Evergrande crisis has lessons for Indian policy makers too

Form of words:
a-
A+

TeaThe optics of sit-ins by angry investors and clashes between protesters and law-enforcement at various offices of Evergrande, one of China’s largest realty firms, reinforced the view that it was a major challenge to the Chinese Communist Party. . Beijing will not let a good crisis go to waste.

The company has become one of the most indebted entities with a liability burden of US$300 billion, which has eroded its credit rating and share price. In the wake of this there are abandoned residential buildings and over one lakh home buyers who have paid partially for their properties. These developments have sent a 9 percent drop in Chinese stock prices to a new low since the global financial crisis in 2008 and a shock wave in markets around the world.

Early in his term, President Xi Jinping set his priorities as tackling pollution, inequality and financial risks. he assumed that remarkable progress Concerning the first two has been done, but the challenge of clearing the Augean stables of debt remains. The legacy of debt is closely tied to China’s economic model known as “international circulation“By researcher Wang Jian. Under this strategy, China will leverage its vast workforce across the global production chain to pursue export-led growth. This was the guiding principle for China’s economic mandarins until the early 2000s. Until 2015 , China had a monopoly in the manufacture of electronics and white goods, whose factories put together or produced about 80 percent of computers and air-conditioners, and 90 percent of mobile handset. However, the “economic miracle” meant that China had to lend more to maintain the same amount of production.

clash of two visions

As China liberalized its economy in the 1970s, “it is glorious to be rich” was the reigning principle; Many quit their government jobs to explore business opportunities, which popularized the Mandarin expression ‘xiahai’ It literally means “landing in the sea”. It is in this political and social environment that Xu Jian, in his 30s, quit his job to start Evergrande Group in Shenzhen, which was in the throes of frenzied construction activity at the time. Deng’s replacement, Jiang Zemin, had built his base in the financial center of Shanghai, pushing economic reforms and flagging economic reforms. entry of businessmen in CCP. As Xu Jiayin’s fortunes increased, so did his ties with the CCP elite. Xu was rated as China’s by Forbes the richest Person in 2017.

Xu was thinking of giving them a piece of his fortune. In his book ‘Wen Jiabao: China’s Greatest Actor’, Yu Ji is accused That former Prime Minister Wen Jiabao’s brother, Wen Jiahong, had a stake in Evergrande, and served as its director. Later, new York Times revealed that Wen’s relatives have hidden assets worth US$2.7 billion, which China has denied.

News of Xu’s US purchase $39 million property In a tony suburb in Australia next to the son of then-Vice President Zeng Kinghong, and news that he took a private jet to survey realty projects caused a stir. Buying Xu’s wealth and his aristocratic ties weren’t the only things making headlines. As a member of the Chinese People’s Political Consultative Conference in 2012, Zoo Participated in ‘Two Sessions’ legislative proceedings sporting a belt designed by a French luxury major; His picture went viral on China’s online platform and it earned him the ridicule of ‘belt brother’.

While such a confluence of business interests and the political elite may benefit some in good times, they bring disrepute to the political class when tough times come. The outbreak of COVID-19 has highlighted the income inequality in the country. Amidst the growing yawning gap in China, the CCP is also unhappy with the ostentatious lifestyle of such businessmen. The CCP believes that the business community has become a pressure group and is unhappy with airing their views on policy matters. Last year, Ant Group had to close its US$35 billion IPO following critical comments from Alibaba co-founder Jack Ma on financial matters. In September, CCP Politburo member Wang Yang marked the industrialist’s centenary sun fulling. Among his other achievements, the party particularly highlighted, was his role in the rebuilding and nationalization of industry amid the ravages of the Chinese Civil War and funding the People’s Volunteer Army’s participation in the Korean War against the West. In Xi’s era, the country’s business icon Sun Fuling follows in the footsteps, eschews the limelight, contributes to nation-building and society, and refrains from flaunting wealth.

In January 2021, a meeting of the Politburo to discuss the economy called for ‘stopping the disorderly expansion of capital’. Even since the term ‘disordered expansion of capital’ has been mentioned by Xi on five occasions, it has been cited by officials as a reason to explain it. drastic measures Against tech and online education majors. Thus, it’red reset‘, the exercise, published prominently in the ‘People’s Daily’ in September, gives Xi considerable latitude in dealing with the financial risk in the Chinese economy and the cronyism of his predecessors.

home truths

Evergrande’s success so far in the realty space was closely tied to the Chinese’s passion for parking their investments in real estate. Since investment options in China are limited, wealth is largely made up of 40 percent of domestic property. An average urban family owns 1.5 Residential property and urban homeownership is the highest in the world. Shenzhen, the hub of many technology companies, has announced curbs on realty purchases. Shenzhen home prices jump 11.4 percent Despite the economic slowdown in the first half of this year.

Down new rules, residents with “hookou” in the city will only be allowed to buy a home if they have had a local home registration document for more than three years. Xi finds that speculation in real estate is hurting China’s growth trajectory as housing becomes expensive in places like Shenzhen, with a massive impact on wages, blunting China’s competitive advantage. High living costs also limit family size, hurting China’s future prospects. experts There has been a proposal to levy property tax on many home buyers.

Since the pandemic, Xi has signaled his intention to move towards a new growth pattern—the dual Spreading. Xi wants innovation to power the country’s future economic growth rather than be a momentary booster for the realty sector. As such, Beijing has signaled its reluctance to oust Evergrande, and has signaled to stop any adverse social change by instructing local authorities. haggle over To take up unfinished real estate projects with state-owned developers. It is the foreign creditors who will bear the brunt of the collapse. Meanwhile, efforts are also underway to provide more investment opportunities to the people, with plans to inaugurate a Share Market in Beijing. Xi announced that Share Market Technology oriented innovation driven firms will benefit in capital.

Mainland China has two major markets located in Shanghai Financial Center and Shenzhen. The Evergrande episode unfolds over a long holiday in China to mark the Mid-Autumn Festival. During this time, Beijing maintained silence on the debt-default row, which caused stock indices around the world to fall. Thus, for Xi, the l’affaire Evergrande serves several purposes. First, it sends a message about how embroiled China is in the global order, and how it has the potential to hurt the economic recovery of other countries. Second, it strikes at the core of the economic protection network. ancient rule. Third, it signals that Xi is serious about transforming his economic growth. strategy, and funnels capital into real technology innovations, and its social policies.

The CCP will hold the National Congress once a decade in 2022. Xi Jinping has indicated that he plans to remain in office for a third consecutive term, a precedent in recent history. By striking the protection network of the past, he solidifies his position face to face A challenger or faction. To stay in power for long, he needs to show a strong report card, and thus, he will be able to use “successes” like reining in private corporations to make his point.

There are lessons to be learned from Evergrande Imbroglio for Indian policy makers as well. After the Galwan conflict on the India-China border, there was a call to boycott Chinese goods. Exports and imports increased more between India and China 65 percent Between January and June this year. China remains India’s second largest export market, and efforts should be made to reduce our dependence on it as China can always weaponize this dependence.

Kalpit A. Mankikar is a Fellow of the @kalpitm Strategic Studies Program, and based out of ORF’s Mumbai Centre. His research focuses on China, especially given its rise – its domestic politics, diplomacy and techno-nationalism. Thoughts are personal.

Article first appeared On the Observer Research Foundation website. It is published with permission.

subscribe our channel youtube And Wire