The long-expected default of China’s second biggest property developer, Evergrande – with more than $300bn of liabilities – was called on 9 December. The fate of the company is yet to be decided, but it will involve some sort of restructuring, ownership change and allocation of losses. The consequences for the wider real estate sector, the economy and China’s political landscape are arguably more important, including for Xi Jinping.
The Evergrande default, along with that of another developer, Kaisa Group Holdings, came and went with little fanfare. Financial markets were more focused on the loosening of monetary policy by the People’s Bank of China, as well as a communiqué from the Politburo indicating that real estate sector curbs would be eased, and that “stability is the top priority”. But economic sleuths should take note.
As I wrote in the New Statesman in September, the government faces a considerable challenge pulling off a soft landing for a sector that isn’t often known for this sort of outcome. In China, the property market is a $60trn sector – or four times GDP – which accounts for about a quarter to a third of annual growth. It faces years of adjustment shaped by a kaleidoscope of excessive debt, rapidly ageing demographics, low marriage and fertility rates, historic overbuilding and the risk of falling prices.
In addition, the Chinese Communist Party’s (CCP) obsession with stability risks making matters worse. Dealing with capital misallocation, bad debt and asset bubbles in property markets means having to recognise and allocate losses. The more you try to “stabilise” the market – and avoid dealing with these losses and inadvertently persist with inflating the bubble – the greater the risk of even bigger financial instability later.
Beijing’s problem is precisely this. It wants to stabilise the market without paying the cost of correcting years of bad policies that produced the bubble. China’s leaders have to choose, now or very soon, between two poor options: deflate the bubble by accepting debt write-offs, bankruptcies and weak growth (or even a recession); or allow inflation to rise and thereby lower the value and burden of debt, which may be no less disruptive as it could entail financial instability, capital flight and a significant depreciation of the renminbi.
How does this all connect to Xi Jinping? Simply put, the property market might lead China to more pedestrian economic growth in the 2020s, and to getting stuck in the middle-income trap. This is a development stage in which countries fail to make more headway in closing the gap of income per head in comparison with rich nations. China could end up in the trap because Xi has turned his back on the liberalising reforms required to spur the productivity China needs to fulfil its goals.
For the moment, he is unassailable. He has presided triumphantly this year over the CCP’s centenary celebrations, hailing China’s rejuvenation. He certainly appears to be on a mission both at home and in trying to restructure the world order.
Now, as he prepares for the 20th Party Congress in November 2022, when he is expected to be nominated for a third term (he could be leader for life), he seems purposeful rather than panicked. He craves stability and control, at pretty much any cost, and even at the cost of growth. This may be fortuitous, because he wants China to shift away from what Marxists call the “forces of production” (or growth and material prosperity) to the “social relations of production” (or the quality of growth, inequalities and the environment). Insistent that the “East is rising, and the West is declining”, he wants China to become dominant by the time of the centenary of the People’s Republic in 2049.
Yet his “Chinese Dream”, which the CCP wants to encourage foreigners to embrace, is far from assured. It already uses language and behaves in ways that are not compatible with its strategic objectives. Indeed, the narrative looks much less robust when judged against the growing push-back against China abroad, including by the UK, the EU, India, Japan and parts of east Asia.
To facilitate new development, Xi has revived the expression “common prosperity”, which is less about European-style welfare and redistribution than control, regional inequality and socialist solutions to past capitalist problems and market excess. It follows a steady drumbeat of rhetoric and actions to mobilise the public behind greater self-reliance and national security across a range of military and commercial activities. Under the banner of common prosperity, the CCP has launched several political initiatives this year that put private firms in the cross hairs, including stricter regulation and a form of coercive corporate philanthropy, among other measures aiming to make the private sector comply with party goals.
This is important, because it raises a new contradiction that won’t be easily resolved: the conflict between lofty economic aspirations based on productivity and innovation and the control over and approach to private firms.
The downfall of Evergrande is a symbol of Xi Jinping’s ideological lurch towards taking on the excesses of capitalism and markets, which the CCP does not like. It is also a sign of what promises to be a difficult decade for the economy. If the consequences of these developments are poorly managed, or if they undermine Xi’s China narrative, there is only one person who’ll be held responsible. The yuan stops with him.