Tens of thousands of retail investors in China are currently fearing for their savings. They have put a lot of money into Evergrande’s asset products and are now wondering whether the state will intervene and save them or whether Evergrande will stop making its payments. Many are taking to the streets, some even taking their frustrations out directly on Evergrande’s founder. The disaster surrounding the real estate giant also threatens Xi Jinping’s CCP. The way Xi will resolve this crisis will help determine its future, analyzes Ning Wang.
China’s state subsidies continue to worry the German economy. Companies from the People’s Republic have caught up so much -not the least thanks to said subsidies – that they are now even competing with the highly advanced German export economy. But what can be done about the high state subsidies? Economic experts addressed this in the “Global China Conversations” series by the IfW Kiel. The conclusion: the EU’s investment agreement with China is not a “knight in shining armor”, the WTO is blocked, and additional trade instruments are risky, analyses Amelie Richter.
Johnny Erling devotes today’s column to the reconstruction of the Danwei system. These work units long served the CCP as their lowest level of administration. Until the economic reforms, they almost completely controlled the daily lives of the city populace. But now it seems like the Danwei are being resurrected. Even during the Covid pandemic, remnants of these work units controlled strict enforcement as a kind of overwatch. With high-tech and artificial intelligence, surveillance could return with renewed fervor.
Have a relaxing weekend!
Ms. Liu from Shanghai had been offered an interest rate of 7.5 percent by her bank consultant if she invested in Evergrande securities. She made the investment since few other financial products offer such high returns. Evergrande’s wealth management products are considered as good as “guaranteed”, as her bank called it – which also assured her that Evergrande’s financial products would “offer a steady return for conservative investors.”
Since it was made public that the property developer, which sells asset management products for small retail investors as well as bonds for major investors and banks, has been sitting on a mountain of debt of more than $300 billion, Ms. Liu has had many sleepless nights. “I have invested all my savings. It’s our retirement savings. We worked hard for it. Now it’s all gone,” she tells China.Table.
She is one of about 80,000 small investors who have invested their money in Evergrande’s financial products. Like Ms. Liu, Evergrande employees, their family members, friends, and acquaintances have invested in Evergrande Wealth Management products over the past five years: The equivalent of more than €13.3 billion has been invested. Evergrande’s wealth management branch is known throughout China for its real estate projects and enjoyed an excellent reputation due to the public presence of the real estate giant.
“It is difficult for Evergrande to make 40 billion yuan ($6.2 billion) of repayments at once for the wealth management products at this moment,” said Du Liang, managing director of Evergrande Wealth Management, according to business magazine Caixin. “Investors can expect returns as soon as Evergrande’s property projects are sold,” he added.
Evergrande Wealth Management went public with a plan on September 9th. The plan calls for investors to receive their money in cash within five years. But most of them rejected the plan, knowing that five years is a long time. They run the risk of not getting paid if Evergrande is dissolved since it is not “too big to fail” and bankruptcy is on the horizon (China.Table reported).
Most recently, investors were promised a choice of residential buildings, apartments, commercial properties, and parking lots as compensation. Evergrande promised to process the payment of non-cash assets in the second half of each month, according to the China Securities Journal, and to set up centralized registration and online housing selection. It was only at the end of September that Evergrande’s asset management executives were summoned by the authorities to gain access to financial records to assess the damage.
Evergrande’s founder Xu Jiayin had also publicly assured that Evergrande would meet its obligations to property owners, investors, partner companies, and financial institutes. In a letter to his employees on the occasion of the Chinese Mid-Autumn Festival, Xu tried to spread confidence. He said it was certain that the company would put “its darkest hour” behind it (China.Table reported). But that was just days before new rumors emerged that Beijing would likely drop the real estate developer.
About half of Evergrande’s debts are to suppliers and trading partners, customers, employees, and banks. But Evergrande has also received down payments from more than 1.5 million homebuyers for properties, some of which have not even been built yet. And homebuyers aren’t just worried about the completion of construction projects. They also fear that they will still have to repay the loans they took out to buy their property – even if they end up empty-handed.
