KAOHSIUNG (Taiwan News) – A few weeks back, the international media was awash with stories about Evergrande Group, China’s second-largest property developer.
Having borrowed big to scale up the business, Evergrande found itself with liabilities of US$310 billion and in a letter to the Chinese Communist Party (CCP) authorities in Guangdong province, admitted that they were close to running out of money.
Following embarrassing scenes that saw small investors massing outside Evergrande's headquarters demanding their money back, the company denied the letter was genuine and the furor slowly disappeared from view as the media focused on newer stories.
But that doesn’t mean the crisis has abated. Far from it.
Evergrande’s attempts to sell some of the vast land and building assets it holds have been largely unsuccessful. Meanwhile, its credit rating has dropped from B+ in June to CC by the end of September, making it far harder and more expensive for them to borrow money too.
On Tuesday, Evergrande Group missed its third round of bond payments in three weeks. This proves that not only are the concerns about cash flow genuine, but the future of Evergrande is now in serious peril.
If it fails to make payment by Tuesday (Oct. 19), it will be formally declared in default.
Evergrande Group is not the only Chinese property developer to find itself in this predicament. However, its prominence and the scale of its liabilities have shone a light on the rest of the sector.
In response, credit ratings companies have downgraded the ratings of several other developers, including Greenland Holdings, E-house, and Modern Land (China) Co. Fantasia Holdings has also missed a major bond payment, while Sinic Holdings Group Co. has warned it is also likely to miss one in the coming days.
This upheaval is causing massive instability in the Chinese financial markets. In the event that Evergrande Group defaults and collapses, the knock-on effect for the Chinese economy would be profound. As well as likely taking other developers with it in a domino effect, its impact will reach all corners of the Chinese economy and send ripples around the globe too.
Normally, you would expect the CCP to step in and nationalize Evergrande. After all, economic instability is one of the biggest fears as financial growth and prosperity are the pillars on which the CCP’s powerbase is built.
Nipped in bud
The big question is, why haven’t the CCP already stepped in to nip this issue in the bud? There is a growing body of evidence that perhaps the CCP can’t afford to.
Take the power cuts, which have hit the northeastern industrial regions of China in recent weeks. Electricity blackouts are not unusual in China, but these are usually in domestic areas, to ensure the industries that keep the Chinese economy ticking over are unaffected.
Not so this time. Energy-intensive but economically vibrant businesses like steel-making, aluminum smelting, cement manufacturing, and fertilizer production have all been hit hard. Goldman Sachs estimates that as much as 44% of the country's industrial activity has been affected.
Why is the government not spending more to increase the energy output and meet demand? And why is it allowing businesses to be hit by power outages rather than domestic areas?
CCP Chairman Xi Jinping (習近平) has begun using one phrase far more regularly when discussing economic matters, particularly in relation to big businesses: “Common prosperity.”
It is a phrase that has been mentioned more than 60 times in CCP statements and speeches this year. It essentially refers to a notion of wealth redistribution, with big businesses encouraged to donate more, notionally to help the poorest in society.
Huge donations have poured in from the likes of Alibaba and Tencent, no doubt aware that there could be major repercussions if they don’t "donate." However, there is precious little evidence this money is coming out of CCP coffers and being used for the causes that it is supposedly intended.
Instead, this "common prosperity" drive looks far more like a good old-fashioned protection racket, whereby the government forces the wealthy to hand over money in exchange for not being subjected to state-sponsored persecution.
The CCP seizing assets from the Chinese business community is nothing new, but why has it stepped up this activity now? Perhaps because, like Evergrande, the CCP is running low on cash.
It is impossible to know for sure. Chinese economic data is not worth the paper it is written on and doubtless, when the economic data for this year emerges, it will show the economy continuing to grow and in rude health.
This brings us on to Taiwan and the escalation in aggression toward Taiwan that we have seen in recent weeks. Is it just a coincidence that this has coincided with Evergrande’s financial woes and power outages across much of China?
The CCP would not be the first government, authoritarian or otherwise, to turn the nationalism dial up to 11 to distract people from other issues closer to home. There is nothing quite like the bang of a war drum to draw people’s attention away from other problems.
Perhaps the biggest question for Taiwan has to be, if Evergrande does fall and the Chinese economy is hit hard, just how hard will the CCP bang Taiwan?