China: When Capitalism and Autocracy Collide
Robert Cole
Since 2008, China has increasingly gained a reputation as a dynamo in a frequently rocky global economy. Its annual GDP growth has stayed between five and fifteen percent since the early 1990s in a remarkable recovery from decades of war and isolation. Indeed some experts have predicted it will become the largest economy in the world by the end of the decade.
Last week however, it suddenly lost some of its luster when real estate giant Evergrande failed to meet a deadline to make an $80 million interest payment to its creditors, a troubling sign for a company currently sitting on $300 billion in debt. The announcement came as China’s Communist Party implements new lending rules to rein in its real estate industry’s borrowing practices over concerns that many of its biggest players are too heavily indebted. Beijing feels that Evergrande’s troubles will serve as a warning to other companies and that its autocratic governance structure holds sufficient financial and bureaucratic power to contain the damage should Evergrande continue to default. Markets have felt otherwise, and Evergrande’s share price has fallen precipitously.
While a true crash of the Chinese real estate industry would likely have major consequences for global markets, the likelihood of such an outcome is probably minimal. The Communist Party has control over all of the major lenders, bankruptcy courts, company executives, and the flow of capital out of the country. As such, no matter how dire things get for Evergrande, Beijing can provide them with financial backing and prevent a bankruptcy filing from moving forward. This raises serious long-term questions about the implications of Evergrande surviving. The whole point of putting the squeeze on this one company was to convince investors to not put money into overly debt-laden companies in a dramatic fashion without throwing the whole economy into turmoil or too badly shaking investor confidence in the nation. The tightrope being walked is between “zombie companies” that are too indebted to survive on their own on one hand and scaring away foreign investment on the other.
Of the two, the former is likely the greater threat. The Chinese government is essentially betting that the threat of Evergrande’s collapse combined with the new lending rules will be enough to fix the problem, since it is not willing to let its major corporations sink or swim on their own. The risk of doing so is simply too great for a regime that relies on the promise of stability and prosperity to maintain power in lieu of democratic elections.
Moreover, there are plenty of other potential threats to continued growth. Within the real estate market, the buying up of properties as investments rather than homes has resulted in over 20% of housing sitting empty and a generation of young Chinese unable to afford to buy a home. President Xi Jinping’s efforts to curb emissions, while admirable, are putting strain on industry and consumers, which when combined with a global microchip shortage and the pandemic is causing severe damage to the nation’s automobile industry, which is a major component of its GDP. Additionally, the nation's income inequality is even worse than that of the US, which is yet another barrier to continued growth and prosperity as it seeks to fully transition from being a developing to a developed nation.
China’s leaders therefore find themselves in a position where they cannot take definitive steps to stop bad corporate behavior due to expectations of and threats to continued economic growth. Ironically, this dramatically increases the risk of economic stagnation that could have a negative effect on global trade and raise questions about the legitimacy of the Communist Party it has not had to face for a generation. How China’s leaders face down this looming threat could have profound implications for global trade and diplomacy, and the best indications of their strategy will appear in their handling of Evergrande in the weeks and months to come.