Real estate is of enormous importance in China: About 90 percent of the population owns real estate, and “concrete gold” accounts for up to 70 percent of people’s total wealth in big cities. Currently, at least half of Evergrande’s 800 or so real estate projects are shelved. Many construction sites have been deserted for months. Around $200 billion have been spent by families as down payments for Evergrande apartments, Gabriel Felbermayr, President of the Kiel Institute for the World Economy, estimated on Deutschlandfunk radio. Protests have been going on for weeks. Many people are desperate and angry.
“I want my money back or I’ll jump,” threatened a woman held back by security guards from a glass railing at the headquarters of Evergrande’s Shenzhen office building. Around her, there is great turmoil. She is accompanied by other apartment buyers who have come to confront Evergrande executives after the problems went public.
A video of this scene spread on social media over the weekend when the country was in holiday mode to celebrate the Moon Festival with their families. It’s actually a time of peace – but this year, police officers are guarding Evergrande offices across the country. They fear riots and protests. In the southern Chinese city of Chongching, for example, thousands of people took to the streets just last week to protest Evergrande. It’s not just investors, they are often suppliers or subcontractors waiting for Evergrande to pay their bills or salaries. The videos and pictures on social media are not only putting pressure on Evergrande.
The extent of the anger of people who have invested their money in Evergrande – whether in apartments or asset management products – becomes apparent in a video in which a woman savagely insults Evergrande founder Xu Jiayin at a creditors’ meeting. She yells at the billionaire Xu in front of everyone present asking how he managed to get himself into such debt and why he gambled so irresponsibly with people’s money while hitting the conference table with her hand – a gesture usually only customary for company leaders.
It is more an expression of desperation than a threatening gesture. Many retail investors who invested in Evergrande have been waiting in vain for months for interest payments. Payments they relied on when making their investments and that is needed in their everyday life.
But pressure is also mounting on the central government in Beijing. Its citizens want a strong state that protects them. This worked well during Covid, despite some harsh restrictions. The people reward these measures to protect them with high approval ratings. But when the chips are down, the capacity for pain and patience is not far behind. The public message by the party is clear: Even the biggest players in the Chinese economy are not too big to fail. They, too, must bow to Beijing’s directives. Most recently, the Chinese government demonstrated this in its tech sector with big names like Alibaba, DiDi, and Tencent (China.Table reported).
However, if it chooses to carry out this conflict on the backs of retail investors, it is taking a huge risk. It hits the population where it hurts the most – the wallet. And that’s where the fun stops. The Communist Party still derives the majority of its legitimacy from the fact that it has lifted millions of Chinese out of poverty.
A narrative that even state and party leader Xi Jinping never tires to bring up time and time again. It’s hard to imagine what would happen if the CCP would leave thousands of retail investors out in the cold, depriving them of their retirement funds, their financial nest eggs, or their condos. There have been minor events in the past that have thrown the party into turmoil. But Xi Jinping’s stakes are higher. His future depends on how he resolves this conflict.
Most recently, analysts even spoke of the possibility that Evergrande’s financial products were a Ponzi scheme. This is likely to lead to even more outrage.
The first Chinese freighter to arrive and moor at Hamburg’s Tollerort terminal in 1982 was called Fenhe 01. It was 170 meters long, had a capacity of about 1,200 standard containers (TEU) and two shipboard cranes. By today’s standards, the ship is a raft: Tollerort now also handles even the largest container ships, with a capacity of over 22,000 standard containers. And ships from China are no longer a rare sight: Container Terminal Tollerort’s (CTT) biggest client is the Chinese shipping company China Ocean Shipping Company or Cosco for short.
Cosco and the operator of the CTT, Hamburger Hafen Logistik AG, or HHLA for short, therefore decided on closer ties. The Chinese group’s terminal division, Cosco Shipping Ports Limited (CSPL), which is listed on the Hong Kong stock exchange, will thus acquire a minority stake of 35 percent in CTT. Tollerort will thus become the so-called “preferred hub” of Cosco in Europe, where all cargo shipping will be focused, HHLA announced. CSPL boss Zhang Dayu called Tollerort “an important logistical pillar in Europe” with “very good development prospects for the future”.
