Evergrande and the Limits of “Common Prosperity”

By Noah Schwartz

The recent troubles of Chinese real estate development group Evergrande provide an accurate window into the Chinese economic system. Evergrande is emblematic of a Chinese economy that has grown to great heights, yet still struggles with issues of inequality. 

Evergrande, a Chinese real estate company, represented the rush for urbanization in 1990s China. Evergrande was founded in 1996 and quickly rose to the position of 122nd in the Fortune 500. This rise reflected the market reforms under Deng Xiaoping and the integration of the Chinese economy into the Western neoliberal order.

Western commentators saw the expansion of Chinese market freedoms and companies such as Evergrande as a sign of the finitude of the ruling Chinese Communist Party. 

“Over time,” wrote Thomas Friedman, “China’s leaders can’t control and monitor their bursting free markets or prevent little people from getting cheated and then rioting against the government.” It became clear that the West encouraged market reforms within China in hopes of introducing a post-Soviet style ‘shock therapy’ and overthrowing the CCP.

China avoided this type of post-Soviet collapse by pursuing pragmatic economic and political reforms. It seemed Evergrande was a key part of these reforms, as it played a crucial role in Chinese urbanization in the 1990s. 

However, Evergrande has over-extended itself and become decadent. As of December, Evergrande liabilities total around $300 billion. The way Xi Jinping and the CCP handle the Evergrande crisis will be a defining moment for “Socialism with Chinese Characteristics.” 

The National People’s Congress in China prioritized Evergrande as a top issue. Hui Ka Yan, the founder of Evergrande, was not invited to the Chinese People’s Political Consultative Conference. 

This seems to be symbolic of the ruling party’s changing attitude towards the Evergrande crisis. Yan had been able to attend the 100th anniversary of the Communist Party over the summer but is now being excluded from the CPPC. 

It indicates that Xi Jinping and the CCP are growing tired of having to back up Evergrande. Evergrande is increasingly an albatross around the neck of the party’s “Common Prosperity” ideal. 

A shaky real estate market would damage the reputation of the party which has prided itself on providing housing to China’s younger generations. 70% of Chinese millennials own a home, compared to 35% of American millennials. 

So far, China has stuck to a hardline of making Evergrande pay back its own debts. Hui Ka Yan has contributed $1.1 billion of his own money to pay down Evergrande’s debts. 

Furthermore, Evergrande has publicly stated that they will not do a ‘fire-sale’ (the practice of selling securities or stock at a well-below market price in order to pay back liabilities). Rather, Evergrande has committed to building 600,000 new apartments in 2022. 

However, these are issues Evergrande cannot simply build its way out of. This reflects a changing global real estate market, where rates of profit are falling and the Chinese Communist Party will have to make a decision. 

Xi Jinping has reiterated the mantra that homes are “for living in, not speculation.” Xi could further shore up his Marxist bonafides and solidify his domestic strength by simply letting Evergrande fail. 

This could prove to be a major propaganda victory for the CCP, as a refusal to bail out Evergrande is easy to contrast with the 2008 financial crisis where American taxpayers bailed out bloated banks and real estate companies. 

As appealing as letting Evergrande fail for a propaganda victory would seem, there are real concerns that letting a firm the size of Evergande bottom out could unravel the real estate market. 

Additionally, foreign direct investment has been central to China’s growth and foreign investors may be scared off if they perceive that the Chinese state will pull the rug out from under them. The CCP will have to walk a difficult path in order to let Evergrande fail in a controlled manner.

Western commentators hoping that the Evergrande crisis is a sign of Chinese decline are mistaken. The CCP will not let Evergrande blow up or bail them out. 

Rather, a more pragmatic series of economic reforms that see the state slowly seizing and selling off Evergrande’s assets is the likely development we will see in coming months. 

However, this crisis does raise the contradiction within the Chinese model: how will Xi continue to build socialism at home but participate in the market abroad?

Noah Schwartz is a senior at George Mason University studying Government and International Politics. He specializes in Chinese grand strategy and Left Realism.