The future of China is often decided on the beach. Every summer, for two weeks, the Chinese Communist Partys top brass retreat from Beijing to the resort town of Beidaihe along the Bohai Sea. In this coastal smoke-filled room, some of modern Chinas biggest decisions took shape: the Second Taiwan Strait Crisis, Maos Great Leap Forward, and ping-pong diplomacy.
Emerging from Beidaihe this year, President Xi Jinping jerked the wheel again. On August 17, Xi announced a whole-of-society reform program so ambitious in scale that even seasoned propagandists resorted to the one loaded word in Chinese politics to describe it: revolution. Xi began his speech with Deng Xiaopings policy of reform and opening up, and how it had created the China we know today in all its contradictionsits awesome skylines and futuristic high-speed rail, as well as its polluted skies and its ever-growing chasm between rich and poor. Then came the pivot. He called his new campaign Common Prosperity, an old Maoist phrase derived from the little-known second half of Dengs famous adage. Let some people get rich first, the reformer said in 1992, ushering in the Chinese economic miracle, for the purpose of achieving common prosperity faster.
The dynamics of Chinese real estate have much in common with America during the Gilded Age of the late 19th century.
The announcement came on the heels of a yearlong regulatory crackdown on some of Chinas most valuable companies. My colleagues at SupChina and I began calling this the Red New Deal. It featured some of the same pieties of Americas Green New Deal: its call for a new social contract, its faith in a justice-delivering state, and, most of all, its rebuke of growth-at-all-costs capitalism in favor of more equitable and sustainable development. Remarkably, similar motives were behind Beijings crackdown on Big Tech monopolies, its cap on real estate prices, its bans on energy-draining Bitcoin miners, and its tax evasion probe for those with excessively high incomes.
Of course, not all is the same. Xis campaign is red because it inevitably draws from Chinas unique brand of socialism with Chinese characteristics. It is top-down and intensely paternalistic. Alongside its egalitarian commitments, Beijing has also shuttered a once-sprawling after-school tutoring industry, placed draconian limits on childrens gaming hours, banned LGBTQ social media accounts, and forbid the display of effeminate men on television.
When I arrived in China last winter, the crackdowns all felt haphazard and ad hoc, a series of frenetic outbursts by paranoid leaders reacting to an unpredictable post-pandemic world. But in daily conversations, patterns started to emerge.
Millennials bemoaned the price of real estate and long work hours. Parents worried ceaselessly over their childrens education. Children seemed trapped in endless competitions they did not choose. The metronome of urban life was set on an exhausting presto, relentless and unrewarding. Most striking of all was the shared belief that Beijings new campaign might address these failures. When I asked Chinese about their views toward Xis Common Prosperity drive, the most common reaction was not disbelief, but relief, like a malady had finally been diagnosed and a remedy prescribed.
Keep this site free and open for all to read...
For decades, China absorbed the externalities of an overleveraged economy through its people and its surrounding environment. In his speech, Xi explicitly addressed two social phenomena, involution and the lying flat movement, both of which emerged lately among urban youth tired of the rat race and the superficial meritocracy. Chinas new direction is inchoate and uncharted. But to understand where its headed, we need to know what its people think. We need to see the world through Chinas eyes.
A different speech tipped the world to Beijings plans. Almost exactly a year ago, at the Bund Finance Summit in Shanghai, Jack Ma, Chinas high-flying tech billionaire and founder of Alibaba, gave a speech in which he chided financial regulators for harboring a pawnshop mentality in their approach to finance. Less than two weeks later, Beijing suspended the IPO of Mas $35 billion fintech firm Ant Group, based on the rationale that it could disrupt financial order.
In the following months, Beijing launched antitrust probes of almost every major tech platform in China, including Tencent (gaming, social media), Meituan (retail), Didi (ride hailing), Baidu (search), ByteDance (online news and video sharing), JD (e-commerce), and New Oriental Education (education). The most conspicuous target was Alibaba, which was fined a record $2.8 billion for antitrust violations in April.
The crackdowns then spread. In May, China banned financial institutions from providing services related to cryptocurrencies because of their high price volatility. A month later, it suspended new app downloads of Didi in order to investigate a data security violation. Three weeks later, on July 24, China forced all its for-profit tutoring companies to register as nonprofits. Regulators also wiped some of the countrys biggest celebrities from social media, instituted strict curfews on underage gaming, and pushed for more masculine role models on television. The list goes on.
Beginning the story of Common Prosperity with Mas Bund speech inevitably reduces Chinas problems to a contest between a billionaire and a politician. As Ezra Klein once diagnosed in Americas own politics, we collapse systemic problems into personalized narratives. Chinas problems predated Jack Ma, just as Americas predated Donald Trump. Chinas new campaign is a swipe at the rich, but it is also a selective indictment of the incentives that got them there.
