4 August 2022

In China, New Purges, New Targets

Victoria Herczegh

China’s restructuring of real estate giant Evergrande Group is not exactly going as planned. In mid-May, the company was on track to deliver a preliminary restructuring plan by the end of July that never materialized. Instead, the Chinese government has taken measures into its own hands. Beijing forced the chief executive officer and the chief financial officer to resign, and then arrested them for their alleged involvement in an embezzlement scheme. Similar fates have befallen officials of smaller real estate development companies, and there’s evidence to suggest the crackdown is spreading to the tech sector as well. All signs point to a possible countrywide purge, impeccably timed with the Central Committee Meeting in November and rapprochement talks between China and the United States. Politically, the purges help President Xi Jinping remove opposition; economically, they could help improve how Chinese companies interact with the West. Beijing needs both to succeed for it to have any hope of saving the Chinese economy.

Beijing’s intervention in Evergrande’s leadership embodies China’s internal debate over how it should recover economically. The company entered default in late December 2021 with over $300 billion in liabilities. The promise of debt restructuring, a measure of last resort, did not happen. Given the company’s size, it had an outsized influence on China’s GDP expanding by only 0.4 percent year-on-year. But it’s just a matter of economic policy. The two officials arrested are affiliated with Shanghai-centered banks and other large companies associated with political opposition to Xi. They aren’t politicians, strictly speaking, but their shared interest in maintaining foreign trade and investments comport with the opposition’s coastal growth model, as opposed to Xi’s consumption-based model.

It’s not uncommon for Chinese leaders to remove their enemies through purges based on corruption charges. Between 2012 and 2017, Xi himself ousted more than 150 people he believed to be a threat to his power. That campaign was aimed at political figures, mainly members of the Communist Party of China. But the current one appears to be taking aim at economic targets. Zhao Weiguo, the former head of the large and once very promising semiconductor producer Tsinghua Unigroup, was placed under investigation by officials in Beijing on July 26 after being forced to resign in May. Like Evergrande, Tsinghua struggled to repay the company’s debts, and its leader has had close personal ties with former President Hu Jintao, with whom Xi has had a fraught relationship. Xi’s purge has even netted such high-profile figures as Xiao Yaqing, China’s minister for industry and technology. Not coincidentally, Xiao started his political career as deputy secretary-general under Hu Jintao.

The cases of Zhao and Xiao show that no one, not even high-ranking officials, is safe as the purge continues in the coming weeks. One sector that is almost certainly going to be targeted is banking. Recently, depositors at some rural banks in central China were unable to withdraw their money, which resulted in regional protests. The banks promised to return the money, but those refunds are still in progress. Expect Xi to respond in kind.

Strategically, the purges are meant to show that Beijing is serious about allaying the concerns of Western investors. The episodes in real estate, tech and banking all share two characteristics: large amounts of Western money and major problems with servicing large sums of debt. Evergrande alone has $20 billion of its liabilities in offshore dollar-denominated bonds. These concerns are only compounded by retaliatory tariffs, financial restrictions and renewed COVID-19 lockdowns. A leadership reshuffle in such a prominent company suggests a major shakeup in how Chinese companies do business could be in the works. While the new leadership and debt repayment structures have yet to be finalized, the changes made in Evergrande will be a good indicator of how the Chinese government may be trying to prepare its economy to restore faith with Western businesses.

China needs to improve its ties with the U.S. Last week, Beijing gave its clearest signals yet that it intends to do so, at least on the economic front. On July 28, Xi spoke with U.S. President Joe Biden on the phone to discuss various aspects of their bilateral relationship and global issues. China’s Foreign Ministry released a statement emphasizing the need for China and the U.S. to communicate and coordinate on macroeconomic policies, keep global industrial and supply chains stable, and protect global energy and food security. They also discussed the need to de-escalate regional hotspots and to reduce the risk of stagflation and recession. Biden reportedly said U.S.-Chinese cooperation can benefit the people of each country. China’s current economic model depends heavily on exports, which have tanked over the past couple of years. China’s best hope for improving exports – and therefore reviving its struggling economy – depends on gaining access to the U.S.

While the purge will remove “problematic” actors, it’s not yet clear how the Chinese government plans to address some of the structural problems facing these sectors. Real estate companies of various sizes have yet to submit debt restructuring plans, and changes in leadership slow the process of drafting and implementing them. Liquidity crunches have forced developers to stall many projects across the country. Similar strains are being felt in the tech sector. Real estate, tech and banking are the foundations of China’s finances, and putting new, Xi-allied people to lead the most important companies would certainly change their management practice. It may also help align moves in the business sector with the country’s broader international economic agenda.

What’s clear is that Xi intends to consolidate political power and reposition Chinese businesses in a more favorable light to Western business. But this is not without risks of its own. The purge has just started, and even though it has already claimed several, it’s not clear how long or broad it will be. Moves on the political front, at the very least, are likely to continue as there is already talk about installing a new generation of party officials at the next Central Committee meeting. The sacking of Xiao shows that the reshuffling may have already started.

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