Evergrande: Symptom of the Typical Malaise of Capitalism
Abhinav Sinha
The shattering crisis in the real estate market of China is symptomatic of the underlying fundamental problem of all capitalist economies: the crisis of profitability. The assumption that the state-controlled economy of China was some kind of ‘socialist economy with some distortions’, or ‘a transitional economy of some kind’ and owing to this special character, was immune from the kind of crises experienced by all capitalist countries, has been decisively shattered. The collapse of the major real estate giant of China, Evergrande, as well as many other real estate companies of China, defaulting on their interest payments, has revealed that Chinese economy is indeed a capitalist economy, albeit with a particularity which stems from the social fascist control of the revisionist Communist Party of China over the capitalist state and economy of the country. We cannot go in the detail of the latter in the present article and are obliged to confine ourselves to demonstrate the character of the present economic crisis of the Chinese economy as a capitalist crisis of profitability.
Let us begin with the crux of what has happened in the Chinese real estate sector. It is essentially bust of a bubble created by speculation in general, but specifically that in the real estate sector. The first symptoms came to light when the largest developer Evergrande reported heavy pressure on its liquidity in August. The shares of the parent company of Evergrande, 3333 HK, began to go downhill and its founder chairman Xu Jiayin resigned from the post of chairman of the group. With the danger of default on interest payments looming over Evergrande, the entire real estate sector of China was sent into a tailspin. Soon other companies like Fantasia Holdings, Sinic Holdings, China Properties Group, etc. also reported their inability to meet the deadlines of interest payments. Chinese property developers account for the high-yield bond markets in entire Asia and a series of defaults in Chinese real estate sector would lead to a domino effect in the world market. We would later discuss why the Chinese state possesses an ability to forestall such a comprehensive collapse temporarily, with some extra-ordinary efforts.
The above situation was result of large-scale and uncontrolled speculation in the Chinese property market. What was the underlying reason of the speculative frenzy in the real estate in China? The same as everywhere in capitalist economies! Marx pointed out more than one and a half century ago that it is only the “plethora of capital” that is driven into speculation and any “plethora of capital” is the plethora that cannot be invested profitably. The general common-sense, even among many so-called Marxists is that the over-speculation itself is the cause of the collapse of the capitalist economies. We know some well-known Marxist political economists and intellectuals like Gerard Dumenil and Dominique Levy and David Harvey who have argued that one of the causes of the crisis of neoliberalism is over-financialization. Since their diagnosis is such, the remedy prescribed is state regulation of the financial sector and a new type of ‘New Deal’ between capital and labour, focusing on investments in the productive economy. However, this never occurs to them that it is not the subjective will of the capitalists, which leads to speculative frenzy. Instead, the ‘animal spirits’ (a la Keynes) of the capitalist class, structured by the ‘expected profits’, but regulated and determined by the real outcomes of the dynamics of capitalist economy, that leads them to speculation. It is the crisis of profitability in the productive sector, leading to the over-accumulation of capital as well as general overproduction (most importantly that of the capital goods), which creates the speculative frenzy.
If we look deeper at the present crisis of Chinese capitalism, we find that it is precisely the crisis of profitability in the Chinese productive economy that gave rise to the speculative bubble that bust recently and sent the entire Chinese state bourgeoisie into turmoil and resulted in a tightening state regulation of the financial sector and real estate sector. Not only commentators in bourgeois media, but also some so-called “Marxists” and Trotskyites have termed this ‘a return to planning’, ‘reverting back to Mao’, ‘mixing more Mao than Deng in the Chinese economic amalgam’! Whereas, what we are witnessing in China, is simply the revisionist leadership curbing the symptoms of the capitalist crisis through regulation of private capital by the state to prevent a full-blown economic collapse. It is nothing more than that and the Chinese revisionist party and state possess more relative autonomy from the class which enables it to discipline it and save it from its own ‘animal spirits’, at least temporarily! Now let us see what actually happened which finally led to this financial abyss.
