Amid a flood of regulatory news coming from China in the past few weeks, one of the biggest has been the impending collapse of China Evergrande Group, the nation’s second-biggest developer and the most indebted of its kind in the world with US$305 billion owed.
Fears were confirmed on Friday last week, when the conglomerate missed a deadline to pay US$83.5 billion in bond interest and entered a 30-day grace period from which there is no indication it could escape without defaulting. The news sent investors worldwide into a furor, prompting comparisons to the fall of Lehman Brothers in 2008, which sparked a contagion leading to the Great Recession.
Whether the comparison has bearing remains to be seen, as Beijing has remained silent on the matter save for an injection of cash into the banking system on Friday. However, all signs indicate that the government intends to leave Evergrande to the wolves to underscore its commitment to economic reform.
Chinese regulators have been building up to this conclusion for years in their campaign to rein in overreliance on debt, especially in the real-estate industry, which has relied on indiscriminate borrowing to fuel its frenzied growth. Showing lenders that the state will no longer prop up big borrowers is crucial to extricating moral hazard from the credit market.
In so doing, Beijing hopes to direct lenders to more productive investments that would spur quality development, or as Chinese President Xi Jinping (習近平) put it in a January speech to provincial and ministerial officials, “genuine” rather than “fictional” growth.
To Xi, this means manufacturing by small and medium-sized firms in consumer-oriented industries. These moves are part of a greater ideological effort to realign the economy away from the capitalism-fueled model that enabled China’s staggering growth and toward the type of socialism envisioned by the Chinese Communist Party’s (CCP) founders.
As Lingling Wei (魏玲靈) describes in the Wall Street Journal, the cascade of crackdowns on industries that Xi sees as “being led astray by a capitalist spirit,” such as technology, tutoring, video games and entertainment, and actions against giants such as Alibaba and Didi, are part of its policy to “make private business serve the state.”
A careful student of Mao Zedong (毛澤東), Xi subscribes to Mao’s theory of development that views state capitalism as a transitory phase to help the economy catch up to the West before being inevitably replaced by socialism. In Xi’s view, this hybrid model has already “passed its use-by date,” Wei wrote, meaning that regaining state control is already overdue.
In Taiwan, regulators and commentators alike have been attempting to assuage fears of a contagion effect from an Evergrande collapse on domestic markets. The Financial Supervisory Commission on Sept. 14 said that Taiwanese financial institutions had limited exposure to Evergrande at NT$2.21 billion (US$79.2 million) as of the end of July, while central bank Governor Yang Chin-long (楊金龍) on Thursday said it is a “domestic problem” and that its effect on Taiwan’s economy would be minor.
However, even if Taiwan’s institutional exposure to Evergrande is minimal, Taiwanese should remain wary of other potential consequences — considering the untold number of retail investors with serious exposure to the Chinese property market. If Beijing — as most analysts predict — decides to protect a hierarchy of creditors starting with domestic retail investors, it is unclear where Taiwanese would fall.
Considering Beijing’s desire to integrate the two economies, Taiwanese investors and suppliers might be required to pour more funds into the Chinese economy or complete other demands as a precondition for covering their losses. As the Chinese real-estate market crumbles, investors are likely to look abroad for more stable options, including Taiwan, where the market is already dangerously inflated.
Ultimately, Taiwanese looking to do business in China must remain acutely aware of how the Evergrande saga fits into the CCP’s grander socialist vision. Fortunes can change in an instant, even for companies as cozy with the government as Evergrande.
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