The crisis of the ailing real estate developer Evergrande in China has so far produced only one winner: the Chinese state. While Evergrande has been on the decline since autumn last year and has asked its international creditors to defer outstanding debts, state-owned companies have used the moment to buy land for new development projects.
Unlike Evergrande, these companies, in which the Chinese state holds shares, have no problems raising capital.
Alexander Görlach is a Senior Fellow at the Carnegie Council for Ethics in International Affairs in New York. The PhD linguist and theologian teaches democratic theory in Germany, Austria and Spain as an honorary professor at Leuphana University. In the 2017-18 academic year, he was at National Taiwan University and City University Hong Kong to conduct research on China’s rise. He is currently researching new technologies at the University of Oxford’s Internet Institute and how they are used in democracies and abused in dictatorships.
Should the company fail, it is not to be expected that the Chinese state will step in and rescue the company, as the US government did during its 2008 financial crisis. Beijing is using the moment of weakness of individual players in the real estate market to consolidate it.
As in other industries, the leadership of the Communist Party makes sure that companies and entrepreneurs who have so far stood out as loyal to the political line get a chance. The People’s Republic, in which wealth is now distributed similarly unequally as in the USA, wants to use a large-scale program called “Common Prosperity” to ensure that living space does not become the plaything of investors, thereby making the precarious situation even more difficult for millions of Chinese becomes.
Since the 1990s, rapid economic development and urbanization, coupled with an expanding financial sector, have attracted international investors to the Chinese real estate market. This development brought growth to Beijing that the country craved. At the same time, this reduced the influence of the Communist Party on economic events in the country, which displeased Beijing. The decisive factor for foreign investment was, until recently, the ambitious growth targets that the Communist Party had presented to the population as a sign and proof of a successful government in the one-party state.
Now that the leadership wants to close the gap between rich and poor, they want to use the other tools that Joe Studwell described in How Asia Works as crucial to the rise of the so-called tiger states of South Korea and Taiwan: the isolation of the Markets of foreign investors who choke off good domestic developments with their return expectations and transfer earnings abroad.
Under President Xi Jinping, the economy as a whole, not just finance or real estate, will be more tightly controlled. The Chinese counterpart to Uber, Didi, was not allowed to go public in the US. The private education sector, for Xi Jinping an epitome of increasing inequality in the country, was liquidated by him with the stroke of a pen. Well-known entrepreneurial personalities such as Alibaba founder Jack Ma also disappeared from the scene for weeks.
In this context, Evergrande is seen by Beijing as an actor who tends to heat up speculation in the country rather than cool it down. According to the Wall Street Journal, it is already evident that the government’s strategy is working: while last year’s auction of new land for development projects went to Evergrande, ten out of eleven sites went to Evergrande, but this May, when the first auction in Evergrande’s hometown, Guangzhou, took place, the local government or the central government awarded the contract for 15 out of 18 plots.
Evergrande is not the only private player unable to service its liabilities. This is a sign that there is a systematic overheating, the flame of which was slowly but steadily simmering on the conviction that in an emerging middle-class society such as Studwell’s Tiger States, the call for new, modern housing would not die down anytime soon.
This assumption turns out to be incorrect: many Chinese women still cannot afford expensive housing. As in the Tiger States, the birth rate in the People’s Republic is at its lowest point. According to estimates by the United Nations, the population of the People’s Republic will shrink by 600 million people by the end of this century. The significantly smaller number of future tenants and owners ultimately means that government investments in new construction projects will not pay off in the long term.
China’s real estate market is overheating. Default will not be limited to a few companies. A collapse of the Chinese real estate market would therefore have repercussions that would be felt around the world.