The Evergrande Group is on the brink of bankruptcy. This news travels the world and shakes stock exchanges. No wonder Evergrande, headquartered in Shenzhen, southern China, owns the second-largest real estate company in the country, as well as other businesses, such as an electric vehicle factory and a football team. With around 200,000 direct employees, it generates 3.8 million jobs a year, according to the company’s website.
By Marcos Margarido – September 24, 2021
However, it has a debt of more than US$ 300 billion to the country’s financial institutions and is suffering a slowdown in the sales of its housing complexes. Its shares dropped 75% over the year, 12% just on the day of the announcement of financial difficulties (09/14). The company’s owner and CEO, Xu Jiayin, one of the richest men in China, has resigned. The Evergrande’s construction branch has about 800 unfinished projects, which add up to 1.6 million apartments already sold.
This huge number of unfinished constructions is due to the company’s investment model, similar to that of many Brazilian construction companies, such as MRV. It performs pre-sales before the beginning of the work and, with the money obtained, it starts other works with pre-sales too, in addition to using this equity to make bank loans and attract investors. Today, Evergrande has enough land to house the entire population of Portugal.
This “infinite” expansion scheme works when the economy is booming. That’s what happened. China began an accelerated urbanization process in the 1990s. From a peasant majority, it now has 60% of its population living in cities in 2020. This has caused enormous growth in the sector. Real estate valuation rose to stratospheric levels, causing the business to be target by financial speculation agents. Since 2015, real estates prices have risen by more than 50% in China’s biggest cities. At the same time, the average area of new homes has dropped to 23 m² per person, a little more than the size of a typical hotel room.
But this expansion seems to come to an end and Evergrande’s “Ponzi scheme” exploded. There is a slowdown in the real estate market. Even with 30% off offers on its apartments, Evergrande could not increase its sales and had a 25% drop in August sales compared to last year. The National Institution for Finance and Development, a Beijing consultancy, said the housing boom “showed signs of a turning point,” citing weak demand and slowing sales.
Crisis in the housing market or of the economy?
This is the big question at stake. Remember that the 2008 economic crisis started in the United States due to the crisis in its real estate market, which dragged large banks into the abyss and even productive companies like GM. The Chinese crisis is no different. High prices, financialization of real estate assets, shadow markets where shares similar to the famous subprime bonds are traded (securities that pay high interest, but at high risk), large loans made by banks to construction companies with no prospect of return, as well as the impossibility to pay investors trying to redeem their shares, many of whom are employees of Evergrande, who were forced to invest in the company under the threat of not receiving their bonus if they did not.
The real estate sector accounts for 13% of the Chinese economy and 28% of total bank loans. Therefore, a drop in sales in this sector directly affects others, such as steel producers (the price of iron ore has fallen to less than $100 per ton) and cement. Furthermore, some numbers indicate a broader downturn in the economy. Retail sales were much weaker than expected last month in China, led by declining car sales, one of the main sectors of the economy. Industrial production has declined, especially for large cargo trucks, an important indicator of a country’s production. China now has a production capacity of 1.6 million trucks a year, but sales have plummeted to less than 1 million. Dealerships are clogged with unsold trucks.
As a result, the Bank of America lowered its forecast for China’s economic growth next year to 5.3% from a previous forecast of 6.2%. The forecast for this year is a GDP growth of 8%. Despite high numbers regarding world growth, mainly of the main imperialist countries, this drop could strongly impact imports and affect countries like Brazil – which depends heavily on its iron ore and soy exports to China -, Australia and Canada, also exporters of iron ore.
On the other hand, the Chinese government can intervene in the economy and save Evergrande from bankruptcy by injecting enough money for it to fulfil its commitments. Three years ago, the government took control of Anbang Insurance Group, which owned a vast overseas empire that included the Waldorf-Astoria hotel in Manhattan. Authorities had arrested their president months earlier, and he was later sent to prison for fraud. Earlier last year, government officials took control of HNA, a transport and logistics company, saddled with debt.
This would be the same policy of the imperialist countries in 2008, whose governments injected trillions of dollars of public money into failed banks, with the excuse that they were “too big to fail”.
Market socialism, or salvation from capitalism?
However, in the case of China, the excuse would be different. The huge growth of private companies, such as in the area of technology (online market, social networks, services of all types) and of civil construction itself, has started to threaten the iron control of the CP of China over the economy and to take out of their pockets the huge profits made by them. Therefore, the eternal dictator-president Xi Jinping instituted a new “doctrine”: the “common prosperity”, already propagated even in elementary schools.
Through this euphemism, Jinping seeks to cover with leftist words the same policy practised by imperialist governments: to save capitalism from bankruptcy. It is clear that in the case of a capitalist dictatorship disguised under the name of the “communist party”, the very capitalists who “get out of line” are arrested and accused of crimes they certainly committed, the same as those committed by the “well-behaved” ones. But this is done in the name of capitalism, not against it. Sometimes it is necessary to save capitalism from bad capitalists, as Marx said. But nothing should happen to Xu Jiayin, the billionaire owner of Evergrande, as he is a member of the Chinese People’s Political Consultative Conference, an elite group (read, billionaires) of CP of China advisers. That is, he’s on the well-behaved list.
Most surprising of all this is that the remaining Stalinist communist parties around the world, the CP of Brazil being a typical example, is that all this is done in the name of perfecting socialism. According to one of its national leaders, Luís Fernandes, “the fact that China has renewed its socialist model, … building an economic foundation with multiple forms of property, maintaining strong planning, intervention and state management power, … show that, in addition to the socialist orientation, the country has a strong anti-imperialist component, and this combination is what has been sustaining this blazing rise of China”. (1)
What do this renewal of the socialist model and the adoption of multiple forms of property mean? It means that the CP of China itself restored capitalism in a country that made a social revolution in 1949 and returned a large part of state ownership to a new Chinese bourgeoisie, created by the party itself, causing companies from all over the capitalist world to set up industrial plants in China to exploit the Chinese working class. And this is called anti-imperialism…
From this new bourgeoisie emerged several billionaires and some of the richest men in the world, including members of the “communist party”. To give an idea, in the plenary of the CP of China congress that approved the eternal presidential term for Jinping, in 2018, the combined wealth of the super-rich delegates was US$ 507 billion, of which at least 102 were billionaires. Among these lucky “communists” were Pony Ma, owner of Internet company Tencent, and Lei Jun of Xiaomi, Apple’s main competitor. Jinping himself owns a fortune estimated at US$ 1.5 billion.
This dazzling rise of China, as Luís Fernandes says, is called market socialism. In other words, capitalist socialism, since, for Marxists, “market” can only exist in a capitalist system. It takes a lot of imagination to say that two excluding social and economic systems, such as socialism and capitalism, can exist harmoniously in the same country. Socialism fights for the abolition of private property and the end of exploitation, capitalism fights for their maintenance. As in China private property and the existence of exploitation of workers are facts that even the Stalinists cannot hide, it is evident that the only existing system in China is the capitalist one. The fact that the ruling party of the country is run by billionaires is a clear demonstration of this, even if it is called the communist party.
Notes:
(1) https://pcdob.org.br/congressos/15o-congresso-live-aborda-crise-do-capitalismo-eo-mundo-em-transicao
Evergrande's Likely Collapse Exposes Chinese Capitalism
