Are the Evergrande problems the start of a contraction in the Chinese economy? For 40 years, various political and economic problems have raised fears of a serious setback, or even a collapse, of the Chinese economy.
Yet so far such a catastrophe has never occurred. Evergrande’s heavy debt is unlikely to cause the Chinese economy to collapse. On the other hand, the difficulties of the company mark the inevitable passage of China to a new type of economic growth less based on the expansion of cities. Above all, given the totalitarian movement of the government of Xi Jinping, the difficulties of the company suggest an even greater interventionism of the Chinese Communist Party, to the great misfortune of the Chinese economy.
1. What kind of company is Evergrande?
Evergrande is a gigantic Chinese conglomerate that was founded in 1996. The company, which made its fortune in building low-cost housing, has branched out into several other activities such as tourism, health, sports and food. . The company, which posted sales of over US $ 100 billion in 2020, has debt of over US $ 300 billion. It is having difficulty meeting its payments, which raises the suspicion that it could go bankrupt and drag part of China’s economy in its wake.
2. Why is Evergrande in difficulty?
There are two main reasons for the company’s problems. First, the heyday of housing construction is probably behind. In 1980, about 80% of Chinese lived in the countryside and 20% in cities. This proportion has reversed. The rural exodus is practically over. The need for new housing construction is therefore much less than before. Then, the government imposes increasingly draconian measures to curb speculation on housing. Indeed, with annual price increases of more than 10% per year, homes have long been excellent investments.
3. Are the company’s problems only economic?
It is likely that the company’s problems are also political. Xi Jinping has been waging a fierce fight against corruption for several years. This struggle especially affected Xi Jinping’s enemies in the Party. The new wave of the fight against corruption targets large private companies which are accused of not redistributing their profits enough and of being run by the “capitalist class”. These new pressures on companies are reminiscent of the takeovers of the private sector by the Chinese Communist Party in the 1950s. Such a policy would be in accordance with the Maoist renaissance desired by Xi Jinping.
4. Is the fall of Evergrande possible?
Almost 70% of Chinese savings are invested in real estate. Given the personal disasters that Evergrande’s bankruptcy would cause, disasters for which the government would ultimately be held responsible, the company is unlikely to be left to fend for itself.
5. Why do Xi’s new policies threaten the Chinese economy?
In the 1980s, Deng Xiaoping attempted to free his country from fussy Communist bureaucracy and economic control. Better control of large Chinese multinationals would lessen their political influence, which Xi does not like. But at the same time, such control will increase the role of the Party in the economy, to the point where a trajectory similar to that of the USSR is conceivable.