The crisis was brewing for some time now. In June itself, the aggregate interest coverage ratio of Chinese real estate firms was as low as 0.94 percent. What is interest coverage ratio? It is the total earnings of the company before tax and interests divided by the interest or debt-service liabilities of a firm. Thus, if the denominator increases relative to the nominator, the interest coverage ratio will fall. At the end of the last year, the interest coverage ratio of the same Chinese firms was around 1.5. It fell below 0.94 percent in June 2021. Thus, it was not September 2021 when the crisis began, but the first half of this year. The reason is that the real outcomes are reflected in indices like interest coverage ratio with a time-lag. The leadership of the CPC was aware of this malaise and the private capitalist class resisting all attempts of the revisionist party and state to discipline it. The utterances of Jack Ma, the founder of Ali Baba, were only one representative expression of this problem, which led to the “re-education” and “disciplining” of Ma by the CPC!
The immediate crisis was the result of the general practice of the Chinese real estate companies of speculative sales of the property. That is, the company sells flats and residential properties to customers even before they have been built. Thus, these companies, Evergrande included, pre-sell the flats and apartments in increasing number even before they are built. Besides the cash flowing in from these sales, the company relies on selling various financial instruments to mobilize capital. This is basically debt-financing or leverage through which ever new constructions are financed. However, it takes the shape of a spiral which ultimately went out of control in this case, as it does generally. Thus, cash flows from pre-sales and other investors who invest in these projects are used to fund more projects and so on. This leads to creation of a financial bubble. It keeps on inflating as long as the incomes are good, economy is in good shape and profitability is more-or-less healthy. In other words, till the economy is in a relatively-better shape, this ponzi scheme appears to be an ‘economic model’ to be emulated by others! However, as soon as, the crisis of profitability hits like a law of Nature and unsettles all the ostensibly settled equations, things go haywire. What happens is that the cash inflows decelerate as the economic crisis deepens. However, the liabilities keep increasing and the demands for cash expenditure and payments (debt-servicing by interest payments) keep increasing. This creates a problem of liquidity for all firms engaged in such speculation. This is precisely what happened in the case of the real estate collapse of China. As a result, for instance, Evergrande alone has more than 800 unfinished projects and more than 1.2 million people waiting to move in their dream houses, which are yet to be built, but cannot be built at present because the ponzi scheme that sold this dream to them came a cropper.
We need to understand how this real estate boom was created and then see how and why speculative frenzy took over this sector. The model of capitalist development adopted by the revisionist party is one where private capital is being given increasingly freer hand. The process that began in 1978 gathered unprecedented momentum in the mid-1980s and especially in the 1990s. Industrial development and urbanization were the priority. The rapid capitalist industrial development that proceeded in this period was based on the political disorganization of the working class, snatching away of all the rights that they enjoyed and the dissolution of workers’ communes and other bodies of people’s power. The social fascist control of the workers and the masses in general gave a particular ability to the state capitalist class as well as the private capitalists who were allowed more and more leeway, namely, a much more efficient control of the work-force, and a much more cost-effective work-force (that is, much cheaper labour).
Moreover, the control of the revisionist and social fascist party over the state also gave it an extra-ordinary ability to control and regulate private capital, at least in the short-run. This led to rapid capitalist development of China in the decades following capitalist restoration in 1976. Some of the main results were the high rate of urbanization, creation of a large urban industrial workforce as well as a sizeable urban middle class. The rate of urbanization in China in 2011 was 50 percent. Last year, it was 60 percent.
