Make no mistake – the fall of Chinese private real estate giant Evergrande aligns with President Xi Jinping’s stated vision for the nation.
He commanded national firms to reclaim their position at the cornerstone of the Chinese economy during the 19th Party Congress in 2017, calling them “the pillar of the Chinese economy on whose success the party derives its material foundation and ruling legitimacy”.
Nonetheless, China's ascent in the global economy mirrors a continuously deepening privatisation. Statistics can reveal where the economic engine revs.
In 2019, private companies contributed approximately half of China’s tax revenue, more than 60 per cent of its GDP, 70 per cent of its R&D and innovation and 80 per cent of employment. That year, 90 per cent of Chinese corporations were private.
In this, Mr Xi sees an economically prosperous China that has ceded economic control from the state to private companies. Now he is driving to make the nation’s largest state-held firms more market-competitive while at the same time rolling back the private economy.
This has everything to do with the three phases that today anchor modern China. We are now at the start of the third phase.
The first three decades of the People’s Republic were characterised by the successful nationalisation of private companies. The following three decades then thrived on privatisation of state ownerships, rewinding the nationalisation achieved in the first 30 years.
In the three decades to come, China is likely to look at re-nationalisation of some fundamental drivers of the private economy, particularly data.
Already the government “invites” China’s largest private companies to invest in state-owned entities to enhance the latter’s global tech ambitions. Tencent invested in China Unicom, Geely in China Railway and Alibaba in China Broadcasting Network. These investments were strategically matched by the state.
In 2019, 43 Chinese private companies listed on the Chinese stock exchanges were nationalised to varying degrees, saved from the brink of debt collapse.
HNA, China’s most ambitious private conglomerate, was fully nationalised in January. Chen Feng, its founder and chairman, was formally indicted with criminal charges this week.
Anbang Insurance, China’s financial dark horse, turned Manhattan’s famous Wardorf Astoria into a Chinese-owned hotel when it bought it for a record $1.95 billion in 2015. But last year, China’s second-largest insurer faded into the history books in a total state takeover. Not even its name survived.
Anbang’s founder, Wu Xiaohui, father to the only great-grandson of the late reform leader Deng Xiaoping, returned $1.6bn to the state, and is to spend the next 18 years behind bars.
Wanda Group, China’s most recognised global brand, sold off nearly all its prized overseas assets, including AMC Cinemas.
Meanwhile, the rules dictating China’s use of capital have changed during the Xi Jinping era. China’s most prized industrial companies have been thriving on an exceedingly high-leverage model to fast balloon the assets – and liabilities – on the balance sheet. Their ambitions for expansion, backed by the state financial houses, went unbridled. But when the flow of financial resources towards them was no longer guaranteed, they all faced an inevitable fall. After all, it is sill the state banks that control finances in China.
Mr Xi's vision for a new model of economic justice should realign state capital to serve not only as liability holders, but shareholders when it comes the debt-ridden traditional industrial companies. The existing model enriches private individuals to the detriment of the state.
Evergrande is not the first – and won’t be the last – private giant to disintegrate. We have thus far witnessed the restructuring and re-nationalisation of Anbang and HNA by the state. The central government has proven it has the will, the confidence and, now, the experience, to manage Evergrande’s inevitable demise.
The government is unlikely to save Evergrande with a bailout. It would not need to. Evergrande exemplifies the exact kind of crony capitalism that Mr Xi is intent on exterminating. So three fates now face the company.
The first would be that Evergrande sifts through an aggressive asset liquidation and business acceleration process that would help it survive the current liquidity crisis.
The second would see the company suffer from a series of sudden and massive loan defaults, causing an immediate takeover by the state. Founder Hui Ka Yan could conceivably face criminal charges, as HNA’s Mr Chen did this week.
Third, without any controls, Evergrande’s fall would cause systemic financial shocks in China, which could also ripple through the global bond markets. This would risk triggering a wider crisis in the Chinese real estate supply chain and panic-selling among Chinese home buyers.
The second fate seems most likely. Had Evergrande not passed a debt inflection point, the company is still likely to have fallen under the current drive of state control over the strategic sectors of the Chinese economy. It would have arrived at the same tragic fate – without the theatrics.