Months before Mas fintech fiasco, Xi had actually made a far riskier gamble, which now dwarfs the Ant case in its fallout. Last August, the government unveiled a policy for its real estate sector known as the three red lines, which capped borrowing by property developers according to a number of balance-sheet metrics. The limits were meant to cool a property bubble that had pushed even the most modest homes beyond the affordability of average citizens. The rules immediately rattled the sector. According to the South China Morning Post, 14 of Chinas 15 largest developers violated one of the three lines. This would have been manageable if not for one developer that ran afoul of all three: Evergrande.
Imaginechina via AP Images
Jack Ma, founder of the Alibaba Group, at the Bund Finance Summit in Shanghai, October 24, 2020
Keep this site free and open for all to read...
Evergrande Group is one of Chinas largest real estate firms, with an empire that spans 1,300 development projects across 300 Chinese cities. After Beijings three red lines capped borrowing, it was forced to sell properties and parts of its business to raise cash. Even with steep discounts, it couldnt do so fast enough. By this September, markets were alerted to the impending liquidity crisis. With $300 billion in total debts, Evergrande faces the prospect of default on bond payments that come due every couple of months.
For now, the IMF says that Evergrandes financial risks are contained, but there are issues beyond finance, including a vast network of contractors and subcontractors that are waiting on payments. A default could ripple through not just the financial system but the entire supply chain, setting off a wider panic in Chinas property markets and beyond.
Evergrandes woes are a better entry point into Common Prosperity than Jack Mas flippant remarks. They touch on many of the themesinequality, corruption, debt-fueled growth, and speculationthat the campaign hopes to purge from Chinese society. These are the same themes that have animated Xis presidency ever since he came to power.
If Common Prosperity means anything, it is a wholesale rebuke of the Evergrande model, one that prioritized the cosmetics of growth over the welfare of citizens.
Real estate is the cornerstone of Chinas economic miracle, accounting for up to 25 percent of GDP. But the sector was always propped up by incentives that encouraged profligacy, corruption, and excess borrowing. As government poured money into infrastructure and housing projects throughout the aughts, well-connected developers made off with billions. Average citizens, hoping to reap a share of the spectacular returns, funneled their savings into housing.
But the building frenzy did not track real demand. Empty houses soon dotted Chinas landscapes, and demolitions have ensued on dead-end projects. Today, between one-fifth and one-quarter of the total housing stock in cities is left empty, owned not by families but by speculative buyers.
Chinese investment in property and infrastructure should not be considered part of Chinas GDP, wrote the China economist Michael Pettis recently. It was not real economic growth so much as residual activity designed to bridge the gap between real economic growth and the politically optimal GDP growth target. Pettis surmised that Chinas actual GDP growth was closer to 3 percent.
If Common Prosperity means anything, it is a wholesale rebuke of the Evergrande model, one that prioritized the cosmetics of growth over the welfare of citizens. Americans came to a similar realization last year when, amid the throes of the pandemic, the Dow reached an all-time high even as hospitals and food banks were overrun. Just as the disconnect between Wall Street and Main Street haunts contemporary American politics, the Evergrande modeland its trade-offshas haunted Chinas leaders for years.
Back in 2007, Chinas premier Wen Jiabao, who played an outsized role in navigating China out of the financial crisis with a massive stimulus plan, recognized the same problems. In a now-famous slogan known as the Four Uns, Wen warned that Chinas growth numbers belied an economy that was increasingly unstable, unbalanced, uncoordinated, and ultimately unsustainable. Five years later, the famous political commentator Deng Yuwen published a sequel called The Ten Grave Problems, a list of ten socioeconomic issues left behind by Wens administration. In retrospect, those problemsincluding inadequate economic restructuring, rampant wealth inequality, and environmental degradationare the moral antecedents to Common Prosperity.
Upon entering office in 2012, Xi launched a sweeping anti-corruption drive targeting both rank-and-file members and high-level cadres. The campaign could be seen as a precursor to Common Prosperity, because corruption is the engine to Evergrandes race car. As former Beijing property developer Desmond Shum wrote recently in his tell-all book Red Roulette, Chinese Communist Party officials and their families made ample use of their connections to assign lucrative plots [of land] to friendly real estate developers. Party members, in other words, picked the winners of the economy, and, in return, they profited immensely. It is no coincidence that Evergrandes founder Xu Jiayin appears in the book, attempting to bribe Shums powerful wife with a million-dollar ring.
The dynamics of Chinese real estate have much in common with America during the Gilded Age of the late 19th century, specifically the cozy links between robber barons and politicians. The big picture, said Yuen Yuen Ang, professor at the University of Michigan and author of Chinas Gilded Age, is that anti-corruption, poverty alleviation, reining in financial risk, the three red lines, regulatory onslaught of big tech, and so on, should be seen as parts of a systemic response to a systemic problem: imbalanced, risky, crony-capitalist growth.
