Will Beijing rescue China's Evergrande?

Will Beijing rescue China's Evergrande?

Will Beijing rescue China's Evergrande?

The plight of the heavily indebted Chinese property company Evergrande has sparked fears of contagion that could damage economic growth in China, the world's second-biggest economy, then spill over into the supply chain and wreak havoc on global growth.To get more China business news, you can visit shine news official website.

There is a general perception that the Chinese government will intervene in some way to rescue Evergrande, despite its debts of $300 billion (€256 billion) and that Evergrande, unlike Lehman Brothers in the global financial crisis in 2008, is too big to fail.

The main reason the ruling Communist Party will intervene to support Evergrande is to preserve the stability it needs to maintain its grip on power. If anyone is too big to fail, it's the Communist Party.

Evergrande's fall has always been a matter of when, not if. The firm's founder, the flamboyant ex-steelworker Xu Jiayian, is the latest Chinese tycoon to fall victim to the old saying "two tigers cannot share the same mountain."

President Xi Jinping's crackdown on business in recent months is sold as a crackdown on inequality and a common prosperity campaign.

But the crackdown goes deeper than that. It's a shift from centrally planned capitalism to a more doctrinaire Marxist approach to business and marks a fundamental shift in China's economic landscape. The chief goal appears to be to further entrench the power of the Communist Party.Recent months have seen a flurry of slogans and economic policies from the Communist Party aimed at reining in what the leadership sees as capitalism's more egregious impulses.

"Common prosperity" aims to fix the country's massive wealth inequality. It involves greater taxation of high incomes and capital, and even includes a long-discussed nationwide property tax.

Meanwhile, "dual circulation" refers to a focus on the domestic market and external circulation, or interaction with the global economy.

Evergrande is China's second-biggest property developer by sales and its earlier success was built on China's astonishing urbanization project of the past 20 years — the biggest the world has ever seen.

Surging demand for housing meant real estate companies were effectively able to print money, backed by local governments, for whom leasing the land to the real estate developers was the main form of income.

The central government in Beijing actively encouraged this massive expansion because so much of China's economic growth story is built on real estate — it accounts for 29% of GDP.

Whenever things get too hot, to maintain stability, the Communist Party intervenes. Recent efforts to put the party at the center of the economy have seen even more measures to strengthen its control.

As a real estate empire built on rapid expansion and heavy borrowing, with what many see as a Ponzi-like cash flow model based on selling apartments that haven't been built to construct units it had already sold, Evergrande's fate hangs in the balance.

Ho-fung Hung, a professor of political economy at Johns Hopkins University, describes this tightening of control over the Chinese economy as "North Koreanization" and he believes it is going to have huge consequences.

"If the Communist Party doesn't save Evergrande, its free fall will create huge economic dislocation and plausible social unrest. If it saves it one way or other, there are many other big developers which are in equally dire shape or worse, and the government obviously cannot rescue everyone. Either way, the economy will take a big hit, and the old China growth model heavily reliant on debt-financed fixed asset investment can no longer continue," Hung told DW.


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