Tollerort is one of HHLA’s three container terminals in the Port of Hamburg. The facility has four berths and 14 container gantry cranes and is connected by five tracks for onward transport to the countryside. In terms of growing rail traffic, networking with China is also in the interests of Hamburg, which certainly considers itself part of the New Silk Road. Upon request, the economic authority reports new Silk Road container train connections in the first half of 2021, for example from Hamburg to Shijiazhuang in Hebei and Wuwei in Gansu. “On almost every weekday, cargo from Xi’an reaches the port terminals,” the authority said. There is also a direct connection to Zhengzhou, the capital of Henan.
In any case, all involved in the Hanseatic city see the Cosco deal as solidifying Hamburg’s role as a central European hub for Chinese commodity traffic. The usual criticism of investments by Chinese state-owned companies does not apply in the Hanseatic city. Hamburg’s First Mayor Peter Tschentscher already expressed his support for Cosco’s entry in July. Hamburg has a strong interest in ensuring that its port continues to participate in Europe’s trade with China in the future, the economic authority told China.Table. The Tollerort entry was also a “strong commitment to Hamburg” by Cosco, which also has its European headquarters in the Hanseatic city. Only trade union Ver.di expressed concern about working conditions and a growing “influence of shipowners on local logistics conditions” resulting from such stakes (China.Table reported).
The strategic goal of this cooperation is to bind Cosco to Hamburg in the long run in an environment of growing competition among European ports, HHLA spokesman Hans-Jörg Heims told China.Table. The battle for cargo is said to have grown significantly in recent years. “The cooperation will ensure that future growing cargo flows from China will continue to be routed via a German port and that jobs in the Port of Hamburg will be secured at HHLA,” Heims said. For HHLA, the deal means more planning security.
HHLA’s supervisory board has already approved Cosco’s entry. Now, according to HHLA, “various approvals under competition- and foreign trade law” are still required. According to the economic authority, these include the reviews of the investment under the Foreign Trade and Payments Act, as well as approval from the Federal Cartel Office and Chinese authorities.
China is Germany’s most important trading partner, and thus also Hamburg’s. According to its economic authority, one in three containers handled in Hamburg originates in or is destined for China. In the first half of 2021, the Port of Hamburg’s seaborne cargo throughput – i.e. not coming in from the countryside – with China increased by 14.2 percent to just under 1.3 million TEU, despite cargo ship congestion. This was more than four times as many as the Number 2, the US, with 0.3 million TEU. According to Hafen Hamburg Marketing, all major terminals in Hamburg handle ships from China – including its heavy, bulk, and general cargo terminals. All major shipping companies offering Far East services call at Hamburg, according to the report, with a total of around a dozen liner services. In addition to Cosco Shipping, these include Hamburg Sued, Hapag-Lloyd, Maersk, OOCL, Evergreen, CMA CGM, Yang Ming, and others.
Hamburg, however, is not the first port that receives Chinese capital. Cosco and its partner company China Merchants have already invested in 14 European ports. These include majority stakes in Valencia and Bilbao, as well as shares in the North Range ports of Rotterdam, Antwerp, and Zeebrugge. The so-called North Range, which consists of important continental European ports at the North Sea, handles about 80% of European imports and exports. However, China’s most important project in Europe is the Greek port of Piraeus near Athens (China.Table reported). Here, Cosco received an operating license for two quays in 2008. In 2016, the company took over the majority of shares in the entire harbor – and has since expanded it massively. Between 2008 and 2020, container throughput in Piraeus increased thirteenfold; the once ailing port now ranks fourth in Europe in terms of cargo throughput – behind Rotterdam, Antwerp, and Hamburg, and even ahead of Bremerhaven.
