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Evergrande shows China’s rulers can’t bank on ‘market miracle’ anymore

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As Chinese real estate giant Evergrande teeters on the edge, pundits are speculating whether its collapse could pull down the global economy. Socialist Worker looks at what’s behind the crisis
Issue 2774
Evergrande has towered over Chinas property market
Evergrande has towered over China’s property market (Pic: Wikimedia/Creative Commons)

Could the potential collapse of China’s second biggest property company trigger a financial meltdown on the scale of the 2008 banking crisis?

That’s the question many are asking as the giant Evergrande firm teeters on the brink.

The company has debts of more £220 billion, more than any other property developer in the world. 

Many of those who bought company bonds are global financial giants hoping to cash in on the real estate bonanza on China’s eastern seaboard. But they are far from the only ones affected.

Millions of workers in China have invested their life savings in the firm, treating it like a pension fund for their retirement. 

And some 1.4 million more families have handed over their cash as an advance payment on homes yet to be completed.

Evergrande’s business model, like so many other property firms, is based on speculation. 

As property prices rose fast, its ability to raise loans and advance ­payments was used to finance future developments. 

And for as long as the money kept flowing in and prices kept rising, the company was able to grow rapidly.

But now prices are falling, the whole sector is at risk.


The Chinese state is itself part of the reason the boom has come to an end. As flat prices spiralled upwards, the state grew nervous that the ­property market was increasing the gap between rich and poor. 

Fear of social unrest, combined with the danger that the financial bubble might burst, haunted the regime. A year ago it changed its rules. 

It instructed property firms to reduce the amount of debt they held, while increasing the amount of cash they must keep on hand to repay debts.

In effect, the ruling class deliberately created a “credit crunch”.

1949 — Mao & the Chinese revolution
1949 — Mao & the Chinese revolution
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Evergrande is now faced with a recurring crisis. 

The value of its unsold property is falling. Every month it has to repay lenders in China and abroad. And every month many speculate that it will be unable to do so unless it can borrow more money. 

For a firm of Evergrande’s size to default on its debts will have a huge ripple effect on both the Chinese and global economies.

Real estate accounts for about 13 percent of the Chinese economy, up from just 5 percent in 1995. On its own, Evergrande has enough empty property to house some 90 million people. The Chinese state, and its Communist Party leadership, ­presents its policy moves as a way to slow down property speculation and help workers. 

It talks of a new era of “Common Prosperity”.

But in reality its intervention is an attempt to stabilise an economy already threatend by falling growth rates and social instability. 

Property crisis is bitter fruit of 1990s privatisations 

Having committed to action against speculation, the state is now deeply nervous.

In the late 1990s it encouraged the property price boom with a policy that mirrored the Tories’ council homes sell-off a decade before. 

Now it reaps bitter rewards.

Protests by investors outside of Evergrande headquarters recently were broken up by police.

One protester explained that his family’s investment had been a way to help pay for his mother’s cancer treatment, and that they now had no more money.

“If my mother’s health situation deteriorates because of this,” he said, “I am going to fight Evergrande every day.”

That anger is why minister Wang Menghui was at pains to repeat his phrase, “Housing is for living in, not for speculation”. 

But the danger of a property market crash also weighs heavily on the government’s mind. In addition to Evergrande, at least four other major developers are in peril. Not only would their collapse hit Chinese growth rates, it would also hit government revenue.

Around a third of local government income comes from selling land to developers. 


China’s rulers therefore wants to partially deflate the speculative property bubble—but not allow it to burst. 

That could mean diverting a huge amount of public money to buy millions of unsold flats. 

This is nothing more than a way of absorbing some of the developers’ debts because those firms are judged to be “too big to fail”.

It is exactly the logic that drove governments in the West to buy up failing banks during the financial crisis of 2007-08. 

More than anything, moves by the Chinese ruling class reveal how much state capitalism and free market capitalism beyond China are alike.

In both banking and property, when the market fails its working class people that will pay pick up the bill for the bailout.

China is ‘heading for slump’

Economists are debating whether the potential collapse of Evergrande could lead to a wider financial crisis. It is far from an outlandish thought. 

Some 13 years ago the debts of the Lehman Brothers bank could potentially have destroyed the world’s entire financial system.

And, with China contributing almost a third of the world’s economic growth between 2013 and 2018, the ramifications of a sharp crisis are immense.

Marxist economist Michael Roberts says there are important differences between the 2008 banking crisis and today’s Chinese property market crisis. 

“The Chinese government can order the big four banks to exchange defaulted loans for equity stakes and forget them,” he writes.

“It can tell the central bank, the People’s Bank of China, to do whatever it takes. 

“So a financial crisis is ruled out because the state controls the banking system.”

But Roberts says the high level of debt the state would then take on will seriously reduce the pace of China’s economic growth.

“China is heading for stagnation, if not a slump,” he says.

Any such slowdown will undoubtedly hit the world economy and have terrible effect on working people everywhere.

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