Until the Evergrande Group began defaulting on creditors, Xi Jinping was riding high in his rule. However, leading a communist regime is fraught with challenges. When the financial framework supporting the nation’s second-largest property developer begins to falter, the situation quickly turns serious.
One of the most critical moments for a communist leader is when the reality of the nation strays from the carefully crafted five-year plans meant to govern it. The illusion of control over 1.4 billion people is difficult to maintain when their lived experiences contradict the narratives put forth by the Communist Party. When that occurs, the state relies increasingly on fear and repression to suppress dissent.
“A man’s heart deviseth his way: but the Lord directeth his steps,” King Solomon wisely stated (Proverbs 16:9). The higher powers have a peculiar sense of humor, especially when serving a timely dose of humility.
By serendipity, Xi Jinping entered the global stage at an opportune moment. A 20-year economic surge had elevated the People’s Republic of China to a prominent position internationally. Instead of enjoying the successes of his predecessors, however, Xi chose to assert his authority abroad while tightening control over citizens at home.
This summer, Xi and the Chinese Communist Party (CCP) launched an aggressive regulatory campaign against prominent tech companies like Alibaba, Tencent, and Didi Global. Now, real estate developers share a similar fate, facing the CCP’s new debt restrictions known as the “three red lines.”
Evergrande is not just any property developer; it is one of the most heavily indebted and has become the first to confront its cash flow failing to meet its debt obligations. More firms in this sector are expected to follow suit.
There are various motivations behind Xi’s efforts to curb the excesses of over-leveraged developers. The industry has run amok for years, evidenced by the numerous ghost cities dotting the landscape. However, it seems that vanity plays a more significant role in Xi’s strategy than any sincere commitment to common prosperity. Here’s why…
Winnie the Pooh
By sheer coincidence, Xi Jinping bears an uncanny resemblance to Winnie the Pooh. Several years ago, astute bloggers began creating memes linking the portly, lovable bear to Xi. This prompted laughter across social media, but the grim authorities did not find it amusing.
The CCP swiftly blocked all references to Winnie the Pooh within China’s Great Firewall. Ridicule of the Supreme Leader is not tolerated; Xi must be revered and above reproach. He cannot be mocked, and any dissent must be eradicated.
What value does a country hold if its citizens cannot poke fun at their leader?
At this point, it seems like a nation unworthy of living in. Furthermore, when wealthy individuals in a communist state overshadow the Supreme Leader, action must be taken to diminish their influence.
Take Jack Ma, for example. The co-founder and former executive chairman of Alibaba capitalized on the internet boom, becoming the richest man in China. However, after voicing criticism of regulatory practices, he faced abrupt backlash, resulting in the cancellation of Ant Group’s much-anticipated IPO. Nowadays, Ma is scarcely seen in public.
Similarly, Hui Ka Yan, founder and chairman of Evergrande, was once the second richest person in the country but has also incurred the wrath of the CCP. Hui greatly benefited from Beijing’s policies.
Following the financial crisis of 2008-09, which briefly dampened the demand for Chinese exports, the central government implemented an extensive stimulus initiative. This plan included an abundance of low-cost credit.
As expected, property prices surged nationwide, from coastal megacities to inland centers. Real estate development morphed into a nearly assured route to wealth. The larger a developer grew, and the more land they held as collateral, the greater their borrowing power. With low-interest rates, this cycle reinforced itself as long as property values continued to rise.
“Everything for me and Evergrande is given by the party, the state, and society,” Hui proclaimed in a 2018 speech.
Perhaps Hui should have added that plentiful, inexpensive credit was also a key factor in his fortune.
But the other side of borrowing is debt, and Evergrande now finds itself unable to meet a series of upcoming bond payments. This unfortunate turn of events comes after the company radically altered the landscape with some of the most garish designs imaginable…
Winnie the Pooh’s Adventures in Fairyland
The phenomenon of “bubble-ism” — communism with Chinese characteristics — has achieved remarkable feats. With abundant credit and the will of the CCP, Evergrande and its counterparts engaged in increasingly bizarre and extravagant developments.
The artificial islands of Hainan, sometimes referred to as the “Hawaii of China,” became a focal point for bubble-ism. Here are some notable highlights:
The enormous, curved structures of Phoenix Island illuminate in vibrant red. Ma Yansong, the founder of MAD Architects, described the development’s vision:
“It is an island in the sea. Architecture on the island should look like it grew out of the sea. They should be curvy, just like coral or sea stars. It feels like they are a group when they are pieced together.”
There’s also the striking Beauty Crown Hotel, featuring nine colossal tree-like structures, along with the Nanhai Pearl, a massive entertainment complex shaped like a yin-yang symbol. Finally, there’s the Aloha Hotel and entertainment venue, designed to outshine Waikiki.
The crown jewel, however, is Evergrande’s Ocean Flower Island, modeled after a lotus flower with five separate petals radiating from a central point. This project is part of Evergrande’s theme park division, aptly named Evergrande Fairyland. One designer articulated the inspiration:
“Our inspiration generally comes from nature, drawing on geometric shapes found in the environment and experiences shaped by nature.”
The grand plan for Ocean Flower Island Fairyland includes a 12-acre water park, hotels, museums, an amphitheater, an arboretum, cinemas, parks, shops, and an opera. The estimated cost is around 100 billion yuan, or about $15 billion. Based on our rough calculations, the final expense could easily double or triple that figure.
According to the group’s latest annual report, it began a trial run for visitors earlier this year, anticipating a full opening “at the end of 2021.” It appears Evergrande will not meet this deadline.
Furthermore, prior to its funding issues, Evergrande had ambitions to construct 15 such Fairyland parks throughout China. Ironically, its financial downfall may be the best outcome for both Evergrande and the nation, likely curtailing further stark changes to the environment driven by corporate ambition.
Thus, one chapter closes, and another unfolds…
Xi may believe he can dismantle the financial structure supporting Chinese developers after decades of enabling their excess, all without triggering a financial calamity. However, he cannot dictate that real estate prices will perpetually rise.
The flow of credit once elevating property values has now turned into an avalanche of debt. Falling real estate prices are inevitable. And for Winnie the Pooh, his adventures in fairyland are only just beginning.
Sincerely,
MN Gordon
for Economic Prism
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