China economy: the fallout from the Evergrande crisis

Last month, China’s State Council, the government’s most powerful organ, unleashed its wrath on an unusually small target, accusing officials in a county of just 660,000 people of effectively extorting private sector businesses.

In a long and detailed statement issued on December 17, the State Council said the local government in Bazhou, situated just 90km south of Beijing in Hebei province, had seriously violated both government and Chinese Communist party orders by embarking on a fee-collection spree from small and medium-sized enterprises in order to offset its own declining land-sale and tax revenues.

Like many jurisdictions across the country, Bazhou had been hit hard by the party’s year-long crackdown on highly leveraged real estate developers such as China Evergrande Group, a colossus that teetered for months before it finally defaulted on bond payments on December 6 and entered into a formal restructuring process.

According to China’s cabinet, in October the Bazhou government ordered officials to drum up Rmb300m ($47m) in new revenues, mainly through the imposition of arbitrary fees and fines. Over the course of nine weeks more than 2,500 local businesses were hit with penalties totalling Rmb67m, compared with the just Rmb6m in penalties collected over the first nine months of the year.

“Every government department has a way to make up for lost revenues,” says Martin Li, who runs a chemical factory in Bazhou and was forced by the local meteorological bureau to buy an expensive lightning rod from a government-designated supplier. The rod cost Rmb1,100, far more than comparable units he could have purchased online for just Rmb200.

In targeting entrepreneurs such as Li, the State Council said Bazhou had “seriously hurt the interest of small businesses, severely damaged the local business environment and undermined the credibility of the party and [central] government”.

A river runs through Bazhou in Hebei province
The local government in Bazhou has been hit hard by the Communist party’s year-long crackdown on highly leveraged real estate developers © Quehure Costfoto/SIPA USA/PA Images

China’s cabinet, however, said nothing about the central government policies that had caused the county’s desperate scramble for revenues in the first place.

Over the past two years, President Xi Jinping’s administration has launched a series of campaigns that target different areas of business — from the country’s largest private-sector technology platforms in late 2020 to education providers and ride-hailing giant Didi last summer. And all that was before it became apparent in September that government-imposed debt limits might bring down Evergrande.

China’s second-largest developer is now on the cusp of becoming the country’s biggest ever bankruptcy case, and its downfall has sparked a broader crisis in the real estate sector. It has accumulated liabilities of about Rmb2tn, equivalent to 2 per cent of gross domestic product, which are owed to creditors ranging from individuals who bought high-yielding investment products from the group to the country’s largest construction companies and banks.

The collective impact of all these crackdowns has been to pile unprecedented…

Read More: China economy: the fallout from the Evergrande crisis

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