In Germany, Tollerort is now the second Chinese project. In Wilhelmshaven, Germany’s only deep-sea port, China Logistics signed a leasehold contract for 20 hectares in the Jade-Weser-Port Wilhelmshaven freight center to build a logistics center called “China Logistics-Wilhelmshaven Hub”. However, construction was delayed by Covid. From Wilhelmshaven, the Ocean Alliance and 2M shipping associations serve China with container ships.
Brussels, meanwhile, is growing concerned about the increasing number of port holdings by Chinese companies in Europe. There has been criticism that Cosco’s entry into Piraeus has led to lower wages, higher rents, and discrimination against local providers. None of that is going to happen in Hamburg. According to the economic authority, this transaction will not affect existing wage agreements and works agreements. The concerns of the trade union Ver.di about working conditions in the future are unfounded, also says Heims of the HHLA: “To secure employment in the port in the future is the exact reason why we have sought cooperation with CSPL.” As the majority shareholder, HHLA retains executive control.
HHLA also sees Cosco’s involvement in Tollerort as the mere beginning of a long-term partnership. This should “have an impact beyond the Port of Hamburg”, says Heims. “With a growing mutual interest, both companies can also more effectively manage the logistics flows of goods from China through Europe by rail.” Which in turn, will further strengthen Hamburg’s role as a hub.
HHLA is also active overseas. It holds a majority stake in a multifunction terminal at the Italian seaport of Trieste, operates a multifunction terminal at the port of Muuga, near the Estonian capital Tallinn, and Ukraine’s largest container terminal in Odessa on the Black Sea. Cooperation with Cosco in Trieste or other ports in Europe is not planned, however, according to Heims.
China’s economic champions are conquering global markets: In 2020, for the first time, the Fortune 500 list featured more Chinese than US companies, and this trend continued in 2021. Chinese state-owned enterprises stand out in particular. The discussion Series on economic relations with China at the Kiel Institute for the World Economy (IfW) therefore asked: “China’s competition for European companies: Fair competition or illicit subsidization?” Economist Juergen Matthes and law professor Dietmar Baetge presented answers on Thursday.
Juergen Matthes, head of the International Economic Order and Business Cycle competence area at the Cologne Institute for Economic Research (IW), stressed that there was clear evidence that China was subsidizing its economy to a considerable extent. However, a lack of transparency on the Chinese side makes it difficult to grasp the range of subsidies, Matthes said. The state supports the entire value chain. The effects can also be seen in overcapacities that are sometimes created. They are extraordinarily large and lead to considerable distortions – not only in China but also on the global market, warned the economist, as the Western solar power industry has learned so painfully.
For Western companies, this is already reflected in increasing competitive pressure, according to a survey of more than 1,000 German companies conducted by the IW. Competitive pressure has great relevance, especially for companies with a high export share, Matthes explained. “In industrialized companies, competition is even a more pressing problem than protectionism.”
Matthes has already presented the results of his study in China.Table: China’s exports are increasingly penetrating key German economic sectors, such as mechanical and automotive engineering. This is confirmed by a look at market shares of the People’s Republic and Germany in EU imports between 2000 and 2019.
According to Matthes, China’s shares have risen very significantly here, while Germany’s shares have declined slightly since 2005. For sophisticated industrial product groups, in which Germany is more specialized, the contrast is somewhat more pronounced than in commodity trade as a whole. In addition, Chinese exports have shifted very clearly towards sophisticated industrial goods, according to Matthes.
However, the economic expert warns against hasty conclusions about causality. Whether the advance of the People’s Republic is the main reason for the moderate decline on the German side has not been examined. “However, there is a certain indication that China is increasingly closing in on us here,” Matthes said. Both the study and survey of companies should be considered as a representation of the state of current developments.
The conclusion of the respondents is clear, especially among export-focused companies: The problem of competitive pressure is increasing. In terms of Chinese competitive pressure, only around one-seventh of all companies surveyed responded that they considered the competition to be “rather large to very large”. “This is not surprising, however, as many companies are focused on the domestic market and are not internationally active,” Matthes writes in the study.
