Welcome to Foreign Policy’s China Brief.
The highlights this week: The downfall of a major property company could spell trouble for China’s real-estate market, what to make of Mark Milley’s secret phone calls with Beijing, and a key #MeToo case is thrown out for lack of evidence.
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China’s Real Estate Market Faces Trouble
China Evergrande Group, the largest property company in the world in 2018, is set to miss interest payments on bank loans due on Sept. 20—meaning one of the most significant debt restructurings of all time is likely just around the corner. Evergrande ran up large debts in the last decade as it expanded in China’s volatile real estate market, fueling a months-long financial crisis for the company that threatens the whole industry. With hopes of bailouts and grand deals falling through, Evergrande’s bonds have dropped to one-quarter of their May price.
Evergrande exemplifies the problems that have haunted the Chinese economy for years, without ever reaching a full-blown crisis. Property markets are inflated across the country: In 2018, nationwide home prices averaged 9.3 times higher than annual incomes. In metropolises such as Beijing and Shanghai, the problem is even worse.
One driving factor of the burgeoning housing crisis is that China has hardly any property taxes, making real estate a tempting asset. Most businesses in China are to some degree real estate businesses, investing in property on a grand scale. The former Hainan Airlines, for example, morphed into the giant HNA Group before declaring bankruptcy in 2017 and putting $11 billion worth of real estate on the market.
At the same time, property supply has outstripped demand in many cities. Some of the so-called ghost cities built in the last 20 years to accommodate urbanization are beginning to thrive, while others remain largely empty. Real estate is also tied into local government finances, which have been in crisis since the late 1990s. Land sales have become the primary form of income for most local governments. Although Beijing has tried to cool the market by restricting land sales and redistributing taxes, it has had only limited success.
One key issue: The Chinese urban middle class, one of the most important groups for Chinese Communist Party support, has invested heavily in property. As part of government housing reforms in the 1990s, urban residents were handed apartments that previously belonged to their work units, forming the cornerstone of their new wealth. That has made them enthusiastic property speculators and often resulted in large protests after local attempts to control prices—leading the authorities to back off.
Thanks to China’s extraordinary growth rates and the range of tools available to its central government, these problems have always just about stayed under control. But the concern with Evergrande is that it could be Beijing’s Lehman Brothers, pushing a long-brewing catastrophe over the edge. The government is doing its best to avoid that by unspooling the company slowly—through targeted interventions and conversations between regulators and debtors—rather than allowing a single moment of collapse.
The world’s second-largest economy may depend on how well that works.
Mark Milley’s secret calls to China. Phone calls between U.S. Chairman of the Joint Chiefs of Staff Gen. Mark Milley and his Chinese counterpart, Li Zuocheng, from October 2020 through January have caused a political kerfuffle in Washington. According to Bob Woodward and Robert Costa’s new book, Peril, Milley twice called Li to reassure him that the United States was stable and was not about to launch an attack on China, despite then-U.S. President Donald Trump’s attempts to cling to power.
Numerous questions remain about how the calls took place and what exactly was said. Beyond Trump’s instability or Milley’s overreach, one leaps out: Why did Milley think the Chinese might overreact to the U.S. political drama so strongly, potentially even taking military action? U.S.-China relations are at a nadir, but the crisis doesn’t seem to have put fingers on buttons yet. If Milley thinks otherwise based on intelligence, that could be a worrying sign. It also could be the overreaction of one general.
It’s even more unclear what Li or anyone else in Beijing has made of the whole affair. The Chinese leadership and their advisors do tend to forecast U.S. political collapse. After the 2008 financial crisis, for example, the belief that the United States would fall like the Soviet Union was relatively common among the Beijing elite. Trump’s autogolpe attempt gave that argument far more credibility. Ultimately, Milley’s call may have done something to refute it—or may have confirmed it.
After all, if a Chinese general reached out to tell Washington everything was fine in Beijing and not to be concerned about coup rumors, U.S. intelligence would probably become concerned that a coup was happening.
Key #MeToo case thrown out. A Beijing court has dismissed charges against TV host Zhu Jun, in a blow to what activists hoped would become a landmark for the #MeToo movement in China. A former intern, Zhou Xiaoxuan (better known by her online nickname Xianzi), accused Zhu of sexually harassing her in 2014. The case was dismissed on the grounds of insufficient evidence—after the court excluded evidence that might have helped Xianzi’s case.
