Welcome to Foreign Policy’s China Brief.
The highlights this week: Property giant China Evergrande Group nears its final demise with a court-ordered liquidation, Hong Kong’s leadership announces it is preparing a new national security law, and a purge within the Chinese defense sector claims another target.
Hong Kong Court Orders Evergrande to Liquidate
On Monday, a Hong Kong court ordered troubled property giant China Evergrande Group into liquidation, with the judge declaring “enough is enough” after years of the company stumbling under massive debt. Investors will see the verdict as a final blow to the firm, which lost more than 99 percent of its market value in three years. Foreign creditors will be unlikely to recover anything Evergrande owes, falling in line behind domestic creditors.
But Evergrande isn’t quite finished yet. More than 90 percent of its assets are held in mainland China, not in Hong Kong. The relationship between the two legal systems is complicated, and China’s courts can effectively stall liquidation on the mainland for as long as the government wants. A 2021 cross-border insolvency agreement between mainland China and Hong Kong allows liquidators from one territory to apply for recognition in the courts of the other.
That means when it comes to Evergrande, courts controlled by the Chinese Communist Party (CCP) will set the timetable. And now is a particularly bad time to try to unravel Evergrande’s debts. China’s Spring Festival, when hundreds of millions of people return to their hometowns, falls on Feb. 10—and the travel rush has already begun. The holiday is often when companies settle debts and back pay; wages are often in arrears, causing a regular pattern of strikes and disputes.
Although attention has focused mostly on those in the urban middle class who bought the properties developed by Evergrande, the impact of the real estate crisis on the migrant laborers building them will be harsh. Construction has become less common as a migrant labor job, but the sector still employs around 50 million people. With jobs thin on the ground, many workers may end up stuck in their rural hometowns after Spring Festival—earning and spending a lot less.
Evergrande is just the largest firm in a much broader property crisis. It’s easy to blame the COVID-19 pandemic and China’s lockdowns for the country’s economic downturn and the slow collapse of the market over the last three years. But China’s property bubble was inflating for years before that, and the government had no solution. Nascent attempts to bring down or control prices were abandoned after protest and pushback from property holders—not least because many Chinese officials were among them.
Abandoned or half-finished buildings have become one of the most visible signs of the end of China’s boom years. For a while, stalled projects would return to life with new funders, but the current crisis risks leaving the remnants of grandiose projects from Evergrande, Country Garden, and other firms scattered across China and beyond. When projects are completed, they are increasingly empty. As one former official put it last year, there are more vacant apartments in China than even its 1.4 billion people could fill.
Talking about the problem, though, could get people into trouble, such as the Chinese property research firm that had to publicly apologize in 2022 after its report on China’s vacancy crisis angered officials trying to prop up the sector. The relationship between censorship and other forms of state control and market sentiments is interesting: After all, China’s control of information and finance is one of the factors that makes a so-called Lehman moment of market contagion and collapse unlikely, even when giants like Evergrande fall.
On the other hand, this government control can worsen general distrust and lack of investor and consumer confidence—since no one can depend on official data—and the restrictions on market feedback allow problems to grow larger over time. That’s visible in China’s stock market losses of the last three years, where even the government’s grip hasn’t been able to slow the slide. Whatever the immediate fate of Evergrande, investors can hear the bells tolling.
What We’re Following
Hong Kong’s new security law. Not content with the arrests made under the draconian law that came into force in 2020, Hong Kong’s leadership is preparing a new national security law that will broaden its public crackdown and expand the definitions of state secrets and sedition more in line with those of mainland China. Hong Kong Chief Executive John Lee said the new law would respond to “foreign agents and Hong Kong independence advocates … still lurking in our society,” echoing CCP rhetoric.
It is possible, although unlikely, that the moves will drive people into the streets of Hong Kong again. A 2003 attempt at a national security law in Hong Kong was defeated by protest, but today the mood in the territory is crushed, with a growing sense that any differences between Hong Kong and mainland China have been erased far in advance of the nominal 2047 date for full integration.
Missile corruption. The ongoing purge in and around the Chinese military claimed another target this week. Senior rocket researcher Wang Xiaojun—the former head of the China Academy of Launch Vehicle Technology—was booted from the Chinese People’s Political Consultative Conference. The group is effectively honorary, but the expulsion indicates that Wang, who led the development of the rockets used by China as space launch vehicles, is under government investigation. (He has reportedly not been seen in public for a while.)
Missile and rocket generals, administrators, and researchers have been a focus of the ongoing crackdown within the Chinese People’s Liberation Army (PLA). Bloomberg reported this month that U.S. intelligence believes corruption in the PLA Rocket Force has rendered many of China’s devices ineffective. But it’s also possible that the people being rounded up now are part of the personal network of former Defense Minister Li Shangfu, who was purged last October after a long career as an aerospace engineer.
FP’s Most Read This Week
- The Reason China Can’t Stop Its Decline by Howard W. French
- America Is Planning to Withdraw From Syria—and Create a Disaster by Charles Lister
- The Red Sea Crisis Proves China Was Ahead of the Curve by Parag Khanna
Tech and Business
Hedge fund failures. Asia Genesis Asset Management, a $330 million fund based in Singapore, announced last week that it would close after failed bets on Chinese and Japanese stocks caused “unprecedented” losses. The news follows a noticeable trend from last year: how badly hedge funds and other financial institutions overestimated the Chinese economy, expecting a recovery that never materialized.
Chinese economic difficulties weren’t hard to call, but asset managers largely failed to do so. Foreign investment rushed in at the start of 2023, only to rush back out in the second half of the year. It’s clear that the narrative of Chinese growth still had a strong hold on hedge funds, especially in East Asia; they seemed to miss the damage done by the failure to support ordinary people during the COVID-19 pandemic.
MrBeast looks east. YouTube star Jimmy Donaldson, who has the most-subscribed individual channel on the platform and is known by his online alias MrBeast, is attempting to break into the Chinese market. That’s notoriously difficult for American content producers because Chinese streaming is subject to strict and constantly shifting rules—and the government is particularly wary of foreigners.
Donaldson’s mixture of consumerism, broad appeal, and philanthropy might be able to do it. His first video has already racked up more than 7 million views on Chinese platform Bilibili. Yet all it will take is a single slip-up to get everything pulled.