In the case of large companies with more than 250 employees or mainly manufacturing companies, the proportion is significantly higher, at just under a third of rather affected or very affected companies. The situation is similar for companies with an export share of more than 25 percent or with foreign production. “Obviously, the perceived competitive pressure is significantly greater when companies are active on the global market.”
Matthes and Dietmar Baetge, Professor of International Trade Law and Private Commercial Law at Wildau University of Applied Sciences, expect this development to increase in the coming years – because state-owned enterprises will continue to gain in importance under the “Made in China 2025” (MIC 25) strategy. The People’s Republic also maintains trade barriers.
Unfortunately, Baetge is convinced, that there is no easy way to readjust the competitive screws – because China’s main advantage is state capitalism. “And at a global trade level, each state is free to define its economic system.” However, organizations and mechanisms that could at least tangent to the problem are currently checkmated: The debate over the dispute settlement procedure of the World Trade Organization (WTO) has paralyzed the process. Apart from that, the WTO-China relationship is a complex one: “The WTO has no guidelines as far as a particular economic system is concerned,” says Baetge, and thus no leverage for state-owned enterprises exists. Moreover, there is no general competition policy for subsidy rules.
The investment agreement CAI by the European Union is also no “knight in shining armor”, says Baetge. “Many issues with the CAI remain unresolved.” The goal of creating a level playing field with the agreement has failed. The CAI is currently on hold anyway. According to Baetge, unilateral measures such as the anti-coercion instrument planned by the EU Commission are also not an ideal solution: “If we can enact unilateral measures, so can others.” Anti-dumping duties are now also said to be a highly political matter.
The two experts conclude: There is a lot of work that needs to be done on multiple fronts in order to stand up to the Chinese distortion of competition. On Baetge’s to-do list of recommendations for the WTO: renew the dispute settlement, reduce China’s advantage as a developing country, a comprehensive ban on subsidies and establish general competition rules. There could also be a focus on cooperation between the EU and the US, as was the case this week with the “EU-US Tech and Trade Council” (TTC) in Pittsburgh (China.Table reported).
However, both experts stressed that solutions must be found. Ultimately, it is the consumers who suffer from the increasing distortion of competition.
The next discussion in the series will take place on October 21, this time in English: 40 Years of Poverty Alleviation in China (TBC). Participants will include Martin Raiser, China Director of the World Bank. Registration will be open from the beginning of October.
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After 1949, more than 90 percent of all urban residents in China belonged to a Danwei (单位 = work unit). It was considered the cornerstone of the socialist planned economy. Factories, government offices, residential areas, hospitals, schools, or universities were each a Danwei. It guaranteed for everyone who belonged to it not only a job for life but also a minimum level of medical care and all-around social provision.
The Danwei called itself “small but comprehensive” (小而全) and was responsible for everything, from getting an apartment to a spot in a daycare center. Its administration approved marriages or divorces. With China’s free-market reforms beginning in 1978, the Danwei lost its social and official powers. It once served as the party’s lowest administrative unit for political training, supervision, and grassroots mobilization. Beijing’s leadership now wants to revive this role as part of its re-ideologization of society.
When party leader Xi Jinping celebrated China’s victory over the COVID-19 pandemic in Beijing last September, he did not only praise himself and his CCP. He gave a number that made people sit up and take notice, saying that “more than four million people involved at the local level (社区工作者) kept watch day and night,” Xi was referring to the local neighborhood committees, remnants of the bygone Danwei of the planned economy.
Beijing had mobilized an army of neighborhood watchdogs in the city’s residential districts to ward off the infection. Equipped with special rights, the men and women locked down all entrances to buildings and houses for the ordered complete lockdown, controlled them day and night, and organized externally delivered supplies for the residents.
