The economic crisis triggered by the real estate crisis in China is continuing to develop. The most obvious symptom of this crisis is that one of China's largest real estate companies, Evergrande, is insolvent, with debts of nearly 2.5 trillion yuan. Many commentators have explained from the perspective of political economy that this massive debt poses a threat to China's financial system and the entire economy. In the eyes of many observers, the China Five Year National Financial Work Conference was held at the end of October after being postponed for more than a year, partly or largely due to the threat posed by the real estate industry crisis to the overall Chinese economy, making it difficult for the Chinese authorities to respond or even speak up. Dr. Cheng Xiaonong, a scholar, explained the origin of this situation where debt can harm enemy countries from the perspective of the interest chain and its operation.
The Great Picture of the Crisis in China's Real Estate Industry
In the past 20 years, the exceptionally developed real estate industry has once occupied half of China's economy and become a world wonder. This foam, which was formed through high leverage, that is, through the extraordinary development of massive debt accumulation, is now deflating. The collapse of the foam not only threatened millions of Chinese people with their lifelong savings turning into nothing, but also brought the prospect of social unrest that was difficult to predict and deal with to the Chinese government.
As the world's second largest economy, the prospect of China's real estate industry crisis triggering a financial crisis and overall economic crisis has also attracted the attention of the International Monetary Fund. At the same time, scholars and analysts are studying and analyzing how large real estate companies like Evergrande can owe a huge debt of 2.5 trillion yuan.
Scholar Hu Ping said: (CEO of Evergrande) Xu Jiayin's business model is to borrow from banks and buy land from the government; Why is the bank willing to lend him a loan? Why is the government willing to sell the land to him? Because they can retrieve the buckle. So, besides the head of the bank, as well as government officials, they are all accomplices of Xu Jiayin.
Independent current commentator Cai Shenkun said: Evergrande's accidents are inevitable, and without the protection of powerful figures, Evergrande would have long been nothing; In fact, as early as 11 years ago, Citron Research, a well-known short selling agency in the United States, issued a report short of Evergrande, pointing out in great detail the problems existing at Evergrande and clearly predicting its final outcome.
The problems in China's real estate industry are currently continuing to develop. On Monday (October 30th), the Wall Street Journal reported that the CEO of global banking giant HSBC stated that the real estate crisis in China has passed and the Chinese government's measures to support the industry are working. But at present, it is not clear whether the crisis has truly passed.
What is the process of Evergrande (as well as other large, small, and medium-sized real estate companies in China that were once prosperous but are now in trouble) borrowing? What does the real estate industry crisis and economic crisis in China mean for the Chinese government, the Chinese economy, the Chinese people, and foreign investors? Does the Chinese government have the will and ability to solve the crisis in the real estate industry? Can China's current political and economic system avoid the situation of real estate developers like Evergrande creating a time bomb for the Chinese economy again?
Dr. Cheng Xiaonong, a scholar who has been observing and researching these issues for a long time, provided his answers. Before obtaining a PhD in Sociology from Princeton University, Cheng Xiaonong served as the Director of the Comprehensive Research Office of the China Economic System Reform Research Institute, gaining first-hand knowledge of the Chinese government system and its bureaucratic operations. In his view, the current crisis in the Chinese real estate industry is caused by both the institutional corruption of China's political system and the lack of basic knowledge of the real estate industry by China's major banks. The resulting crisis is unprecedented, and the solution is currently difficult to see.
The following is a partial summary of Cheng Xiaonong's interview with Voice of America.


The massive expansion of the real estate industry leads to major disasters, a product of the Great Leap Forward in the new era
Reporter: Evergrande was once very big. Xu Jiayin, the CEO of Evergrande, was once the richest person in the country, with a value of 290 billion yuan. Currently, Evergrande is insolvent and has a debt of 2.5 trillion yuan. In the past, some people in China said that someone was very rich and could be considered as a wealthy enemy. Now, Xu Jiayin or Evergrande can be considered as a debtor but an enemy. How did the astronomical debt of 2.5 trillion come about?
Cheng Xiaonong: I want to describe this debt as a result of a new type of Great Leap Forward. People of our age may know to some extent that the Great Leap Forward was a movement launched during the Mao Zedong era to break through the production of tens of thousands of tons of steel and tens of thousands of tons of grain; Launching such a ridiculous Great Leap Forward, then disregarding costs and fabricating a large number, and then piling up a task that seemed to achieve its goal on the surface, what was the result? Bringing endless disasters, including starving 30 million people.
