Chinese Communist Party supporters look like they are being tested after irate investors stage sit-ins at offices of one of the country’s largest real estate firms, Evergrande, and clashes with police. Beijing may not want the good crisis to go to waste. The company became one of the most indebted with a burden of $300 billion liabilities, a development that has negatively impacted its credit rating and share price. Unfinished residential buildings and over a million partially paid home buyers were left in the wake of the crisis.
Clash Of Two Visions
China’s economy has also taken a hit with stocks prices falling 9 percent to their lowest level since the global financial crisis in 2008.
The first three priorities that President Xi Jinping outlined in his term were pollution control, income inequality, and reducing financial risks. In his estimation, there has been considerable progress to the first two, but the next challenge will be to clean out Augean stables of debt. As Wang Jian describes, debt is closely connected to the model of international exchange that China has developed.
Chinese export growth would be enabled on this basis by leveraging its massive workforce in the global production chain. From the early 2000s until the end of 2009, this was China’s economic rule. As of 2015, China was the world’s leading manufacturer of electronics and white goods. Its factories produced close to 80 percent of computers, air conditioners, and mobile phones. Due to the “economic miracle,” however, China has had to inject more credit to maintain the same output levels.
During China’s economic liberalization in the 1970s, “Get rich is glorious” became the credo of the day. Thousands quit their government jobs in search of lucrative opportunities, which popularized the Mandarin term “xiahai,” which means “going down to the sea.” Jiang Zemin had built his political base in Shanghai’s financial hub by drastically advancing economic reforms and easing the entry of businesspeople into the CCP. In parallel with the growth of Xu Jiayin’s fortunes, his connections with the ruling party’s elite grew. Xu was rated as the wealthiest person in China by Forbes in 2017.
Xu was thoughtful of sharing a portion of his fortune with them. According to Yu Jie’s book Wen Jiabao: China’s Greatest Actor, Wen Jiahong, the brother of former premier Wen Jiabao, was a significant stakeholder in Evergrande and served as its director. The New York Times reported that Wen’s kin had hidden assets worth US $2.7 billion, although China denies it.
Apart from the headline-making property purchase, Xu’s connections among the elite were also making headlines. Chinese People’s Political Consultative Conference member Xu, sporting a belt crafted by a French luxury major in 2012, became a laughing stock following the viral image of his belt going viral on Chinese social media platforms.
Although such confluences of business interests and political elites benefit a few in good times, they bring disrepute to the political class when circumstances are tough. Income inequality in the country has been brought to light by the COVID-19 outbreak. With China’s yawning wealth gap, the CCP is also unhappy with the extravagant lifestyles of such business people. The business community has been perceived as a pressure group by the CCP and when they state their views on policies, they are displeased.
Alibaba’s co-founder Jack Ma made controversial remarks about financial matters in the aftermath of Ant Group’s US $35 billion IPO. Wang Yang, a Politburo member of the Chinese Communist Party, marked the centenary of industrialist Sun Fuling in September. Other achievements, emphasized by the Party, included rebuilding and nationalizing industrial sectors amid the ravages of the Chinese Civil War, and financing the People’s Volunteer Army’s participation in the Korean War against the West. The country’s business icons now follow in Sun Fuling’s footsteps, eschewing the limelight, serving the nation and society without flaunting their capital.
Politburo meeting in January 2021 aimed to prevent ‘orderly capital expansion. While Xi has mentioned the term ‘disorderly expansion of capital’ five times since then, the regulatory authorities have used it as an excuse to justify harsh actions against major tech and online education companies. With this ‘Red Reset’, exercise announced prominently in the ‘People’s Daily’ in September, Xi has a large degree of freedom to tackle the risks in the Chinese economy and confront the political corruption of his predecessors.
The success of Evergrande in the real estate arena was closely tied to the Chinese obsession with parking their investments. Due to the limited choice of investments in China, real estate makes up about 40 percent of household assets. Most urban households own 1.5 residential properties, which is the highest rate in the world. Real estate purchases have been curtailed in Shenzhen, a technology hub. Although the economy slowly slowed down, Shenzhen’s home prices soared by 11.4% in the first half of the year.
Xi has indicated his intention to adopt a dual circulation policy since the pandemic. Innovation will power China’s future economic development, not the transient boost of real estate. Beijing is thus reluctant to provide help to Evergrande and to block any adverse social consequences by instructing local authorities to negotiate with state-owned developers to buy what is left of unfinished real-estate projects. Most of the financial collapse will be borne by the foreign creditors.
Beijing is working to establish a stock exchange while simultaneously expanding investment opportunities. As announced by Xi, technology-orientated innovation-driven companies can benefit from the share market in the capital. Shanghai is China’s financial hub and Shenzhen is its second-largest market. Chinese officials marked the mid-autumn festival with a prolonged holiday that included the Evergrande incident. At this time, Beijing kept quiet about the loan defaults, causing stock indices around the world to fall.
Xi, therefore, views l’affaire Evergrande from a variety of perspectives. First, it demonstrates how embedded China is in the global economy, thereby having the potential to hurt economic recovery in other nations. The second implication is that it strikes at the heart of the ancient régime’s economic patronage networks. Thirdly, it signals that Xi is serious about changing his country’s economic development strategy and channeling capital into real technological advancements and social policies.
2022 will be the CCP’s once-in-a-decade National Congress. In recent years, no third consecutive term has been held by a president. Xi Jinping has indicated he will stay on through a third term. His actions weaken any challenge or opposition by causing damage to old patronage networks. For him to remain in power longer, he will need to demonstrate a better track record. He can do this by creating “successes,” such as reining in private corporations.
Despite the aftermath of the Evergrande saga, Indian policymakers can learn something from the incident. Sino-Indian border clashes resulted in a boycott of Chinese goods following the Galwan clash. In the period January to June this year, bilateral imports and exports rose by over 65 percent. The second-largest market for Indian exports, China, must be reduced, as it can always weaponize this reliance.