China’s ruler Xi Jinping had hoped never to hear bad news from Hong Kong again after he successfully destroyed the financial metropolis’s special democratic status. But now he is beset by new trouble – not from the democracy activists, many of whom he had imprisoned or driven into exile, but from the Hong Kong judiciary.
This sent the Chinese real estate giant Evergrande, which was $300 billion in debt, into bankruptcy. The court will now appoint insolvency administrators for the company and attempt to divide the remaining company assets among the creditors. That will likely be difficult because the People’s Republic does not recognize the Hong Kong ruling.
Although Hong Kong is part of the People’s Republic, the law from British times still applies here. The courts therefore still enjoy a certain degree of independence, which protects the once proud semi-autonomous city from the grip of the dictatorship in Beijing.
For Xi, the right is to bend to the will of the party
The verdict from Hong Kong is unlikely to be anything but refreshing to China’s rulers, because for the dictator the right has to bow to the will of the party and not the law. In the People’s Republic, judgments are made based on political and not legal aspects.
Xi Jinping had a very different idea of how to handle China’s hot real estate industry. As in other sectors of the economy, the ruler had in mind consolidation that would benefit those companies that did not escape the party’s control.
In fact, the People’s Republic under Xi has long since moved away from the mechanisms of a free market and transformed into state capitalism. Real estate development was one of the country’s most important economic sectors during China’s capitalist phase, accounting for around 25 percent of China’s total economic output.
Evergrande speculated with investors’ money
The provinces of the People’s Republic poured money into their coffers primarily through the sale of building land, and the newly created middle class invested their savings in real estate. Rural exodus and the corresponding urban planning made the concrete business the gold standard in the emerging country.
But Evergrande and other players speculated with their investors’ money and gambled it away on daring projects that ultimately did not deliver what they promised. In order not to expose the fraud, old projects were completed with fresh money.
The fraud was exposed in 2021 when the central government in Beijing changed the rules for the construction of large-scale projects. The Communist Party’s real goal was to shrink the playing field to allow the nomenklatura greater control.
Until then, it was common practice in China for buyers to pay for apartments before they were built. A circumstance that was fatal for many people in China. Today, many of those cheated live in the shells of their unfinished apartments, without electricity or water. How many unhappy homeowners have to live like this is unclear. In any case, tens of millions of apartments are said to have not been completed across the country.
If the leadership doesn’t come up with anything, there will be major protests
Since the ruling is not final in mainland China, where the majority of Evergrande’s creditors are located, there was no major stock market collapse there today, unlike Hong Kong. The leadership’s strategy in Beijing is likely to be to delay the legal clarification of the question of jurisdiction and legal force of the Hong Kong ruling for as long as possible.
In the past, party officials have repeatedly suggested that those affected by Evergrande could receive government help. This seems appropriate now more than ever. Thousands of jobs and the savings of millions of people depend on the construction industry.
If the leadership around dictator Xi doesn’t come up with anything here, there is a risk of major protests that are in no way inferior to those against his failed zero-round policy in November 2022. The economy in the Middle Kingdom has not been doing well since then. Xi really doesn’t need any more bad news, whether from Hong Kong or other corners of the People’s Republic. The Evergrande bankruptcy is becoming a high-risk factor for Beijing.