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As part of its recent campaign to regulate capital and to rein in capitalists, Chinese President Xi Jinping and the Chinese Communist Party (CCP) has set their sights on the China Evergrande Group. Last week, Asian and global markets sank quickly on the news that Evergrande was unable to make interest payments on its debt, which it reports as $309 billion but which could be even higher. The deeply-indebted property developer is the largest company in the largest sector of the Chinese economyprima facie, it would seem “too big to fail,” a phrase Americans learned about in 2008. That is why a company no one in America had heard of until last week was suddenly in newspaper headlines, being called the “Lehman Brothers of China.”

It’s true that Evergrande is highly leveraged and has little chance of surviving in its current form, but this is not really the Chinese equivalent of a “Lehman Brothers moment.” By week’s end, it appeared that the contagion effects of the Evergrande affair on the global economy would be limited. 

Still, within China, the dismantling of Evergrande is a landmark in an ongoing struggle between Chinese capital and the Chinese state over the direction of the their economy. The Chinese state has always maintained ownership of the “commanding heights” sectors such as telecoms, banking, and energy, while encouraging the rapid growth of private capital everywhere else. The “Chinese model” of what many termed “state capitalism” was based on an alliance between private enterprises and local governments to export products globally, and build cities and infrastructure. Developers like Evergrande were well-positioned to acquire state-owned land with soft loans from state banks, and profit as hundreds of millions of households poured their savings into home purchases. It was an extremely lucrative business model for Evergrande and other developers. The Evergrande crisis was not precipitated by the actions of panicked investors but by a state that reversed the rules of the game by tightening credit standards. It’s part of a broader strategy to reduce the share of investment in China’s GDP, but also part of a campaign to reassert state dominance over a private sector that had become too powerful for Xi and the CCP.

The question is, can Xi pull this off without sending the Chinese economy into long-term stagnation, or resuming the old model of development backed by soft loans? 

Much of the Western financial press coverage of the Evergrande events framed the case in terms of a financial crisis suddenly confronting the CCP. But the tumult from Evergrande is less an exogenous shock than a deliberate, if risky, stance by Xi and the CCP to demonstrate their utter resolve in confronting powerful capitalists in China who have long evaded financial and other regulatory measures from the central government. 

Evergrande is only one of a dozen Chinese development companies that have let their debt ratios exceed those of the “red lines” that the central government recently announced. The CCP has begun what it hopes will be a carefully controlled dismantling of Evergrande, one that will send a signal to other indebted developers that they must get their financial books in order or face a similar fate. 

If the financial complexities and implications of the Evergrande case could be boiled down to a six-syllable tabloid headline, it would read: “XI TO BUILDER: DROP DEAD.” (With a nod to the iconic 1975 Daily News front-page amidst New York City’s fiscal crisis.)

Why has President Xi decided that the status quo under which large private firms such as Evergrande, Alibaba, Tencent, Didi, and others amassed extensive wealth and power while keeping out of politics, was no longer tenable? After all, Evergrande’s debt-fueled growth strategy was well-known and widely reported. Why would Xi take the risks of scaring off investors, and destabilizing the Chinese stock exchanges, where shares of Evergrande and other companies have lost 84 percent of their market value in 2021? 

And what will happen to the 1.4 million households that paid for but have not yet had their Evergrande-backed homes built? Can the government compel Evergrande and its contractors to make amends without signaling some kind of bailout? Reading the intentions of Xi and the CCP’s command center in the Politburo Standing Committee is always highly speculative, but for those of us who have followed Chinese politics closely over the past 30 years, the Evergrande affair can be placed in the context of an ongoing conflict within the CCP over the status and power of private capital in China. 

Many observers contend that the CCP and its leaders in the post-Mao era took an essentially pragmatic stance on economic questions. But the lively debate within the CCP over communism and capitalism has in fact been ongoing and never really resolved.

