China’s construction giant, the Evergrande Group , was in the news about a month ago as it ran out of money, had no options to get more loans or overdrafts, and had almost $310 billion worth of liabilities and several angry lenders, suppliers and homebuyers wanting clear answers that did not seem to come from anywhere. It began in January 2021 when regulators in China changed lending regulations with an aim to “strengthen [the] anti-monopoly push and prevent disorderly expansion of capital” which brought in more curbs in lending to big private businesses. While this was a delayed structural reform, it also marked the beginning of the end for Evergrande.
Housing as a bubble
The Evergrande crisis is a significant recent development that has struck the country’s ruling elites. However, at least since 2014, China’s housing sector has been labelled as a “bubble waiting to burst”. What kept it going on over the seven years or so and why Evergrande has imploded so suddenly is the real story that can be answered only with reference to the Communist Party of China’s (CPC) present political and social outlook.
Developments in China tend to be explained with the help of Chinese idioms. One such popular idiom is to “kill the chicken to scare the monkey”. Perhaps what China did with the Ant Financial IPO late last year was akin to killing the chicken. But now it seems that Evergrande was indeed the monkey that is now about to die, and the party does not know how exactly to handle it. In other words, did the Chinese government want to make an example out of Evergrande?
Factors behind China’s rise
China’s spectacular rise thus far is based on two pillars of exports and infrastructure. There is a realisation now that this has led to what was called “unbalanced and inadequate growth” when the new principal contradiction was declared during the 19th Party Congress in 2017. Recently, exports have slowed down and are not as profitable as before. The infrastructure sector, on the other hand, is at the centre of the guanxi (social network) induced corruption and cronyism, and is adding to the country’s debt problem. China’s President Xi Jinping has spoken of a need for course correction right since 2012, primarily to avoid a heating of the economy; expensive houses would make the middle class angry and it may have cascading implications for the party’s credibility.
Second, the ostentatious lifestyle of the Evergrande boss is also something the party wants to distance itself from, and may be punish; in China, it is okay to make money but let it be about your hard work and acknowledge the party’s guidance but do not be nouveau riche. This feeling has only got stronger since the 2012 incident involving a fatal Ferrari crash involving Ling Jihua’s son. China’s netizens are also aware of this problem and they often take to social media to vent their anger. Chinese youth are angry as jobs are hard to find, and recently, there have been popular protests targeting several icons. Such protests may even be managed from inside the party to underwrite its imminent policy choices as it helps the party appear more responsive and engaged. Thus, celebrities with businesses outside China, non-conforming youth, fin-tech and ed-tech moguls who were too autonomous for the party’s liking were targeted because the party leads everything as Mr. Xi proclaimed in 2019.
Common prosperity is the central explanation for what is happening in China right now in several diverse sectors. This idea did not make a sudden appearance in the party lexicon. It was mentioned in the 19th Party Congress document as a target for the Chinese people “… to work together and… ultimately achieve common prosperity for everyone” and more as a wishlist in the previous two reports. For the same reason, Alibaba will invest $15.5 billion in corporate social responsibility under the party’s guidance. There is also a strong influence of China’s new left thinkers who have for long argued that China is moving from being a market economy to a market society where corruption and cronyism are rampant and where distribution of social goods takes a back seat.
Domestic consumption
However, there is another dilemma that the CPC must resolve soon. China needs companies such as Evergrande to operate because the country has ambitious twin targets of expanding urbanisation and increasing domestic consumption as was highlighted in the Dual Circulation strategy. Today, China’s construction sector directly accounts for 7% and along with allied industries accounts for close to 17% of the country’s GDP. So, the role of the construction sector is critical in terms of employment, wealth creation, contribution to tax, and in terms of the overall expansion of the urban middle class. The CPC already finds it hard enough to make the Chinese middle class spend its money since it is a savings driven class. Any sign of contraction may drive the middle class away from consumption and that may indeed be a bad sign for the economy.
Also, China consumes 50% of the global steel and cement production. So the Evergrande crisis does have global implications. Is it possible then that this is one that is actually a party-engineered crisis to assert Chinese centrality for the world economy? There are economic reasons to consider and whether China would let Evergrande fall. However, beyond that is the political issue of whether it might happen because it is closer to the Jiang Zemin faction and has links to the family of former Premier Wen Jiabao. Depending on how these questions are answered one might find the clues to what happens in the next party congress in fall next year.
Avinash Godbole is Associate Professor and Assistant Dean at the Jindal School of Liberal Arts and Humanities, Jindal Global University
