Xi Jinping’s Mild Success in his Policy towards “Common Prosperity”

  • Xi Jinping’s property crisis with Evergrande weakens communist ideology
  • Xi Jinping’s market speculation weakens as Evergrande is on brink of collapse
  • Xi Jingping’s action could be a 2008 housing crisis repeat.
Xi Jinping - China
Source: Financial Times

Why is Xi Jinping’s Heat Level Mild? 

Answer: The Evergrande crisis is an example of Xi Jinping’s efforts to strengthen the communist ideology in his country, but this matter will have important consequences. 

Xi Jinping is determined to enhance the communist ideology in his country. What is more, he is seeking to install his own thought in Chinese society. As a means of doing that he is aiming at “Common Prosperity”. However, as of now he is only mildly succeeding at it.

Managing the economy of a country as large and prolific as China is undoubtedly a difficult task, even more so in a centralist, authoritarian and communist way. Thus, despite wanting it to be a communist country to the core, Mr Xi is trying to fight a problem typical of capitalist countries: inequality, and so, he is leading an at-first-sight adamant campaign to counter it. Some of the measures he has been implementing since 2020 strive towards tightening his grab over tech giants. And now, he is focusing all his efforts on ridding the property market of speculation and making housing more affordable. This is where the real estate company, Evergrande, comes in. 

First of all, it is important to highlight the importance of the property sector in China’s economy, since it accounts for 20-25% of it. Moreover, Evergrande is the world’s largest property developer, but right now its apparatus is crumbling and it has also become the world’s most indebted property firm with a $300 billion debt. This can be explained because Evergrande’s modus operandi is mainly based on borrowing in order to build properties. Furthermore, it sells these properties before they are completed to also make profits from the buyers’ deposits. Problems began in 2020 when Evergrande started to find itself unable to deliver properties that had already been bought. 

The question many have been wondering since the crisis began is whether the Chinese government – and more specifically Xi Jinping – will intervene to rescue the real estate firm or at least will try to reduce the impact of its collapse. However, it is likely that the current situation of the Evergrande was brought about by the President himself in his efforts to seek stability and control of the financial system. So, the question remains: will Mr Xi dare push to the ultimate consequences? He may not. 

Who is changing Xi Jinping’s temperature? 

Answer: Chinese analysts, investors, and the Central Bank itself are warning of the dangerous effects it could have on the whole Chinese economy, should Evergrande finally collapse.

If Evergrande were to end up bankrupt, there are many stakeholders that would be affected. It would have an overall impact on the Chinese economy. 

To begin with, most of Evergrande’s loaners are banks, so there is a possibility of a bank crisis if they do not regain their investments. Nevertheless, shadow-banking entails an even greater risk. These kind of institutions borrow short-term funds and use them to buy assets with longer-term maturities, but they are not covered by insurance, neither from Central Banks nor from depositors.

It is here that the real danger lays. In fact, shadow-banking was first spoken of during the global financial crisis, for it was one of the domino pieces that led to it. And it is not the only domino piece of the 2008 crisis of which we can find a comparison on the Evergrande crisis. This real estate company is the largest bond issuer in Hong Kong, so the downfall of the bond market is yet another worry for the Chinese financial system. After all, the bond market is always a complicated matter and usually a source of problems. 

Also, there is a big risk for households themselves. Indeed, many have their assets placed on the real estate sector. Moreover, plenty of local governments rely upon the land market and property expansion to make profit.

Due to this, there is a chance that Mr Xi will not be able to carry his plan against market speculation through. On the one hand, there have been protests from investors and homebuyers in front of the Evergrande headquarters in Shenzhen. Allegedly, there have also been protests in other cities around the country and messages to organize these have been blocked. One of the goals of these protests was to ask the Government to intervene. After these rallies, the Central Bank vowed to protect homebuyers’ interests. 

On the other hand, analysts predict that an Evergrande collapse would diminish China’s general growth prospects

In any case, a state-owned company has bought a big part of Evergrande’s stake in a commercial bank for $1.5 billion. Therefore, Mr. Xi’s government is already taking action to help avoid Evergrande’s being completely bankrupt. 

What is driving Xi Jinping? 

Answer: Xi Jinping is working to implement his own thought in all scopes of Chinese society.

Since Mao Zedong, founding father of the People’s Republic of China, no other leader had concentrated so much power than Xi Jinping currently does. In fact, he plans to claim a third five-year presidential term. What is more, since Mao no one had dared name his ideology after himself, and Mr. Xi has gone even further. “Xi Jinping thought” will now on be taught in schools and universities. Thus, his personal ambition is clearly driving the Chinese President.

In terms of the economy, he is envisaging to reshape the market. To begin with, he wants China to rely less upon the housing market. Instead, there are other areas he’d rather have China invest in. For example, he favours high-tech manufacturing, since it would help reduce the country’s dependence on the US. Additionally, another of his main goals is to cut pollution and carbon emissions, which is one of the reasons why he is pressuring big companies. All in all, he aims at financial and social stability and Evergrande’s excessive borrowing endangers this. Nevertheless, so far he is only mildly reaching said goals.

What does this mean for you? 

Answer: Xi Jinping’s actions could have great consequences not only for China but for the world. However, this is not likely to stop the Chinese President.

Xi Jinping is certainly taking a huge risk to achieve his goals. After all, Evergrande’s collapse is being compared with that of the Lehman Brothers that unleashed the financial crisis in 2008. So, its downfall could impact not only the Chinese but the global financial system. However, it is important to note that barely any international bank had lent money to Evergrande. 

Still, given the importance of the property sector in general and the broad scope of stakeholders related to Evergrande directly, its meltdown would have significant consequences in the Chinese economy. Therefore, it is likely that the Chinese President will be persuaded to take action so as to avoid this outcome. Still, given his authoritarian attitude, it is not probable that Mr. Xi will give up completely on his efforts to change the market. Hence, we can expect him to keep pressuring this and other similar companies in different ways. 

Silvia Cortina Fernández

Research and Analysis Intern