In the wake of the 1989 protests and swift repression that followed, the newly installed CCP leader Jiang Zemin coined the terms “socialist market economy” and “socialism with Chinese characteristics.” By the late 1990s he also formulated the position from Marxist teleology that China was still in a “primitive stage of accumulation,” during which capitalists and capital accumulation could be permitted, as a temporary stage in China’s advance toward socialism under the CCP’s leadership. By the early 21st century, capitalists were defined as an “advanced force of production” essential to China’s development. In a highly controversial move, the party began to recruit capitalists both large and small into its ranks as members. The move spawned an academic literature in the China field to study these “red capitalists.” For the past two decades, China’s private sector has accounted for the majority of job creation and GDP growth

As has happened on a smaller scale in the United States in the 21st century, the rapid ascent of China’s privately-owned technology companies and platforms created massive corporate wealth while leaving government regulators far behind in coping with the consequences through antitrust law, data ownership and privacy, and labor law for the growing ranks of gig economy workers. In the real estate sector, private developers like Evergrande became close allies with local governments, where city officials were promoted (and enriched, with bribes and insider deals) on the basis of their performance in bringing rapid economic growth in the form of glistening central business districts and infrastructure hubs like airports and train stations. These officials, who were prohibited from issuing bonds the way local governments elsewhere finance infrastructure, instead raised funds by auctioning state-owned land to development companies under long-term leases.   

Despite what looked like capitalism in practice, and what made the CCP pronouncements of “socialism with Chinese characteristics” look phony, the party and its leaders were in fact far more concerned about aligning their communist ideology with their economic practice than it superficially appeared.

In 2012 Xi became the CCP leader and the tolerance that his predecessors had extended to China’s massive private corporations diminished continuously through to the start of his second term in 2017. As the scion of an elite Communist family, Xi was concerned that massive wealth accruing to party members from their ties with capitalists was hollowing out the CCP. But the lingering suspicions within the party about capitalists and capitalism was broader, and preceded his tenure. At the party Congress that rubber-stamped Xi as General Secretary for a second term in 2017, the new ideological formulation was “never forget our original intent.” Put in more concrete terms, the CCP was saying, let’s remember how and when we began and what our goals were back in 1921: to overthrow capitalism and make China a socialist country. Having the 100th anniversary of the founding of the CCP in 2021 helped the party remember its roots. 

The second point of context through which many China watchers are observing the Evergrande debacle is a recent formulation known as “common prosperity.” This term, which Xi issued at a CCP forum on August 17, is being read as a direct rebuttal to Deng Xiaoping’s old formulation to let some people and areas of China get rich first. As a catchphrase, “common prosperity” suggests that the party will finally tackle some of the intractable problems that Xi inherited from his predecessors: vast inequalities of wealth, serious income inequality, soaring housing prices, the massive informalization of work, and a cutthroat education system and meritocracy in which (as in the United States) household wealth determines access to the best schools and universities. 

The results are paradoxical. The same leader and ruling party that is carrying out massive repression and even cultural genocide against Muslim minorities in Xinjiang is announcing an intention to enact policies similar to those being championed by left-center parties in the Organization for Economic Cooperation and Development (OECD): a commitment to introducing new property taxes and inheritance taxes, new tax incentives to donate wealth for public purposes, rural revitalization programs, and labor protections for millions of delivery workers and drivers in the technology-enabled gig economy. 

A frontal assault on China’s capitalists, however, is not without significant risks. The collapse of more real estate companies could threaten the balance sheets of China’s state-owned banksthe nodes of China’s financial system. While strict capital controls are in place in China, the wealthy do have ways of moving money out. Xi and the CCP view the credit-tightening measures against Evergrande as both a fiscal and ideological necessity, but the political calendar is also working in favor of a cautious approach. Next fall is the 20th CCP Congress, and Xi will do everything possible to ensure that his claim for an unprecedented (in the post-Mao era) third term goes without social disruptions or political challengers. 

—September 27, 2021

Mark W. Frazier is Professor of Politics at The New School, where he also serves as Academic Director of the India China Institute. He is also the author of The Power of Place: Contentious Politics in Twentieth Century Shanghai and Bombay (Cambridge University Press, 2019).