China’s construction giant, the Evergrande Group, recently ran out of money, had no options to get more loans or overdrafts. Click here to know more.
The political and social outlook of the Communist Party of China (CPC) has had a significant influence in such recent crises and changes.
What led to the Evergrande crisis?
In January 2021, regulators in China changed lending regulations.
It came with an aim to strengthen the anti-monopoly push and prevent disorderly expansion of capital.
The moves 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.
Evergrande has the distinction of being the world’s most debt-saddled property developer.
Evergrande is faced with more than $300 billion in debt, hundreds of unfinished residential buildings and angry suppliers who have shut down construction sites.
What are the implications?
At least since 2014, China’s housing sector has been labelled as a “bubble waiting to burst”.
The Evergrande crisis is a significant recent development that has struck the country’s ruling elites.
China consumes 50% of the global steel and cement production. So the Evergrande crisis does have global implications.
What led to China’s rise and what is the present condition?
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 “unbalanced and inadequate growth.”
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.
This is adding to the country’s debt problem.
Chinese youth are angry as jobs are hard to find, and recently, there have been popular protests targeting several icons.
What is the CPC’s political and social outlook’s influence?
China’s President Xi Jinping has spoken of a need for course correction right since 2012.
His party felt expensive houses would make the middle class angry and it may have cascading implications for the party’s credibility.
Also, the ostentatious lifestyle of the Evergrande boss is also something the party wants to distance itself from.
It proposes working together and ultimately achieving common prosperity for everyone.
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.
They 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.
In essence, the Evergrande crisis is one that is actually a party-engineered crisis to assert Chinese centrality for the world economy.
What caution should China take?
China needs companies such as Evergrande to operate.
Because the country has ambitious twin targets of expanding urbanisation and increasing domestic consumption.
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 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 further drive the middle class away from consumption and that may indeed be a bad sign for the economy.