This urbanization created huge opportunities of profit in the real estate sector. The Chinese state allowed free hand to private capitalists in this sector. The model of state-housing was given up for the model of privately-owned houses built by capitalist property developers. As a result, today the overwhelming majority of Chinese population owns their houses, often without the liability of mortgage payments. Thus, the residential (as well as commercial) property construction became an opportunity for financial investments too. In the 1990s, the state and corporations run by the state sold their residential properties to their employees and real estate, especially residential property market was opened totally for private capital. The high rate of urbanization helped in this process. Soon private real estate developers came into existence in dozens and then in hundreds, making good of this opportunity.
Thus, housing sector became one of the principal sectors dominated by speculative investments. The speculative frenzy is such that not only the well-to-do upper middle class in Chinese metropolitan centres, but also lower level office employees and even some skilled workers have invested in the real estate buying properties that are not intended to be lived in, but only to be sold at a higher price at a later date in order to gain profitably from this speculative investment. The concern with the speculative bubble created in the real estate led Xi Jinping to comment that ‘houses are meant for living and not for speculation’. Ironically, it was precisely the policy of the Chinese revisionist party and state that created this situation, where state-housing was abandoned and privately-owned housing and speculation in housing sector was promoted in order to allow huge speculative profits for the private real estate firms. Property prices in some of the coastal cities (which are the major centres of industry, commerce, trade and transportation, like Guangzhou, Shenzhen, Wuhan, Nanjing, etc.) are sky-rocketing. Some of these properties are costliest in the entire world!
The party-bureaucrats of the revisionist party sitting in the offices of provincial and district governments are also making good of this opportunity by participating in this speculation. The local governments as well as the central government functionaries provide very cheap commercial land to the capitalist firms. The supply of residential land thus becomes scarce and is also kept deliberately scarce by the state. The resultant high prices of residential land supplies the state with much higher revenues. Thus, not only the private realtors benefit from this speculation, but also the state bourgeoisie. The real estate sector accounts for 13 percent of the economy today. In 1995, this figure was only 5 percent. It also accounts for 28 percent of total lending in Chinese economy. The local governments themselves have a debt of $10 trillion and speculative land sales to private realtors are one of the most important sources of debt-servicing. Therefore, the abrupt stop to the speculation in the real estate market would not only create a crisis in one particular sector, but would send the economic health of the state into a downward spiral. At the same time, the high prices of land obliged the realtors to rely increasingly on debts in order to accumulate more and more land. Hence, the increasing debts of the real estate firms. In order to finance the frantic and anarchic expansion, Evergrande as well as other real estate firms not only relied on speculative pre-sales to consumers, but also sold mortgaged-backed bonds in the national and international markets, known as ‘wealth management products’. The name might be new, but it was akin to the financial instrument at the centre of the subprime collapse in the 2007-08 in the US housing market, called collateral debt obligation. The model of financialization was very much similar to those adopted by housing markets in a number of capitalist economies.
Now, let us come to the essential question: why this speculative bubble was created in the first place? The boom in the real estate sector does not always and necessarily lead to speculative bubbles or at least speculative bubbles of such proportions. The reason was this: decline in the profitability of capital in the Chinese economy coupled with stagnant productivity of labour in the last few years. The latter could alleviate the crisis of profitability temporarily by increasing the rate of surplus value faster than the rate of rising organic composition of capital. In essence, it was the crisis of profitability in the Chinese productive economy that ultimately led to the creation of financial bubble in general, and especially, in the real estate sector.
The growth story of China, especially in the new millennium, relied increasingly on the speculative growth of the real estate sector, where the growth rate increased from 8 percent of the GDP in 2000-01 to almost 20 percent of GDP in 2020-21. Thus the official annual growth rates of China were fuelled most importantly by the speculative growth in the real estate sector. If we subtract this sector from the calculations, we see that rate of profit and therefore rate of investment (not absolute quantum of investments!) have been steadily falling in the productive sectors of economy, most importantly manufacturing. Therefore, the frequent official declarations that the growth rate targets of 6 to 8 percent are being met were based on a speculative bubble.