Why do I call the big foam of real estate the Great Leap Forward? It is related to the question you asked. In fact, the real estate foam was born out of China's financial system. That is to say, it has accomplices, and the accomplice is the bank.
Of course, it can't be said that banks do this just to create foam, but that banks are greedy and simple minded, and their risk awareness is seriously insufficient. In fact, the so-called 'debt can be hostile to the country' means that real estate companies rely on banks for huge debts.
So, how come banks grow beans? Do you think banks want to make money through real estate loans, but as a result, they make a profit and take the bank in on their own. Banks have relaxed strict scrutiny and regulation of loans, which means they want to make a profit from it. The result is that like the Great Leap Forward, almost all provinces and cities have formed nationwide, except perhaps Xizang, where such Evergrande style real estate companies will basically appear.
The real estate industry has encountered major problems, where have the government regulatory authorities gone
Reporter: Why can Evergrande achieve debt to the enemy and become a time bomb for China's economy? In other words, why have so many regulatory authorities in the Chinese government been giving companies like Evergrande a green light over the years, ultimately leading to the current difficult situation to handle?
Cheng Xiaonong: In fact, in terms of real estate control, the central government is the last to fail to check. It was the local government that first pushed the expansion of the real estate foam. Of course, it started in Guangdong. The local government in Guangdong first learned from Hong Kong people, and then began to realize that all of our land in China is publicly owned, and the government can sell any land it wants, and it can be forcefully expropriated. So in the last few moments of the last century, China's forced demolition became a common trend. Why do local governments want to sell the best land in every place and city to real estate companies first? Because the government sells land as an important source of government revenue. This is called off balance sheet income, which is not nominal normal fiscal revenue, but rather revenue from land sales. This is the so-called government's second budget, but sometimes the second budget can be so large that it generates even more revenue than the first budget, which is tax revenue.
Why is the government so aggressive? That's because you can handle it from top to bottom. Anyone who touches it can take a piece from it. People who take money, for example, are engaged in real estate development. In almost every city in China, there is a local financing platform, or a local investment company, which is actually a white glove for the government to sell land to real estate companies. These white gloves take benefits from banks in the process of promoting the real estate foam, and also take bribes from real estate agents.
These people are not just for free. Someone will be in charge of them above. Because you have meat to eat, you cannot eat it alone. So, these urban real estate investment companies, also known as urban investment companies, also have to go up in filial piety, just like this all the way up. You see that these anti-corruption films in China introduce situations that go to a city, from the party secretary to the mayor, where you have to at least deal with some major people. The so-called flattening is giving money.
This is also why Chinese officials suddenly posted. You see, the current level of wealth among Chinese officials is definitely not saved up through salary savings. Ghosts don't believe it.
Who benefits the most in the beautiful days of the real estate industry
Reporter: Evergrande and a series of thousands of real estate companies in China, including large, small, and medium-sized enterprises, have once enjoyed unlimited prosperity. In these days of unlimited prosperity, who in China has benefited the most from them?
Cheng Xiaonong: I think the accuracy depends on your status. You are the big boss of a real estate company, and of course you make the most profits. Xu Jiayin, Country Garden, and other companies that are bosses have certainly made the most profits. And the middle level of real estate companies is also the same.
And then what? Do government officials have to be powerful to reap benefits? That's not necessarily true. Because the concept of power depends on what level it is. Of course, when you say in Beijing, those at the central level are called dignitaries. People in Beijing no longer call the officials in the local counties powerful. What are they? But a county magistrate couldn't do well in the local market. With a stomp of his foot, the entire county town trembled. But when we arrive in Beijing, what are they. But in a local county, its nobles are the county officials and officials of the county government and committee.
There are over 2000 counties in China, and most of them have real estate development. Therefore, many local officials also collude with corresponding local real estate companies at their corresponding levels to obtain money from them. Although the county magistrate is not considered a powerful figure, in reality, they are just small powerful figures in the local area.
The Crisis of Real Estate Companies and the Overall Economic Crisis in China
Reporter: What kind of losses will the Chinese government and domestic and foreign investors suffer from the collapse or equivalent collapse of large-scale real estate such as Evergrande and Country Garden, or other large, small, and medium-sized real estate?
