Neeraj Singh Manhas
The optics of irate investors staging sit-in protests in various offices of Evergrande, one of China’s largest real estate firms, and clashes between demonstrators and law enforcement lent credence to the view that this was a major challenge to the Chinese Communist Party. Beijing may not want to waste a good crisis.
With a burden of US $300 billion liabilities, the company has become one of the most indebted entities, decimating its credit rating and share price. It has left behind unfinished residential buildings and over a million home buyers who have only paid a portion of the purchase price. These developments have 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 bourses around the world.
Early in his presidency, President Xi Jinping stated that his top priorities were to address pollution, inequality, and financial risks. He believed that significant progress had been made on the first two, but that the challenge of cleaning out the Augean stables of debt remained. Debt is inextricably linked to China’s economic model, dubbed “international circulation” by researcher Wang Jian. China would pursue export-led growth under this strategy, leveraging its massive workforce in the global supply chain. Until the early 2000s, this was the guiding principle for China’s economic leaders. By 2015, China had a near-monopoly in the production of electronics and white goods, with its factories assembling or producing nearly 80% of computers and air conditioners, and 90% of mobile handsets. However, the “economic miracle” meant that China needed to inject more credit in order to maintain the same level of output.
As China liberalised its economy in the 1970s, the mantra was “get rich is glorious”; many left government jobs to pursue a sea of business opportunities, popularising the Mandarin phrase xiahai, which literally means “going down to the sea.” In this political and social environment, Xu Jiayin, then in his 30s, quit his job to establish the Evergrande Group in Shenzhen, which was then undergoing frenetic construction activity. Jiang Zemin, who succeeded Deng, established his base in Shanghai’s financial district by accelerating economic reforms and allowing businesspeople to join the CCP. As Xu Jiayin’s fortunes improved, so did his ties to the CCP elite. Forbes named Xu the wealthiest person in China in 2017.
Xu was wary of handing over a portion of his fortune. Yu Jie alleges in his book ‘Wen Jiabao: China’s Greatest Actor’ that former Premier Wen Jiabao’s brother, Wen Jiahong, had a stake in Evergrande and served as its director. The New York Times later revealed that Wen’s kin had hidden assets worth $2.7 billion, which China has denied.
Xu’s purchase of a US $39 million property in a posh suburb of Australia next to that of then Vice-President Zeng Qinghong’s son, as well as his use of a private jet to survey real estate projects in Australia, sparked outrage. Xu’s real estate purchases and elite connections were not the only things making headlines. In 2012, as a member of the Chinese People’s Political Consultative Conference, Xu attended the ‘Two Sessions’ legislative proceedings wearing a belt made by a French luxury major; his picture went viral on China’s online platforms, earning him the mocking moniker ‘Belt Brother.’
While such a convergence of business and political interests may benefit a few in good times, it brings the political class into disrepute when times are tough. The COVID-19 outbreak has focused attention on the country’s income disparities. Amid China’s widening wealth disparity, the CCP is also dissatisfied with such businesspeople’s ostentatious lifestyle. The CCP believes that the business community has evolved into a pressure group and is dissatisfied with their public statements on policy issues. Ant Group had to postpone its US $35 billion IPO last year, following Alibaba co-founder Jack Ma’s critical comments on financial matters. Wang Yang, a CCP Politburo member, commemorated the centenary of industrialist Sun Fuling in September. Among his other accomplishments, the Party emphasised his role in rebuilding and nationalising industry amidst the ravages of the Chinese Civil War, as well as financing the People’s Volunteer Army’s participation in the Korean War against the West. In Xi’s era, the nation’s business icons, like Sun Fuling, avoid the spotlight, contribute to nation-building and society, and refrain from flaunting wealth.
A Politburo meeting in January 2021 to discuss the economy aimed to ‘prevent disorderly expansion of capital.’ Despite the fact that Xi has mentioned the term “disorderly expansion of capital” five times since then, it has been used by the authorities to justify harsh measures against tech and online education majors. Thus, the ‘Red Reset’ exercise, which was prominently featured in the ‘People’s Daily’ in September, gives Xi considerable leeway in dealing with financial risk in the Chinese economy and dealing with the cronyism of his predecessors.
So far, Evergrande’s success in the real estate market has been closely linked to the Chinese obsession with parking their investment in real estate. Due to the scarcity of investment opportunities in China, real estate accounts for roughly 40% of household assets. The average urban household owns 1.5 residential properties, making it the world’s highest rate of homeownership. Shenzhen, a technology hub, has announced restrictions on real estate purchases. Despite the economic slowdown, Shenzhen’s home prices increased by 11.4 percent in the first half of this year (see graph).
Residents with “Hukou” in the city will be allowed to buy a home under the new rules if they have held the local household registration document for more than three years. Xi recognises that real estate speculation is harming China’s growth trajectory. As housing in places like Shenzhen becomes more expensive, it has a cascading effect on wages, undermining China’s competitive advantage. High living costs also limit family size, harming China’s long-term prospects. Property taxes on people who buy multiple homes have been proposed by experts.
Since the pandemic, Xi has signalled his intention to shift to a new pattern of development-dual circulation. Xi wants innovation to drive the nation’s future economic development rather than being a short-term boost to the real estate sector. Thus, Beijing has indicated its reluctance to bail out Evergrande and to mitigate any negative social ramifications by instructing local governments to negotiate with state-owned developers to take over unfinished real-estate projects. Foreign creditors will bear the majority of the brunt of the collapse. Meanwhile, efforts are being made to provide more investment opportunities for the people, including the establishment of a stock exchange in Beijing. Xi stated that the capital share market would benefit technology-oriented, innovation-driven firms.
Mainland China has two major markets, one in Shanghai and one in Shenzhen. The Evergrande saga unfolded during a long holiday in China to commemorate the Mid-Autumn Festival. During this time, Beijing remained silent on the loan-default issue, causing stock indices around the world to plummet. Thus, lawfare Evergrande serves multiple purposes for Xi. First, it sends a message about how entrenched China is in the global system, and how it has the potential to harm other countries’ economic recovery. Second, it strikes at the heart of the ancient regime’s economic patronage networks. Third, it shows that Xi is serious about changing China’s economic development strategy and directing capital toward real technological innovations as well as social policies.
In 2022, the CCP will hold its once-in-a-decade National Congress. Xi Jinping has stated that he intends to serve a third consecutive term, which is unprecedented in recent history. By severing past patronage networks, he strengthens his position vis-à-vis any challengers or factions. To stay in power for a longer period of time, he must demonstrate a better track record, and he will be able to use “successes” such as reining in private corporations to make his case.
There are lessons to be drawn from the Evergrande saga for Indian policymakers as well. Following the Galwan incident on the Sino-Indian border, there were calls for a boycott of Chinese goods. Between January and June of this year, exports and imports between India and China increased by more than 65 percent. China is still India’s second largest export market, and efforts must be made to reduce our reliance on it, as the latter can always weaponize this reliance.
(The author is Research Intern at Kalinga Institute of Indo-Pacific Studies)
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