Evergrande Bankruptcy—The Implosion Begins

Evergrande Bankruptcy—The Implosion Begins
Evergrande residential buildings under construction in Guangzhou, in Guangdong Province, China, on July 18, 2022. (Jade Gao/AFP via Getty Images)
James Gorrie

What does the Evergrande real estate development firm’s bankruptcy mean for China’s economy today and in the near future?

With the property developer’s collapse now official, is the worst behind China? Or does it point to more fractures in an already fragile economy?

It seems to be the latter.

Yes, Evergrande’s failure has long been expected as it has been unfolding over the past year or so. And Evergrande isn’t the only Chinese development company in hot water—far from it. Real estate developer Country Garden is also in danger of default, adding fuel to the contagion risk fire.

Overreliance on Development

But Evergrande’s collapse didn’t happen in a vacuum. Rather, it’s the result of decades of poorly managed economic factors and foolish policies put in place by the leaders of the Chinese Communist Party (CCP). What’s more, China Evergrande’s failure isn’t just an economic one; it’s also a symbolic one.

Here’s why both are true and why it’s so important.

First, the real estate development sector has accounted for up to one-third of China’s economy for decades. The development brought a level of financial success and growth to the economy that the CCP was always quick to claim as validation of its rule. After all, the CCP’s deal with the Chinese people was based on a simple understanding. The CCP would provide jobs, growth, and economic prosperity, and in exchange, the Chinese people would stay out of politics.

Corruption, Waste, and Fraud Drove Projects

Unfortunately, because it provided so many jobs, wealth, and physical improvement in China, the CCP came to over-rely on the real estate development sector. It funded enormous amounts of development projects throughout China that were unnecessary, highly unprofitable, wasteful, and full of graft that made many Party officials millionaires.
By the 2010s, China had built entire cities, complete with downtowns, office buildings, condominiums, shops, malls, subway systems, parks, and more that would forever remain uninhabited. These “ghost cities,” as they came to be called, number in the hundreds and even thousands, with enough apartments alone to house the entire population of the UK.

Of course, basing almost a third of the economy on only one sector dependent mainly upon debt and plagued by corruption is unsustainable.

Moreover, because the CCP funded so many huge projects without any true need or economic rationality, efficiently allocating labor and materials was never a priority.

The questions asked by the CCP regarding development typically weren’t about true economic impact or sustainability in the way we might think about them. Instead, the main concerns were about Party loyalty, which Party members needed to be paid off from the project to get the loans approved, how much money could be made, and maintaining political alignment with Party superiors.

Political Priority Over Economics

The political priority of CCP officials was also about keeping people employed, of course, as they enriched themselves along the way. As a result, the financial and physical resources wasted on these projects grew to unfathomable proportions, as did the level of debt used to fund them.
Also, keep in mind that the debt used to pay for such development projects was typically never paid off by the project itself but instead simply rolled into larger loans from local government funding vehicles, which would then be often covered by the People’s Bank of China, and still larger ones afterward over years and years.

Ripple Effect Just Beginning

But no matter what kind of spin the leaders try to put on it, that won’t lessen the effect or the importance of the collapse as an economic disaster. The ripple effects have been moving through the economy for months and are likely to increase, especially given that the economy has been wobbly since at least 2020 with the CCP’s draconian, zero-tolerance COVID-19 lockdown measures, but also even earlier, because of U.S. sanctions and tariffs.
But today, Evergrande isn’t the only thing that’s bankrupt in China. The ideas and the credibility of the CCP leadership are, too. Evergrande’s collapse sends a clear signal to the Chinese people that Party leaders are unable to lead the country into prosperity or even maintain it once it’s achieved with the vast assistance of Western nations with their money, technology, and know-how. Even portfolio managers in China are preparing their clients for more bad news.

A Legacy of Failure and Futility

The optics of the CCP’s failure are becoming ever clearer.
Growth expectations have been downgraded—again—for this year, with no expectation for improvement in 2024. Foreign investment is also down, the housing market is showing weakness, and the unemployment rate among the youth is so bad that the state isn’t publishing the numbers. In June, it was more than 20 percent, which was undoubtedly an understatement. In fact, it may be as high as 50 percent.
The young people, who are China’s future in every sense of the word, aren’t dazzled the way their parents were with a growing economy. Instead, they’re disillusioned. Moreover, Chinese leader Xi Jinping’s hollow recommendation that the unemployed youth learn to “eat bitterness”—an expression that roughly parallels “tough love”—is falling on deaf ears, just as his official Mao-like political homilies are rejected by the same disaffected young minds.

Mr. Xi’s “let them eat bitter cake” moment is toxic elitism and is nothing less, and nothing more, than his placing the blame and responsibility for his profound failures as the supreme leader of China onto the younger generation, and they know it.

All they see is failure and futility and their future undone as the rest of China’s economy continues to implode. They don’t want children, don’t believe in the CCP, and don’t believe in Mr. Xi.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, TheBananaRepublican.com. He is based in Southern California.
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