Make no mistake, the fall of Chinese private real estate giant Evergrande aligns with President Xi Jinping’s stated vision for the nation.
He ordered domestic companies to reclaim their position as the cornerstone of the Chinese economy at the 19th Party Congress in 2017, calling them “the pillar of the Chinese economy on which the party’s success draws its material foundation and legitimacy. in power”.
Nonetheless, China’s rise in the global economy reflects an ever-deepening privatization. Statistics can reveal where the economic engine is running.
In 2019, private companies contributed about half of China’s tax revenue, more than 60% of its GDP, 70% of its R&D and innovation, and 80% of employment. That year, 90% of Chinese companies were private.
In this, Xi sees an economically prosperous China that has ceded state economic control to private companies. Now he’s looking to make the country’s largest state-owned companies more competitive in the marketplace while pushing back the private economy.
It has everything to do with the three phases that anchor modern China today. We are now at the start of the third phase.
The first three decades of the People’s Republic were characterized by the successful nationalization of private enterprises. The next three decades then thrived on the privatization of state property, rewinding the nationalization achieved in the first 30 years.
Over the next three decades, China is likely to consider re-nationalizing some fundamental drivers of the private economy, especially data.
Already, the government “invites” the largest Chinese private companies to invest in public entities to strengthen the global technological ambitions of the latter. Tencent has invested in China Unicom, Geely in China Railway and Alibaba in China Broadcasting Network. These investments were matched strategically by the state.
In 2019, 43 Chinese private companies listed on Chinese stock exchanges were nationalized to varying degrees, rescued from the brink of debt collapse.
HNA, China’s most ambitious private conglomerate, was fully nationalized in January. Chen Feng, its founder and chairman, was formally indicted this week with criminal charges.
China’s financial dark horse Anbang Insurance turned Manhattan’s famous Wardorf Astoria into a Chinese-owned hotel when it bought it for a record $ 1.95 billion in 2015. But the China’s second-largest insurer made history in a total state takeover last year. . Even his name did not survive.
Anbang founder Wu Xiaohui, father of the late reformist leader Deng Xiaoping’s only great-grandson, has returned $ 1.6 billion to the state and is due to spend the next 18 years behind bars.
Wanda Group, China’s most recognized global brand, has sold almost all of its valuable assets overseas, including AMC theaters.
Meanwhile, the rules dictating China’s use of capital changed during the Xi Jinping era. China’s top industrial companies have flourished on an extremely high leverage model to rapidly grow assets – and liabilities – on the balance sheet. Their ambitions for expansion, supported by the state coffers, are unleashed. But when the flow of financial resources to them was no longer guaranteed, they all faced an inevitable downfall. After all, it is still the state banks that control the finances in China.
Xi’s vision for a new model of economic justice should realign state capital to serve not only as responsibility holders, but also shareholders when it comes to traditional industrial enterprises riddled with debt. The existing model enriches individuals to the detriment of the State.
Evergrande is not the first – and will not be the last – private giant to disintegrate. So far we have seen the restructuring and re-nationalization of Anbang and the HNA by the state. The central government has proven that it has the will, the confidence and, now, the experience, to deal with the inevitable demise of Evergrande.
The government is unlikely to save Evergrande with a bailout. He wouldn’t need it. Evergrande illustrates the exact type of crony capitalism that Mr. Xi intends to exterminate. Three destinies are therefore now imposed on the company.
The first would be for Evergrande to sift through an aggressive process of liquidating assets and accelerating business that would help it survive the current liquidity crunch.
The second would see the company suffer from a series of sudden and massive defaults, prompting an immediate takeover by the state. Founder Hui Ka Yan could potentially face criminal charges, as HNA’s Mr. Chen did this week.
Third, left unchecked, the fall of Evergrande would trigger systemic financial shocks in China, which could spill over into global bond markets as well. It would risk triggering a wider crisis in the Chinese real estate supply chain and panic sales among Chinese homebuyers.
The second spell seems the most likely. Had Evergrande not crossed a debt inflection point, the company would likely have fallen under current state control over strategic sectors of the Chinese economy. He would have arrived at the same tragic fate – without the theatricality.
Posted: Sep 28, 2021 2:28 PM
Update: September 30, 2021, 9:10 a.m.