Today's Opinions, Tomorrow's Reality
By David G. Young
Washington, DC, September 21, 2021 --
A collapse in Chinese financial markets can be easily stopped by centralized power. A collapse in growth cannot be.
When China's largest property developer filed a warning last week that it may be unable to repay its debts1, it triggered a stock sell-off going far beyond China's financial institutions. The China Evergrande Group's debts are widely reported to exceed $300 billion, with cashflow limited largely to sagging pre-payments by residential property buyers. If nothing is done, a collapse of Evergrande could drag down a large chunk of China's banking and construction industries and cause property values to plummet.
Market analysts are ill-prepared to predict how this will unfold, because the end-game has nothing to do with markets and everything to do with China's mercurial dictator Xi Jinping. Since appearing in a Mao suit at the 70th birthday party for the Chinese Communist Party last October, Xi abruptly ended China's hands-off approach to businesses. The Chinese leader is now sticking his thumbs in to punish tycoons who fall out of favor and command changes in business practices as he sees fit.
In the most infamous case, Jack Ma, head of the giant Ant Group and the Alibaba e-commerce company, disappeared from public view last November after voicing some mild criticism of China's regulators.2 Since then, billions of dollars have been wiped out from the value of his companies and other tycoons have been put on notice.
The downfall of Ma marked the beginning of China regulatory crackdown, an effort to bring private businesses under central government's control. These interventions have come at all levels. At a high level, China's courts have ruled that the tech industry's abusive 9-9-6 practice of making employees work from 9 a.m. to 9 p.m. 6 days per week is illegal.3 And diving into the mundane, regulators have even placed limits on how many hours per week Chinese teens are allowed to play video games.
The willingness of China's government to intervene in such mundane cases leaves little doubt that it will be willing to intervene so in cases like the teetering giant Evergrande. But nobody (except maybe Xi) knows exactly how.
After China's export-driven economic model began to run out of steam a decade ago, Chinese policymakers propped up growth by encouraging domestic consumer spending and redirecting the construction industry toward international projects with the 2013 Belt and Road Initiative.
This growth model was always a bit of a house of cards -- Chinese banks gave loans to Third World governments for building projects on the condition that Chinese construction companies get the contracts. On the domestic front, companies like Evergrande built residential towers for existing customers using the money from the down payments of new customers. Both of these strategies are sustainable only so long as new foreign contacts and Chinese property owners keep flowing into the system. Once the music stops, everything collapses.
But the collapse that might happen in a market system is quickly squelched by a dictator. Xi need only make a phone call to a few Chinese tech titans asking them to invest in a bailout for the good of the country. If they balk, he can gently remind them of the sad fate of Jack Ma who wasn't quite as patriotic as he should have been. One way or another, the Evergrande crisis will simply fade away.
The more important question is how Xi's new centrally-driven model will attempt to sustain the high economic growth rate that China's unquestioning subjects have come to expect. Castrating tech titans with regulatory crackdowns is great for centralizing power, but such acts don't have any obvious benefit for encouraging economic growth -- on the contrary, they may actually squelch it. What's more, as China faces increasing financial pressures on its construction industries, it is in sore need of a new model.
In a speech to the Communist Party last fall, Xi announced the new five-year plan, again a relic of the era of Communist central planning. While updated with modern tech buzzwords, in strategy it didn't sound much different than what you might hear from Brezhnev in the 1970s. Was this nonsense speech just a stodgy Communist Party formality? Does Xi actually have a real plan? And does the man in the Mao suit even realize that he needs one?
1. China Evergrande Group, Inside Information Updates Since 31 August 2021e, September 14, 2021