After their victory and the founding of the People’s Republic in 1949, China’s communists had established the so-called Danwei System in all cities. It was based on mutual property and Mao’s utopian socialist ideas of egalitarian distribution. The model for establishing Danwei in the cities of the People’s Republic was both the experience of administration in the revolutionary areas of Yan’an and the influences of traditional Confucian culture, which placed the individual in the collective extended family. As Zhou Yihu and Yang Xiaoming write in their standard work, The Chinese Danwei System (中国单位制度), the socialist Danwei only supervised urban residents. Therefore, it covered only 10 to 28 percent of all Chinese at a time when 80 percent of the population still lived as farmers in the countryside.
The book by the two sociologists, published in 1999, presented the Danwei “as a system in disintegration” two decades after the start of China’s economic reforms. The rise of the private sector and free travel allowed hundreds of millions of farmers to flock to the cities in search of work. Factories and institutes had rid themselves of all former Danwei baggage, such as the unproductive social welfare benefits. The Danwei no longer guaranteed lifetime employment. After 2003, it also lost all official functions. Chinese were released from their immaturity and were allowed to apply for passports, marry or divorce on their own – all without the written endorsement of a Danwei.
The state almost completely withdrew from its interference and control of the private lives of the Chinese, and the household name disappeared. Soon, all that remained of the former Danwei system were the neighborhood committees, which supervised neighborhoods and public order, and still helped to oversee the enforcement of the imposed one-child family policy.
Now, the relic of the planned economy seems to be on the rise again in China. Since CCP leader Xi took office, his party has been trying to revive parts of the old Danwei system and better embed it at a local level. In 2019, Beijing professor Zhou Wang allowed a neighborhood committee to recruit him as a “Danwei-Ren,” a new Danwei member. His task was to optimize the management of the neighborhood community.
Zhou, a CCP member himself, described in an essay for Caixin magazine, “Why China is dusting off its Danwei system?” that the Party wants to reassert more influence at a local level. “The return of the Danwei-Ren to community management is part of a broad initiative to intensify the reach of Party organizations over the local level,” he says, adding that the “Danwei-Rans” recruited for this purpose are called the “red blood cells of the state apparatus, carrying the Party’s will and interests like oxygen to the various local administrative bodies.” The “Danwei-Ren” formed “a large network and are a pool of resources that the Party can draw on.”
Party leader Xi, who is committed to the re-ideologization of China and absolute party rule, is also utilizing high-tech to institutionalize modern control systems that will enable him and his CCP to better monitor and mobilize the population. Since 2014, Beijing has been in the process of developing a social credit rating system through which the credit and trustworthiness of each Chinese, their family, and even any business enterprise or institution can be measured: lightning-fast and incomparably more efficient than the old Danwei administration ever was.
Beijing philosopher Zhao Tingyang warns in his book “On the Tianxia System” (All Under Heaven, Suhrkamp 2020) that humanity is in danger of globally and even voluntarily surrendering to a future “service dictatorship” and its control. “It is a completely new form of dictatorship.” Without specifically naming China or the Danwei system (but arguably alluding to them), he writes: Humanity is up to “some high-risk stuff” through “the marriage of biology, artificial intelligence, and social networks.”
Because technological systems “provide top and all-around service to everyone,” its beneficiaries accept that they “collect and monitor everyone’s information” and lead them into an “inextricable dependency.” People would “voluntarily allow themselves to be controlled because they need the total package of services provided by the technological system.”
China leads in these AI technologies. They provide the perfect setting for the re-launch of a Danwei System 2.0.
Online shopping with cat ears: An exhibitor sells her wares to fans via livestream at the International Cartoon and Animation Festival (CICAF) in Hangzhou. According to the organizers, the convention attracts visitors from around “50 countries and regions” every year. It was not known whether foreign cartoon fans attended the festival this year, given the strict Covid entry regulations.
Tens of thousands of retail investors in China are currently fearing for their savings. They have put a lot of money into Evergrande’s asset products and are now wondering whether the state will intervene and save them or whether Evergrande will stop making its payments. Many are taking to the streets, some even taking their frustrations out directly on Evergrande’s founder. The disaster surrounding the real estate giant also threatens Xi Jinping’s CCP. The way Xi will resolve this crisis will help determine its future, analyzes Ning Wang.
