General Studies for Civil Service Exams – 3

Painful corrections to China’s run-away growth – Policy shift towards conservatism buffets business icons grievously

Evergrande, the construction behemoth of China now stares at bankruptcy as the State turns on the heat on it.

China’s construction giant, the Evergrande Group, once the country’s pride, is on the verge of a disorderly collapse as a severe cash crunch has resulted in the company’s default of payment to its institutional lenders, suppliers, and countless home-buyers who have made advance payments for getting a flat at a later date. The combined wrath of such a large group of irate lenders has rattled the government and the Communist Party of China.

China’s spectacular economic growth continues to be the envy of the western world, but such scorching pace of economic expansion brought with it a myriad of social, political, and economic problems. The top brass of the Communist Party saw the problems as a real threat to the country’s social foundation. To curb the soaring growth, the Party’s ideologues decided to rein the industry icons whose business empires were expanding by leaps and bounds, thanks to the easy availability of bank credit and a buoyant stock market. The first step they took was to stanch the credit flow. As the first step, the lending norms of banks were tightened, stock markets were regulated, and the culture of consumerism was discouraged by publicly berating the behaviour of the super-rich. The process of austerity started in early 2021 and has been pursued quite vigorously since then. As the credit flow began to dry up, the discomfiture of the top industry houses grew. Icons like Jack Ma of Ali Baba, Ma Hueteng of Tencent, Lei Jun of Xiaomi, Robin Li of Baidu, and many such trail-blazing Chinese entrepreneurs began to be seen as people who have amassed wealth at the State’s cost.

The Eventgrande Group is one such conglomerate with interest in Real Estate, Sports, Tourism, Automotive, Health, etc. This company now owes a whopping E310 billion USD and is unable to service its debt. If it collapses, the shock waves will be felt across the Chinese economy and beyond. The collateral damage to the country’s economy might prove to be too big to bear. With the fear of Eventgrande’s demise looming large, the government leaders must be thinking if their anti-monopoly push and zeal for conservative banking have not gone too far. The structural reform has been a long time coming, and its first casualty has been Evergrande.

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The Housing bubble bursts, finally

The world over, the real estate sector has been historically the most profitable and the riskiest. From 2p014, the Chinese housing sector was growing at an astounding pace, sucking in capital from banks, stock markets, and home buyers. Market watchers had begun to sound caution that such spiraling growth was not sustainable, and bound to end calamitously, sooner than later.

Quite predictably, Eventgrande’s sudden collapse has started rumblings among China’s top financial planners and regulators. They twisted government policy to botch the Initial Public Offering (IPO) of the Ant Financial group. The government’s intervention was intended to be a warning shot intended to deter those who were planning over-ambitious expansion plans of their businesses. Some industry houses drew their cue from the aborted Ant launch, others ignored it. The action against Ant was a shot over Eventgrande’s bow, but presumably, the latter’s management failed to take notice. Now, the day of reckoning has arrived for the company. Eventgrande is facing closure.

What propelled China to dizzy heights, economically

China’s growth is undoubtedly export-driven. The other spur is its heavy stress on infrastructure building. Belatedly, China’s policymakers realize that the growth was ‘unbalanced, uncontrolled, and inadequate. In the 19th Party Congress of 2017, this fear was spelled out loud and clear.

The events unfolding now show that the apprehensions of 2017 were real. Post pandemic, China’s export growth has sputtered. Its GDP growth has slowed down in tandem. Infrastructure growth that once bedazzled the Western world has been bogged down in corruption, cronyism, and excessive dependence on debt. China’s President Xi Jinping, considered the conscience keeper of the nation, has pleaded for corrective measures to curb the deviant tendencies of the present-day Chinese society. He wants the over-heated economy to slow down, and penchant for luxurious living to be curbed, and old values of morality to return. If not, he sees the anger and resentment of the middle class boiling over to the streets. In the process, the Chinese Communist Party could lose its credibility.

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The flippant mannerisms of the children of the super-rich, their infatuation with gadgets and computer games were clear signs of the Chinese society losing its traditional moorings, thinks President Xi. The ostentatious lifestyle of Xu Jiayin, the founder of the debt-laden Evergrande must have convinced President Xi to assume that living off other’s wealth is deeply antithetical to Chinese values. This could explain why the Chinese government has refused to rescue the beleaguered Eventgrande.

After the pandemic, life is becoming harder for Chinese young men and women. Jobs are hard to come by, wages are falling, and there is despondency in the air. Chinese social media is rife with expressions of anger and frustrations of the youth. President sees great danger in such seething anger and wants to take strong measures to reverse the slide. Bearing the brunt of President Xi’s anger are celebrities with businesses outside China, non-conforming youth, fin-tech and ed-tech moguls who were too autonomous for the party’s comfort.

Now, the Communist Party of China says it will strive to orient all development and governance policies for the ‘common good’, not allow individuals to flaunt their wealth. Ensuring common prosperity is the hallmark of the government’s revised policy now. It has virtually arm-twisted Alibaba to give 15.5 billion USD towards its Corporate Social Responsibility (CSR) obligations. The money will be spent on social sector projects. That the ugly face of a market-driven neo-capitalist society is now visible across the social fabric has become clear to the Communist party leaders. Corruption, consumerism, and cronyism are anathema to Chinese values are very much evident to them, and they want to correct the evil with an iron hand.

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A policy dilemma

The Communist Party leadership concede that the demise of Evergrande will come with heavy costs. China has grandiose plans to expand its urbanization drive, and spur domestic consumption. This policy initiative was highlighted in the Dual Circulation strategy. Today, China’s construction sector accounts for nearly 17% of the country’s GDP. Nearly 7% comes directly from the sector and the balance 10% from the ancillary and allied sectors. For creating employment, boosting consumer spending, the construction sector’s role is pivotal. This sector, directly and indirectly, contributes to government revenue collection and helps to increase consumer spending. Battering the construction sector will dry up jobs, reduce tax collection, and drive the middle class to cut buying to save money for harder times. Thrift is a Chinese trait, and any sign of calamity makes the people cut avoidable purchases.

If the construction sector’s wings are clipped, China will reduce its imports of steel and cement. The affected exporters could hit back by cutting their imports from China. This will be very damaging for Chinese exports. Alternatively, some analysts say that the shrewd policymakers in Beijing have deliberately heightened the risks to the construction sector, so that other trading partners realize that China’s growth and prosperity are very much essential for the good of the world community.

Eventgrande might not fall after all. It has got friends in high places. There are economic reasons to consider and whether China would let Evergrande fall. The boos of the company are closer to the Jiang Zemin faction and have links to the family of former Premier Wen Jiabao. The world will keenly watch how things unfold in the coming weeks and days. Till that time, we have to keep our fingers crossed.

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