Most harassment cases, especially against powerful men like Zhu, never make it to the courts in China, and judges often favor the defamation suits bought by the men over the harassment suits bought by women. Nevertheless, Xianzi became an icon to many Chinese women—but has also been insulted and threatened online and offline.
Xi says no to summit. Chinese President Xi Jinping has reportedly refused an offer from U.S. President Joe Biden for a personal summit, although Biden denies the story. U.S. leaders often overrate the value of personal diplomacy with foreign leaders, such as former President George W. Bush’s conviction that Russian President Vladimir Putin’s eyes revealed him to be “straightforward and trustworthy.”
Nonetheless, it’s notable that Xi hasn’t left China since the start of the coronavirus pandemic, as opposed to his previous regular program of foreign travel. Concerns over COVID-19 clearly play a part in this change, but it may also represent domestic political worries: Foreign trips traditionally present opportunities for moving against temporarily absent leaders.
Online restrictions toughen. China’s crackdown on an already limited internet environment continues, with regulators promising new guidelines that will “consolidate the guiding status of Marxism in the ideological cyberspace sphere.” The trend is moving toward greater restriction of all content, especially anything involving foreigners. Following the near-total ban on online games for minors, unapproved discussion of video games now appears forbidden on social media platform Weibo. (It will soon be hard to distinguish between official mandates and the results of companies scrambling to appear politically reliable.)
In the meantime, it remains relatively easy for teenagers to evade the new video games rules. But don’t bet on that lasting. Numerous online regulations in China, from real-name identification to bans on VPNs, have gradually become inescapable for ordinary people. In 2001, for example, VPNs were easily accessible; getting a VPN today is expensive, time-consuming, and sometimes requires leaving the country to install it.
Rich parents find private teachers. China’s draconian restrictions on private education companies are producing an elite grey market in private tutoring. Although the big education companies remain doomed, smaller ones are acting as brokers between parents and tutors, arranging deals such as disguising live-in tutors as cooks or maids for as much as $4,500 a month. Others are setting themselves up as companies overseas to allow parents with access to foreign bank accounts to pay them directly. These moves have prompted further threats and restrictions from the authorities, central and local.
Researcher acquitted after FBI case collapses. University of Tennessee professor Anming Hu has been acquitted of fraud charges after the FBI twice attempted to prosecute him, only to have its case dismantled by judges for flimsy evidence and false statements. The case against Hu should not have been brought even once; attempting it twice makes the Justice Department’s campaign against Chinese scientists accused of espionage appear vindictive and racist.
As Margaret K. Lewis argued in Foreign Policy in July, the China Initiative needs to be dropped or seriously rethought.
Jingzhou, Hubei: 5.2 million people
The city of Jingzhou epitomizes a common pattern in China: historically respectable, presently boring. As a secondary capital for the Tang Dynasty, Jingzhou was the focus of sieges and drama during civil wars and foreign invasions. It is currently most famous for its 57.3-meter statue of Guan Yu, a third-century general who was deified as a war god in the seventh century and immortalized in an epic 14th-century novel.
Guan Yu’s connection to Jingzhou consists of losing a key battle there; his statue aims to drum up tourism. Such schemes are common in China, which has dozens of giant statues and far more mega-complexes, bizarre museums, and half-abandoned theme parks. The central government has campaigned against these “vanity projects” for over a decade, but the projects are deeply embedded in the political economy of Chinese officialdom.
These vanity projects often play into the ambitions of officials on the rise. GDP growth was a key metric for official success from the 1990s onward; building an enormous statue or a giant complex was an easy way for local officials to manipulate statistics while leaving their successor to pay the price when they left for a higher office or were transferred elsewhere. It also allowed opportunities for inevitable kickbacks during the construction process. Because manipulating GDP is still the norm, the central government has spent years talking about reducing the measure’s role as a metric in officials’ career tracks, without much success.
In Jingzhou’s case, betting on the war god hasn’t paid off. The statue, which a state-run local tourism body spent at least $26.3 million building in 2016, was in the news recently: It was condemned by the central government this month as an illegal eyesore that has only collected around $2 million in revenue. The statue is now being relocated to an emptier location several miles away, at a cost almost as high as the original construction.