China’s state subsidies continue to worry the German economy. Companies from the People’s Republic have caught up so much -not the least thanks to said subsidies – that they are now even competing with the highly advanced German export economy. But what can be done about the high state subsidies? Economic experts addressed this in the “Global China Conversations” series by the IfW Kiel. The conclusion: the EU’s investment agreement with China is not a “knight in shining armor”, the WTO is blocked, and additional trade instruments are risky, analyses Amelie Richter.
Johnny Erling devotes today’s column to the reconstruction of the Danwei system. These work units long served the CCP as their lowest level of administration. Until the economic reforms, they almost completely controlled the daily lives of the city populace. But now it seems like the Danwei are being resurrected. Even during the Covid pandemic, remnants of these work units controlled strict enforcement as a kind of overwatch. With high-tech and artificial intelligence, surveillance could return with renewed fervor.
Have a relaxing weekend!
Ms. Liu from Shanghai had been offered an interest rate of 7.5 percent by her bank consultant if she invested in Evergrande securities. She made the investment since few other financial products offer such high returns. Evergrande’s wealth management products are considered as good as “guaranteed”, as her bank called it – which also assured her that Evergrande’s financial products would “offer a steady return for conservative investors.”
Since it was made public that the property developer, which sells asset management products for small retail investors as well as bonds for major investors and banks, has been sitting on a mountain of debt of more than $300 billion, Ms. Liu has had many sleepless nights. “I have invested all my savings. It’s our retirement savings. We worked hard for it. Now it’s all gone,” she tells China.Table.
She is one of about 80,000 small investors who have invested their money in Evergrande’s financial products. Like Ms. Liu, Evergrande employees, their family members, friends, and acquaintances have invested in Evergrande Wealth Management products over the past five years: The equivalent of more than €13.3 billion has been invested. Evergrande’s wealth management branch is known throughout China for its real estate projects and enjoyed an excellent reputation due to the public presence of the real estate giant.
“It is difficult for Evergrande to make 40 billion yuan ($6.2 billion) of repayments at once for the wealth management products at this moment,” said Du Liang, managing director of Evergrande Wealth Management, according to business magazine Caixin. “Investors can expect returns as soon as Evergrande’s property projects are sold,” he added.
Evergrande Wealth Management went public with a plan on September 9th. The plan calls for investors to receive their money in cash within five years. But most of them rejected the plan, knowing that five years is a long time. They run the risk of not getting paid if Evergrande is dissolved since it is not “too big to fail” and bankruptcy is on the horizon (China.Table reported).
Most recently, investors were promised a choice of residential buildings, apartments, commercial properties, and parking lots as compensation. Evergrande promised to process the payment of non-cash assets in the second half of each month, according to the China Securities Journal, and to set up centralized registration and online housing selection. It was only at the end of September that Evergrande’s asset management executives were summoned by the authorities to gain access to financial records to assess the damage.
Evergrande’s founder Xu Jiayin had also publicly assured that Evergrande would meet its obligations to property owners, investors, partner companies, and financial institutes. In a letter to his employees on the occasion of the Chinese Mid-Autumn Festival, Xu tried to spread confidence. He said it was certain that the company would put “its darkest hour” behind it (China.Table reported). But that was just days before new rumors emerged that Beijing would likely drop the real estate developer.
About half of Evergrande’s debts are to suppliers and trading partners, customers, employees, and banks. But Evergrande has also received down payments from more than 1.5 million homebuyers for properties, some of which have not even been built yet. And homebuyers aren’t just worried about the completion of construction projects. They also fear that they will still have to repay the loans they took out to buy their property – even if they end up empty-handed.
Real estate is of enormous importance in China: About 90 percent of the population owns real estate, and “concrete gold” accounts for up to 70 percent of people’s total wealth in big cities. Currently, at least half of Evergrande’s 800 or so real estate projects are shelved. Many construction sites have been deserted for months. Around $200 billion have been spent by families as down payments for Evergrande apartments, Gabriel Felbermayr, President of the Kiel Institute for the World Economy, estimated on Deutschlandfunk radio. Protests have been going on for weeks. Many people are desperate and angry.