Cheng Xiaonong: Let me first queue up based on the size of the loss. The biggest loss is that when the real estate company reaches a certain level, it starts to issue US dollar bonds to overseas investors through Hong Kong. That is to say, with its company's reputation as a guarantee, and even a Chinese bank as a guarantee. I borrowed a sum of money from you in the form of a bond for a period of 10 to 5 years. You buy my bonds and lend me the money.
So what number is this? It may be around $400 to $500 billion. Now, led by Evergrande, a series of real estate companies behind Country Garden and Evergrande are basically unable to repay their debts, which means that $400 to $500 billion has gone bankrupt. Wall Street is very anxious about this matter.
For the Chinese government, there may be narrow-minded officials who say, 'It's okay, that's American money. If you lose, you lose. What can he do?'? That's right, it's possible that Wall Street has suffered losses and can only swallow them. But what losses does this really cause to the Chinese government? The result is a huge loss of international reputation.
So, this is the biggest loss to the international financial credibility of the Chinese government. The result of more than 40 years of reform and opening up has been that the Chinese government has built up its international financial reputation and ruined it once again. This is the biggest loss,
The second major loss is the main banks referred to by the Chinese government, namely the major national banks, which are the four major banks mentioned earlier, including Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, and Bank of China Communications, among others. These major banks also have a large amount of debt owed by real estate companies, namely loans. The real estate company has collapsed, and these loans are also a huge amount, possibly worth billions, which cannot be paid back.
The money in the bank was not created by the bank itself, it was piled up from the savings of ordinary people. So in reality, it is becoming money owed to the people by the government and major banks in China.
What is the key issue now? It's government credit. The credit of the Chinese government has not yet collapsed in China, so that the people do not believe me. The money stored in the best banks in China has since disappeared. Once that situation is formed and everyone runs, the Chinese government will not be able to play around.
Of course, I'm not saying that the government has collapsed, but rather that the government has to come up with various ways to coax the people into saying, 'Your money has not been lost, and the party and government promise to give it to you sooner or later.'. As for which day it will be, it will never be clear. Because there wasn't that day.
As for the third largest loss, the Chinese government's losses are indirect. The real estate company still owes a lot to its upstream companies, such as real estate design companies, construction companies and decoration companies, as well as raw material companies, which provide building materials, building metals, and so on.
This series of companies have trillions of dollars in debt, called corporate bonds. The so-called corporate bills actually refer to the bills owed by real estate companies to them, as well as the signatures and blank notes. Originally, this note was written to say that I owe you billions or more. In principle, there is no fixed date for repayment, or else there will be additional interest for payment. Why not? It is based on mutual trust between enterprises.
But once this type of commercial paper is not available due to the imminent bankruptcy of a real estate company, a large number of its upstream companies will be heavily implicated. For example, the cement industry is currently undergoing large-scale layoffs and production reductions. Why? If the real estate company falls down, the cement account it owes will certainly not be repaid, and the cement company will be finished.
At the same time, real estate companies still owe a lot of money directly to the people. They have attracted many people who are greedy for high interest rates through financial products and other means, and have saved their money. Now that this money is gone, the people will also suffer considerable losses. The only thing the Chinese government can do now is to press the law not to allow ordinary people to pursue debts. If you lose, you lose, and if you lose, you lose.
The real estate crisis has blown China's past 30 years of prosperity back to its prototype
Reporter: With China's current political and economic system, can we avoid or eliminate the formation of time bombs like Evergrande or the real estate industry in the future?
Cheng Xiaonong: I don't think there's a need to consider the formation of the next time bomb. China can't bear this time bomb, and it may blow China apart. After it rots, there is no need to form a second time bomb, this one is enough.
Now we are talking about the extremely low employment rate of Chinese university graduates, and most young people are lying flat in the city and have no hope for the future. Some even joked that I have no hope myself, just hope they have no hope either. Chinese people understand at first glance that they refer to the top. Now people have become this mindset. In this situation, China's economy, people's livelihoods, and the future of the Chinese people have actually been lost in it.
What are we waiting for now in this situation? What will happen when that time bomb really explodes. I don't talk about the tragedy, just talk about what it was blown up into. I think you can actually tell by staring at the bank. All bombs, in fact, are not one, they are countless in countless banks, and each bank has its own bomb. The only thing I don't know is, how long is the detonation time set by your timer? I don't know Short ones may explode in two years, while long ones may take three, four, or five years. And it's chain like. This explosion will trigger another one. So, from this perspective, I think there's no need to consider forming a new time bomb, which would be too unbearable. That's enough for it. It can be said that it will blow back the prosperity of China over the past 30 years.