President Xi, the impending crisis in China and the myth of infallibility
The gist of the analysis on China and its debacle in Evergrande is generally “the government will save things” and “China cannot have a crisis”. Both statements are based on the decades-old article of faith that China’s rulers are all-seeing and all-powerful and have an incredible array of tools in their political kit. The less true this point of view, the more fervently it is affirmed.
Over the past six months, Xi Jinping and his “Thought” have been elevated in state media and statements by leaders to a level that only Mao has enjoyed so far. In his public speech, the Party dramatically elevated Xi to the status of a semi-deity, with the explicit claim that he is able to control everything.
As we try to determine whether Evergrande’s demise will trigger a systemic crisis in China and international markets, it may be helpful to read a new book written by a disgruntled real estate developer named Desmond Shum: Red Roulette. The book must be read along with an excellent Harvard Business School article by Meg Rithmire and Hao Chen on the emergence of mafia-like business systems in China. The damning findings of this work are twofold: The price of rapid growth in China is a personal risk to upper-middle-class families and private sector tycoons. And the government’s management of affairs is chaotic, disorganized, short-term, and poorly serves its claimed public purpose.
Why don’t people inside and outside of China realize this time and time again? A quick drive through town by taxi to any city in China demonstrates the dangerous mess that governs traffic management across the country. Since any visible system is chaotic, why do people assume that banking, capital allocation, crisis management, and virtually all sudden movements of the Central Party are well ordered?
The controlled press and most of the voices on social media are friends of the government. Whenever China is faced with a crisis – the vast unemployment created by the restructuring of state-owned enterprises, the Asian debt crisis, the global financial crisis – the media hides the negative and emphasizes the positive.
As for Evergrande and the real estate debacle in general, the evidence before us is of a government terrified of the fallout and very uncomfortable having to deal with it. Some of the issues they carefully ignored:
· There is news that Evergrande submitted several restructuring plans to the government ahead of the Spring Festival this year and has been ignored.
· Hundreds of real estate developers went bankrupt in the first half of the year. Several listed developers are currently in distress, but they are not covered.
· Government statistics show a dramatic drop in local income from land sales.
· Local land offices report property values without real market testing, and developers have been cited some 400 times for lowering prices in violation of local floor prices.
· Banks have universally tightened mortgage requirements, and rates average over 6%.
· The demand for iron ore and construction is plummeting. Sales of construction equipment, especially excavators, collapsed.
Evidence suggests a prolonged crack in the economic bud since at least July, but authorities have acted as if someone had made a rude noise in an elevator.
Newspapers and TV stations regularly prepare obituaries for famous people well in advance of their death so that they are ready for publication as soon as the death occurs. After all, death tends to be inevitable. As foreign analysts remind anyone who will listen, they have warned for a decade that Evergrande and the Chinese housing bubble were generally unsustainable. So why hasn’t the Chinese government come up with a plan? Maybe the authorities just aren’t equipped to deal with issues like Eveergrande.
Red Roulette provides several clues as to why. Among them:
· Absolutely no one is motivated by civic goals. Terms like “common prosperity” are thrown around half-heartedly, as the developers say they want to “build China,” like self-righteous narratives.
· In the effort to remove localism from governance, China has emphasized the short-term nature of the incentive. Civil servants are parachuted from other localities and, if successful, transferred within a few years. Their interest lies in immediate and visible KPIs, not in lasting gain.
· Private entrepreneurs have served as lewd agents of Party interests in the system, but their usefulness is limited and their risks to the Party’s monopoly of power increase.
· Property rights are so threatened that entrepreneurs are better advised to withdraw money from transactions immediately and spend it quickly, just as drug dealers spend on luxuries lest the government take their money away.
A gray regulatory haze envelops just about all private business and financial activity, making it easier for the government to force private parties to suffer losses – people are always wondering if their investment has broken a rule, and what? is still the case.
· China’s period of economic reform and restructuring has always been meant to be instrumental and temporary. The culmination of the use of “capitalist tools” like the free market, never really fully deployed, is here.
The book reveals a sort of panic to make money and run, as private entrepreneurs rush for three dinners a day, escort government officials on foreign trips, and travel from agency to agency in chauffeured cars trying to get approvals for transactions. You can tell from this book that nothing beats all the headaches. Obviously, a lot of people in China disagree.
But some disagree and seek shelters. Ever since Miles Kwok appeared in New York City and developed mysteriously intimate relationships with American politicians, Chinese real estate developers who have fled and published official corruption denunciations have become a trend. This is one of the problems that Chinese leaders see in private affairs: individuals with means who have mobility and connections beyond the Party’s reach. CCP officials never break the code of omerta who governs the government – they cannot, and to be even safer, the government does not allow retired civil servants to leave the country.
But the developers are part of the bizarre private complex that has grown like a carbuncle on the state, and the people who run these companies, like Hui Ka Yan of Evergrande and Desmond Shum of Great Ocean, are in a good position. greater measure of free agents.
Shum’s book indicates a sort of invisible hand of corruption in which the pursuit of blind interests locally generates windfall returns. But that flies in the face of the idea that there is a master plan, inbound or outbound. What we can expect is a growing crackdown: if you can’t stop this from happening, you need to make sure no one mentions the rude guy in the elevator.
As the name of Shum’s book suggests, inside the gun chamber is a real bullet, and it may now be under the firing pin.