The crisis of profitability is exacerbated by the fact that the total factor productivity of the Chinese economy has been declining in the past decade. That simply means that the productivity of the new investments has either stagnated or has been declining. Thus, in 2006, in order to increase GDP by one unit 2.9 units of capital investment were required and at present this figure has increased to 6.6 units. In even simpler terms, the productivity of labour in the productive economy has been decreasing due to lack of investments in technology (for a variety of reasons that cannot be discussed at length here) and therefore the rate of surplus value cannot be increased in order to counter-act (of course, temporarily, because it is precisely due to the methods used to increase productivity, that the rate of profit falls as a secular tendency) the fall in the rate of profit. The fall in the real GDP is one of the results of this stagnant or declining unit productivity of capital.
The crux of the matter, therefore, is the crisis of profitability. It is yet another vindication of Marx’s law of tendential fall in the rate of profit which characterizes all capitalist economies. Moreover, the present Chinese economic crisis has also dispelled any illusion of the Chinese economy being some kind of ‘transitional economy between capitalism and socialism’ which is presumably immune from the capitalist crisis.
However, one factor distinguishes the Chinese capitalist economy, namely, the revisionist social fascist state. This is indeed a capitalist state, however, a revisionist capitalist state, characterized by social fascism; this particular characteristic creates certain differences. All bourgeois states have relative political autonomy from the bourgeois class, because the function of the state is to collectivize the long-term general class interests of the capitalist class. This obliges it not to identify itself with individual capitalist interests. However, this relative autonomy of the capitalist state is even greater in the case of revisionist state due to its particular history. It has far greater abilities to discipline individual capitalist interests as well as control of labour. In other words, it has greater capability to discipline capital and repress the working class. This particularity of the Chinese revisionist state, along with its particular economic status in world capitalist system, allows it a much greater degree of maneuverability in dealing with such situations of crises, even if only temporarily. Temporarily, because it is precisely this enhanced ability to repress labour and discipline individual capitals, that eventually leads to a social and political crisis for such a state. The outcome of such crises can assume a variety of form, one of which is the end of revisionist politics by a broadly Soviet-type collapse. Without descending into the realm of speculation, we can say this much with certainty: though the revisionist state, due to the special ability stemming from the greater relative autonomy that we discussed above, can handle crises such as the present one, with greater efficiency, yet the very mechanisms through which it can deal with such crises, leads to even deeper crises of the state in the long run.
The greater ability of the Chinese social fascist and revisionist state to deal with such crises as the present one is reflected in the fact that even today most of the debt in the Chinese economy is internal debt owed by different local governments to state banks and from the state banks to the central government. Total debt in 2020 was more than 300 percent of GDP. However, most of this is in Chinese currency and is owed by one state body to other. When we subtract that, the total debt owed by the households and corporate capitalist companies is much lower if we compare it with most of the advanced capitalist economies. The external debt of China in dollars is very low: around 15 percent of the GDP. At the same time, due to decades of export-oriented growth model, the China is a major creditor to the world, as almost 6 percent of all global debt is owed to China. Precisely due to this, the dollar and euro reserves of China are much bigger than the external debt that it owes.
The problem with Chinese government is that the overall increasing debt will eventually become a major threat for the economic health and the rising debt mountain can be curbed only by increasing productivity and profitability in the productive economy to keep the debt ratio within acceptable limits and by regulating the unproductive financial speculation. The first method has structural limits in the given situation and the second method would lead to financial busts and defaults, which can result in sharp decline in the profits and therefore rate of investment in the private capitalist sector. This is something that the revisionist state can do only for a short-term and with a lot of restraint. State-led growth has its own contradictions and it cannot be relied upon as a model of growth within the ambit of logic of capitalism. As a result, it is a catch-22 situation for the Chinese revisionist party and state. It can certainly manage the situation for the time being. However, this contradiction cannot be resolved through such short-term measures and knee-jerk reactions. It will continue to grow with the passage of time and would assume even more serious forms.
