Evergrande and others – China relies on purges to save its economy

The restructuring of the Chinese real estate giant Evergrande Group is not going according to plan. By the end of July, the company was to present a preliminary restructuring plan, but it was not implemented. Instead, the Chinese government took action on its own: Beijing forced its CEO and CFO to resign – and then arrested them on charges of embezzlement.

A similar fate has befallen officials in smaller developers, and there are signs that the crackdown will spread to the tech sector as well. Everything points to a possible nationwide purge, ideally scheduled for the November meeting of the Central Committee and talks on rapprochement between China and the United States.

Politically, the purges help President Xi Jinping eliminate the opposition; from an economic point of view, they could help Chinese firms to interact better with the West. Beijing needs both if it is to save the Chinese economy. Because it is under tremendous pressure as a result of, among other things, severe coronation procedures in the country.

GDP grew by only 0.4%. compared to the previous year

So Beijing’s intervention in Evergrande is the result of a debate about how the country can and should recover economically. At the end of December 2021, the company had defaulted on more than $ 300 billion in debt. The promised debt restructuring, a last resort measure, did not materialize. Given the size of the company, this had a huge impact on China’s GDP, which only grew by 0.4 percent year-on-year. But economic policy is only one thing.

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Second, the two arrested officials are linked to Shanghai-based banks and other large corporations linked to the political opposition to Xi. Strictly speaking, they are not politicians, but their shared interest in sustaining foreign trade and investment aligns with the coastal opposition growth model and contrasts with the consumption model of Xi.

Other eminent personalities affected

It is not uncommon for Chinese leaders to cleanse their enemies on allegations of corruption. In 2012-2017, Xi himself dismissed more than 150 people whom he considered a threat to his power. This campaign targeted political figures, especially members of the Chinese Communist Party (CCP). However, the current campaign appears to be geared towards economic goals.

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Zhao Weiguo, former head of the large and once promising semiconductor company Tsinghua Unigroup, was brought to life by Beijing officials on July 26 after being forced to resign in May. Like Evergrande, Tsinghua struggled to pay his debts and his boss had close personal ties to former president Hu Jintao, with whom Xi has a strained relationship. Xi’s purge has even attracted eminent personalities such as Xiao Yaqing, China’s Minister of Industry and Technology. It is no coincidence that Xiao began his political career as deputy secretary general for Hu Jintao.

The Zhao and Xiao cases show that no one, not even senior officials, is safe as the purges will continue in the coming weeks. One of the sectors that will almost certainly be a target is banking. Recently, depositors of some rural banks in central China were unable to withdraw their money, sparking protests in the region. Banks have promised a refund, but these refunds are still ongoing. Xi can be expected to intervene there in the same way.

To allay the concerns of Western investors

Strategically, the purges are also expected to show that Beijing is serious about easing the fears of Western investors who have become more cautious about the country’s weak economic growth. Incidents in the real estate, technology, and banking sectors share two things in common: large amounts of Western funds and serious problems with servicing large amounts of debt. Evergrande itself has $ 20 billion in offshore dollar bonds. These fears are compounded by retaliation tariffs, financial constraints and renewed Covid-19 blockades.

A shift in leadership at such a major firm suggests that there could be a major upheaval in the way Chinese firms do business. While the new leadership and debt repayment structures are yet to be finalized, the changes to Evergrande are a good indicator of how the Chinese government plans to prepare its economy to restore confidence in Western companies.

Agree and coordinate macroeconomic policies

First of all, China wants to improve its relations with the United States. Last week, Beijing gave the clearest signals that it intends to do so on an economic level. On July 28, Xi had a telephone conversation with US President Joe Biden to discuss various aspects of bilateral relations and global issues. The Ministry of Foreign Affairs of China issued a statement stressing the need for China and the US to adjust and coordinate macroeconomic policies, maintain the stability of global industrial and supply chains, and protect global energy and food security.

Xi and both also discussed the need to de-escalate regional hotspots and reduce the risk of stagflation and recession. Biden reportedly said US-Chinese cooperation benefits citizens of both countries.

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