FeatureChina via AP Images
The unfinished buildings of a deserted real estate project dot the landscape, in Shenyang in northeast Chinas Liaoning province, February 24, 2021.
By around 2016, Xi began to outline a new growth model called the Five Development Concepts: innovation, coordination, green, openness and sharing. Though it was ambiguous at the time, the concepts were significant in that they no longer took all growth as an unqualified good. Over time, Xi has become more specific, drawing a distinction between real and fictitious growth.
This years crackdowns have given us much more insight into Xis developmental goals. It appears Beijing considers fictitious growth as related to financial assets (credit products, cryptocurrencies, property, etc.) and the attention economy (advertising, social media, gaming, etc.). By contrast, Beijing associates real growth with manufacturing, hard technology (semiconductors, batteries, electric vehicles, etc.), and productivity enhancements (AI, internet of things, blockchain, etc.).
For years, the party staked its legitimacy on its ability to deliver ever-greater economic prosperity to its people. But the connection between GDP and legitimacy has grown weaker as inequality swelled, borrowing exploded, and the toll on the environment grew unsustainable. Theres a parallel between Xis now-or-never mentality on Common Prosperity and his remarks on reunification with Taiwan. Speaking to a senior envoy from Taiwan recently, Xi said the two sides must reach a final resolution and that the issue cannot be passed on from generation to generation. He could have said the same about the economy.
The timeline of the Common Prosperity campaign was likely influenced by three events. First, five months before the Communist Party centenary in July, Xi announced a total victory over extreme poverty, an initiative that began alongside the anti-corruption campaign in 2012. Experts have questioned the way the numbers were measured, but it is the optics that matter to the timing.
Ever since the Chinese Communist Party was founded in 1921, it had staked its legitimacy on bettering the lives of the rural poor. Throughout the 80s and 90s, as hundreds of millions of farmers moved to work in factories, the party had delivered, albeit with an economic model closer to capitalism than communism. When Xi entered office in 2012, the problems with Chinas growth model were accelerating. (From 2016 to 2021, the debt-to-GDP ratio soared 45 percent, the highest for any developing country.) But a major restructuring would have been too risky, endangering one of Xis main policy goals and a key pillar of the partys legitimacy. By reaching the goal of what the party calls the moderately prosperous society, the pent-up demand for economic adjustments could finally be made.
The second event was the pandemic itself. Structural adjustments require societies to accept a demonstrable short-term pain for an intangible long-term gain. Chinas leaders did not know whether their system could handle the potential fallout from Common Prosperity, and whether their people would trust their government to deliver something better on the other side. They do now. The pandemic was the perfect stress test. In 2020, China became the only major economy to expand rather than contract, confirming to its people that the leadership could be trusted to make difficult decisions. Beijing now believes it has accumulated the political capital to undergo a structural adjustment.
More and more, Chinas leaders see America as incapable of a similar kind of reinvention. Kneecapped by constitutionalism, a hyper-polarized government, and powerful interest groups, it can no longer make basic decisions on behalf of its people (the pandemic cut against this as $5 trillion in relief was quickly administered, but the political system snapped right back after the emergency). If Chinas system has one fundamental advantage over the U.S., its leaders believe, it is the ability to take risks, to crack some eggs to make an omelet. The state, in other words, is so powerful and flexible that it can make controversial decisions now for better times later. To embark on Common Prosperity is to lean into what China truly does best.
The third event involves Chinas political calendar. China does not have elections, but every five years, it undergoes a major shake-up at the highest echelons of power. The 20th Party Congress next fall will be historic. After abolishing term limits in 2018, Xi is expected to enter an unprecedented third term as president. To pull that off without a hitch requires an impeccable record. Just as U.S. presidents time their policies with the election cycle, Chinas leaders think carefully about what outstanding problems must be resolved before performance evaluations are up. In this context, Common Prosperity, a program that rids Chinas system of capitalist contradictions and brings the economy back on track, makes sense. It also explains the behavior of regulators: The most prolific regulators during this years crackdowns may likely be jockeying for promotions next year.
Over the past few months, U.S. observers have, again, heralded the end of Chinas rise. Its true that Chinas GDP may fall in the coming years, but to see this as symptomatic of a decline is to ignore Chinas own agency in the matter. It is to see China as a black box, static and reacting to dangerous exogenous forces, rather than multifaceted, riven by its own debates, and the author of its own destiny. Some analysts see the Evergrande crisis as the result of Chinas failures, but it is actually the result of Chinas decisionhowever belatedlyto do something about its failures. China is now heading down an unprecedented and risky path, but only because its leaders, seemingly in response to its people, willed it. Common Prosperity is, in Chinas eyes, an overdue course correction, one where its leaders have already priced in the risk.