When studying the problem with Evergrande, the last thing the CCP thinks about is the U.S. stock market. Perhaps if Biden had rolled back Trump’s tariffs, Xi Jinping would have considered accommodating U.S. investors. Instead, the CCP will let foreign investors fend for themselves in Hong Kong courts (which are now under Mainland control).
Many Wall Streeters who write about Evergrande do so from the perspective of the world revolving around the U.S. I’m going to write from China’s perspective (of course, pure speculation).
First, a framework. Within the CCP I presume three factions.
- Capitalists their only desire is to build business empires and integrate with the West where possible.
- Nationalists who favor a militarily strong China and strong internal policing. (I would put Xi Jinping in this category)
- Communists who believe the CCP serves the people and must always put them first. (Don’t laugh, if they didn’t exist the Chinese wouldn’t trust their government in many areas).
Lately, the Capitalists have been under attack by both the Nationalists and Communists. Chinese businesses wanting to sell stock in the U.S. market have had their wings clipped. Western-style entertainers have been erased from the media. Hong Kong, long favorable to the West, has been subsumed under Beijing rules.
Ever since Trump’s tariffs, foreign businesses, from most Japanese companies to Walmart, have been exiting China — these are pre-Covid trends. Trump didn’t create the exodus. He only voiced what was already happening beyond the public eye. Why have foreign companies been leaving? The CCP keeps changing laws (like Hong Kong) and it has the reputation for IP theft. But I believe there is an even stranger change in the economics of China.
The CCP has been sucking China dry; that is, it isn’t leaving enough money for average Chinese workers. Because the average Chinese worker has no money he can’t buy the goods and services foreign companies entering China offer. Therefore, foreign companies are leaving.
They also see that…
China is old, slow, and falling apart.
Foreign companies no longer look at China as a great untapped market. GDP is declining. Year after year, it’s the same result, back to square one. Foreigners can’t buy property. They don’t get a fair deal in court. The politics remains opaque. CCP officials shake them down at every opportunity. In short, foreign capital has had enough.
Nationalist and Communists within the CCP don’t need the West anyway. The Nationalists can refocus China back to the world’s #1 provider of manufactured goods and distribute them through their belt and road. The Communists can shake the Capitalists down for money they’ll redistribute to the masses.
In short, the Capitalists are out of power.
Both the Nationalists and Communists want to see affordable housing for the masses. Sure, the Nationalists aren’t altruists, but they can’t win over Taiwan if mainland citizens are protesting in the street.
The Nationalists and Communists were fine with Evergrande Capitalists playing a ponzi scheme as long as the buildings kept going up. Now that Evergrande can’t get fresh money they will take over the development of Chinese cities.
Don’t be surprised if Evergrande senior executives end up in jail for life, or worse.
Let me say this in bold. Both Nationalists and Communists do not care about free markets (except as they compete in the arenas the CCP creates for them). The Capitalists were only tolerated because China was growing its GDP in double digits. The West has nothing more to offer. Time to get back to the fundamentals of central planning.
In the CCP’s collective mind, they made China great. And really, who can argue? The last thing they’ll listen to is sanctimonious Westerners. They’re not going to protect the U.S. Dollar! Indeed, the Nationalists would love to see the US Dollar take a beating.
What will Evergrande mean to the U.S. stock market? Very little. What does Evergrande mean as statement to the U.S.? Everything.
My guess is Evergrande will be the clearest indication yet, that the Chinese capitalists will do what the Nationalists and Communists tell them to do.
The foreign capitalists? They got the message long ago.
Regardless of the above, China is a super-power and will remain one for the foreseeable future.