Corporatism – that unholy alliance between big State and big corporations bypassing parliaments, centralising economic power and defying consumers and voters – is now the dominant political economic system in the world – with catastrophic results. China’s Evergrande property collapse shows how the worst practices are increasingly common to both East and West.
Corporatist fascism (the European tradition) and Communism (the Russian and Chinese tradition) have logically been deadly enemies. My own work exposing the former over the last 30 years has been praised by left wing socialists and communists. But we must not forget that Hitler the Nazi made a pact with Stalin the communist and that today in the USA elements of big business have aligned themselves with the communist and racist Black Lives Matter and big tech corporations are allied with the left wing Biden regime.
So it should not come as any surprise that when communist China turned to capitalism to rescue the country from decades of communist economic failure it was to that socialist form of capitalism – Corporatism – that it turned. Now we are seeing the fruits of that corrupted process – and it is not too different from the economic failures and threatening collapse plaguing the “capitalist” West.
China’s Evergrande property empire is on the verge of collapse. Its shares dived 90% and it is over $300bn in debt and cannot meet its Bond payments.
Needless to say it was Joe Biden who years ago saw no problem at all in trading freely with the closed communist system of China, importing their products and exporting US technology – which was promptly stolen. It is difficult for free enterprise capitalism working in competitive markets with free consumers, the rule of law and freely moving workers in trade unions to compete with a Government controlled economy, directed workers, communist rule and artificial prices – as big Chinese companies are now finding.
China’s public debt already stands at 270% of GDP (compared to 98% for the UK and 125% for the USA) and non-performing loans have hit $466.9 billion. Evergrande has total liabilities of $305 billion, making it the most indebted property developer in the world. It is also the largest issuer of Dollar Junk Bonds (the riskiest and least credit worthy debt) in Asia. Its share price has dropped by 90 percent over the past 14 months.
GOVERNMENT AS SPECULATORS
The close involvement of Chinese central and local government in the property sector is a massive distortion. The Government owns all land but makes long term leases to individuals and corporations. Risks seem to be “covered”, the cost of capital is artificially low and political exhortation to “build for the people” soon tend to outweigh rational business decisions. Evergrande owes money to 128 banks and over 121 non-banking institutions. Local government financing vehicles (LGFV) have defaulted on many loans from those non banking institutions.
Local Government in China has to cover a lot more public expenditure than central Government is prepared to finance so they are deeply in debt. But local government earns a lot from land taxes – an urban land use tax, a real estate tax, a land value-added tax, a farmland occupation tax, and a deed (land transfer) tax. The importance of land tax revenues have grown with China’s booming housing market, going from less than 4% of tax revenues in 1999 to 20% in 2010.
Local Government has therefore become a joint speculator in land and house building and has acquired land, often already occupied, and sold it to China’s booming property developers like Evergrande. This process has resulted in the displacement of millions of people and been a key source of economic and political conflict. Socialist corporatist property speculation is more ruthless than in the West!
In turn the Chinese central bank accepts local-government bonds as collateral, thus encouraging banks to buy those bonds and aid local government.
GOVERNMENT SLAMS THE BREAKS ON, BIG BUSINESS MAKES ITS EMPLOYEES PAY
But now, seeing the results of their promotion of the property boom (and sky rocketing prices) the Government has told Banks to reduce their lending to property corporations. This has removed funds which Evergrande needed to complete homes already bought off plan by individuals and families. It has nearly 800 development projects still in progress in more than 200 cities
In Evergrande’s case the company turned to its employees for cash! Those who wanted to keep their bonuses would have to give Evergrande a short-term loan!! This is what workers then did – hence the film of the crowds of workers demanding their money back!
The loans they made were “packaged” as high interest “investments” (like the packaging of risk distorting “sub prime” mortgage bonds in the USA! – another example of State corporatist distortion) and then Evergrande stopped repaying the loans.
Hypocritically the Beijing Government is trying to show that no company is too big to fail when it is itself behind that failure. (Just like the British Government blames trucking companies for the shortage of drivers when its own DVLA is holding up 50,000 lorry driver licence renewals. Or allowing energy companies to go bust in the gas price shock even though the main problem is the Government’s price cap)
Evergrande has paid off some suppliers with unfinished buildings, and other contractors still owed money have protested. So the whole huge supply chain is in danger (with the typical Beijing politician being as ignorant of the dangerous complexity as their Western equivalents) and Evergrande is not the only property corporation in trouble.
The property sector accounts for 16% of China’s economy. The banking system which is vulnerable to property collapse has assets of 174% of GDP (compared to 62% in the USA, 131% in the UK and 91% in Germany). The dangers of a world wide spread of Evergrande infection is considerable. China accounts for 18.34% of the world economy.
LESSONS FOR THE CORPORATIST WEST
And to see how entrepreneurial capital can be transformed into corporatist Statist failure consider the founder of Evergrande, Hui Ka Yan, who has made $5.3bn in dividends over the last four years but whose company now threatens the whole Chinese economy.
That the road that brought China to this situation bares so many comparisons with the boom bust incompetence and speculation which we have witnessed in the (now corporatist not capitalist) West was to be expected. China is a classic corporatist State but with a far more dominant State socialist core. Perhaps western politicians might at last wake up to their own failing systems, ditch State corporatism and return to enterprise capitalism in which a diverse economy, decentralisation and competition promote the dispersal of wealth and preserve both prosperity and democracy.
