called “international circulation” by researcher Wang Jian. As part of this strategy, China would leverage its huge workforce in the global production chain to pursue export-led growth. This was the guiding principle of Chinese economic mandarins until the early 2000s. In 2015, China held a virtual monopoly in the manufacture of electronics and household appliances, with its factories assembling or producing nearly 80% of computers and devices. air conditioners, and 90% of cell phones. However, the “economic miracle” meant that China had to inject more credit to maintain the same amount of production.
In 2015, China held a near monopoly in the manufacture of electronics and household appliances, with its factories assembling or producing nearly 80% of computers and air conditioners, and 90% of cell phones.
The shock of two visions
As China liberalized its economy in the 1970s, “getting rich is glorious” was the reigning credo; many quit their government jobs to explore a sea of business opportunities, which popularized the mandarin phrase “xiahai” which literally means “to go down to sea”. It was in this political and social environment that Xu Jiayin, in his thirties, left his job to found the Evergrande group in Shenzhen, then in the grip of frantic construction activity. Jiang Zemin, who succeeded Deng, had built his base in the financial center of Shanghai by significantly advancing economic reforms and giving the green light for businessmen to enter the CCP. As Xu Jiayin’s fortune increased, his ties to the CCP elite also increased. Xu was ranked by Forbes as the richest person in China in 2017.
Xu was keen to give them part of his fortune. In his book “Wen Jiabao: China’s Greatest Actor,” Yu Jie alleges that former Premier Wen Jiabao’s brother Wen Jiahong had a stake in Evergrande and had been its director. Later, New York Times revealed that Wen’s relatives had hidden assets of US $ 2.7 billion, which China has denied.
News of Xu’s purchase of a US $ 39 million property in a Tony suburb in Australia next to that of then-vice president Zeng Qinghong’s son, and news that he took a private jet to study real estate projects caused a sensation. Xu’s real estate purchases and his relationships with the elite weren’t the only things making the headlines. As a member of the Chinese People’s Political Consultative Conference in 2012, Xu attended the legislative procedures of the “two sessions” sporting a belt made by a French luxury company; his photo went viral on Chinese online platforms, earning him a mocking “Belt Brother” epithet.
While such a confluence of business interests and the political elite may benefit a few at good times, it brings discredit to the political class when times get tough. The COVID-19 epidemic has shed light on income inequalities in the country. Amid the yawning wealth gap in China, the CCP is also unhappy with the ostentatious lifestyle of these businessmen. The CCP believes that the business community has become a pressure group and is unhappy that they voice their opinions on political issues. Last year, Ant Group had to suspend its US $ 35 billion IPO following critical comments from Alibaba co-founder Jack Ma on financial matters. In September, CCP Politburo member Wang Yang celebrated the centenary of industrialist Sun Fuling. Among its other achievements, the Party particularly highlighted its role in the reconstruction and nationalization of industry amid the ravages of the Chinese civil war and in funding the involvement of the Volunteer People’s Army in the Korean War. against the West. In Xi’s day, the country’s business icons follow in Sun Fuling’s footsteps, avoid the limelight, help build nation and society, and refrain from displaying wealth.
In January 2021, a Politburo meeting to discuss the economy aimed to “prevent a disorderly expansion of capital.” Even though the term “disorderly capital expansion” has been mentioned five times by Xi since then, it has been cited as a reason by the authorities for the harsh measures against the majors in technology and online education. Thus, this exercise of ‘Red Reset’, prominently published in the ‘People’s Daily’ in September, gives Xi considerable leeway to face the financial risk of the Chinese economy, and overcome the cronyism of his predecessors. .
Evergrande’s success in real estate so far has been closely linked to the Chinese obsession with parking their investment in real estate. As investment options in China are limited, real estate accounts for around 40% of household assets. An average urban household owns 1.5 residential properties and urban property is the highest in the world. Shenzhen, the hub for many tech companies, has announced restrictions on the purchase of real estate. Home prices in Shenzhen jumped 11.4% in the first half of this year despite the economic downturn.
Under the new rules, residents with a “Hukou” in the city will only be allowed to buy a house if they have held the household’s local registration document for more than three years. Xi realizes that real estate speculation is hurting China’s growth trajectory, as housing in places like Shenzhen becomes expensive, it has a cascading effect on wages, which dampens China’s competitive advantage. The high cost of living also limits family size, which is hurting China’s future prospects. Experts have spoken of the levying of property taxes on people who buy multiple houses.
Since the pandemic, Xi has signaled his intention to switch to a new development model: dual circulation. Xi wants innovation to propel the country’s future economic development, rather than the transitory boost to the real estate sector. Thus, Beijing has indicated its reluctance to bail out Evergrande and plug any negative social reverberation by ordering local authorities to negotiate with public developers to take over unfinished real estate projects. Foreign creditors will bear the brunt of the collapse. Meanwhile, efforts are also underway to provide more investment opportunities to the population, with plans to inaugurate a stock exchange in Beijing. Xi said the capital stock market will benefit innovation-driven and technology-driven companies.
Mainland China has two main markets based in the financial center of Shanghai and in Shenzhen. The Evergrande episode took place during an extended stay in China on the occasion of the Mid-Autumn Festival. Meanwhile, Beijing has remained silent on the default line, causing stock indexes to tumble on world stock exchanges. So, for Xi, the Evergrande case serves several purposes. First, it sends the message about China’s entrenchment in the global system and its potential to harm the economic recovery of other countries. Second, it strikes at the heart of the economic sponsorship networks of old regime. Third, it indicates that Xi is determined to change his economic development strategy and channel capital into genuine technological innovations and social policies.
The CPC will convene its 10-year National Congress in 2022. Xi Jinping said he plans to stay for a third consecutive term, which is unprecedented in recent history. By striking a blow to the patronage networks of the past, it strengthens its own position vis à vis any challenger or faction. To stay in power longer, he needs to present a stronger ballot, and so he can use “successes” such as overpowering private business to get his point across.
There are also lessons from the Evergrande imbroglio for Indian policymakers. Following Galwan’s clashes on the Sino-Indian border, calls have been made to boycott Chinese goods. Exports and imports between India and China increased by more than 65% between January and June of this year. China remains India’s second largest export market and efforts must be made to reduce our dependence on it, as the first can still militarize this dependence.
– Evergrande, one of the largest real estate development companies in China, started operations in 1996 in Shenzhen.
-The company reported sales of 507.2 billion yuan (US $ 78.4 billion) in 2020.
– The Chinese Communist Party celebrated Evergrande founder Xu Jiayin as “Outstanding Private Entrepreneur” in 2018.
– Evergrande owns the Guangzhou FC soccer team and has branched out from theme parks to electric vehicles.
– The company has become one of the most indebted entities with liabilities of US $ 300 billion.
The opinions expressed above belong to the authors.