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CWA # 1176, 31 December 2023
The World This Year
China in 2023: Cracks in the Great Wall

  Femy Francis
Femy Francis is a Research Assistant at the National Institute of Advanced Studies.

The year 2023 has showcased the duplicity of the Chinese rise; as an international and regional actor, it has become a force to be reckoned with, establishing itself as a superpower, brokering peace negotiations and expanding its dominance in the South China Sea. Internally, it has been plagued with political and economic crises. 

Two significant developments internally impeding China were the property crisis and the political purge of Chinese leaders by Xi. Currently, China's most prominent developers, both private and public, face possible liquidation. Evergrande and Country Garden have defaulted on dollar bonds and have liabilities that have grown far beyond their assets. Evergrande is the most indebted developer in China, with liabilities of nearly USD 330 billion, including USD 20 billion of offshore debt.

Widespread speculation over the missing ministers kicked off in July when then-Foreign Minister Qin Gang disappeared for weeks, only to be unceremoniously removed from his post without rhyme or reason after a one-month absence. These two issues aptly showcase the internal turmoil ensuing in China. 

Major Issues in 2023
First, the debt-fuelled development. China's real estate is amongst the most crucial sectors, accounting for one-third of the country's GDP. China has always invested in property and housing development, where 70 per cent of household wealth goes into investing in property. The financing of these properties was based on developers collecting the total price before construction, essentially blocking their space. The funds now in the hands of the developers would be used to further invest in land and other profitable activities, hence putting themselves in a cycle and creating huge debt pockets.

Second, the saturated housing market. China overcame the global financial crisis of 2007-09 by boosting domestic demand; the housing market was paramount to helping China survive the crisis. However, the housing market became so attractive that there was over-investment with no alternative to invest in. The situation further deteriorated with slower economic growth due to the pandemic and inefficient state-owned enterprises. 

Third, the failure of government policies. The Three Red Lines policy was proposed to improve financial health by reducing debts and improving liquidity by tackling property developers' unbridled borrowing by restricting the amount of new borrowing they can get each year. These include a 70 per cent or lower debt-to-asset ratio, a 100 per cent cap on net debt-equity, and enough cash to accommodate short-term borrowing. The new regulation hindered developers' access to credit, resulting in defaults and stalled projects. 

Fourth, the housing crisis and the problem in the real estate market. Price support by govt furthered the excess supply of houses; in a free market, an excess supply of housing would be eliminated by allowing the price of housing to fall until a new equilibrium is reached with supply and demand. China's adherence to market socialism has steered it toward using price support to prevent decreases in demand. A growing number of developers were abandoning projects, leading to several families and individuals opting for a 'Mortgage Boycott' by refusing to pay loans after being delayed in their homes. This led to a further dip in confidence in real estate. With the houses lying unfinished, several could not pay or refused to pay their mortgage, and with the interest rate of their debts piling up, most are now trapped in a debt circle. 

Fifth, a political purge. 2023 saw the cleaning or purging of high-profile individuals from the politburo of China. As mentioned in the beginning, the Chinese foreign minister, Defence minister, and Other high-profile victims, including the generals in charge of China's nuclear weapons program and some of the most senior officials overseeing the Chinese financial sector, were sacked. Minister of National Defense Li Shangfu, Rocket Force Commander Li Yuchao, and Rocket Force Political Commissar Xu Zhongbo are among the few.  

The purge shows that Xi is trying to rebuild its Bureau of Leaders and that any dissent, misstep, or misconduct would not be tolerated. The nature of the removals is also a fresh demonstration that compartmentalisation in party governance is far more critical to Xi than looking democratic to appease its international actors. The purge also reflects the unknown dissent within the party, or rather, the fear of dissent has led to a change in the bureau. 

2024: Looking Ahead
First, the diminishing attraction and high-profile purge of top-ranking officials, bankers, and generals have decimated investors' confidence as they are already reeling from the punitive investigations. Now, bankers are forced to do ideological study sessions rather than productive work. The new draconian controls on exporting data and other sectors have made Chinese investment seem troublesome. 

Second, President Xi's aggressive political consolidation. China will observe aggressive consolidation as Xi Jinping tries to rework the politburo in its favour and those who strictly follow his idea of the Chinese rise. Xi will double down on the political purge until he is satisfied that the bureau is to his liking. There would be an ongoing restructuring in the party and executive sectors.   

Third, the economic crisis of the housing bubble will be addressed amidst the growing tensions and protests in China. However, the mechanism to resolve will be state-based and not market-based, and the party and government would try to bail out a few defaulters of choice rather than let the market lead the natural course.  

In 2024, there will be cracks within the Great Wall, while externally, China stands as a unified front when dealing with foreign policy. Domestic differences are often overlooked or never discussed due to heavy censorship and the stronghold of the party over freedom of information. China will continue to rise as a regional and international power, and impending issues will further deteriorate if the stifling continues. 

About the author
Femy Francis is a Research Assistant at the National Institute of Advanced Studies.

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