“I want my money back or I’ll jump,” threatened a woman held back by security guards from a glass railing at the headquarters of Evergrande’s Shenzhen office building. Around her, there is great turmoil. She is accompanied by other apartment buyers who have come to confront Evergrande executives after the problems went public.
A video of this scene spread on social media over the weekend when the country was in holiday mode to celebrate the Moon Festival with their families. It’s actually a time of peace – but this year, police officers are guarding Evergrande offices across the country. They fear riots and protests. In the southern Chinese city of Chongching, for example, thousands of people took to the streets just last week to protest Evergrande. It’s not just investors, they are often suppliers or subcontractors waiting for Evergrande to pay their bills or salaries. The videos and pictures on social media are not only putting pressure on Evergrande.
The extent of the anger of people who have invested their money in Evergrande – whether in apartments or asset management products – becomes apparent in a video in which a woman savagely insults Evergrande founder Xu Jiayin at a creditors’ meeting. She yells at the billionaire Xu in front of everyone present asking how he managed to get himself into such debt and why he gambled so irresponsibly with people’s money while hitting the conference table with her hand – a gesture usually only customary for company leaders.
It is more an expression of desperation than a threatening gesture. Many retail investors who invested in Evergrande have been waiting in vain for months for interest payments. Payments they relied on when making their investments and that is needed in their everyday life.
But pressure is also mounting on the central government in Beijing. Its citizens want a strong state that protects them. This worked well during Covid, despite some harsh restrictions. The people reward these measures to protect them with high approval ratings. But when the chips are down, the capacity for pain and patience is not far behind. The public message by the party is clear: Even the biggest players in the Chinese economy are not too big to fail. They, too, must bow to Beijing’s directives. Most recently, the Chinese government demonstrated this in its tech sector with big names like Alibaba, DiDi, and Tencent (China.Table reported).
However, if it chooses to carry out this conflict on the backs of retail investors, it is taking a huge risk. It hits the population where it hurts the most – the wallet. And that’s where the fun stops. The Communist Party still derives the majority of its legitimacy from the fact that it has lifted millions of Chinese out of poverty.
A narrative that even state and party leader Xi Jinping never tires to bring up time and time again. It’s hard to imagine what would happen if the CCP would leave thousands of retail investors out in the cold, depriving them of their retirement funds, their financial nest eggs, or their condos. There have been minor events in the past that have thrown the party into turmoil. But Xi Jinping’s stakes are higher. His future depends on how he resolves this conflict.
Most recently, analysts even spoke of the possibility that Evergrande’s financial products were a Ponzi scheme. This is likely to lead to even more outrage.
The first Chinese freighter to arrive and moor at Hamburg’s Tollerort terminal in 1982 was called Fenhe 01. It was 170 meters long, had a capacity of about 1,200 standard containers (TEU) and two shipboard cranes. By today’s standards, the ship is a raft: Tollerort now also handles even the largest container ships, with a capacity of over 22,000 standard containers. And ships from China are no longer a rare sight: Container Terminal Tollerort’s (CTT) biggest client is the Chinese shipping company China Ocean Shipping Company or Cosco for short.
Cosco and the operator of the CTT, Hamburger Hafen Logistik AG, or HHLA for short, therefore decided on closer ties. The Chinese group’s terminal division, Cosco Shipping Ports Limited (CSPL), which is listed on the Hong Kong stock exchange, will thus acquire a minority stake of 35 percent in CTT. Tollerort will thus become the so-called “preferred hub” of Cosco in Europe, where all cargo shipping will be focused, HHLA announced. CSPL boss Zhang Dayu called Tollerort “an important logistical pillar in Europe” with “very good development prospects for the future”.
Tollerort is one of HHLA’s three container terminals in the Port of Hamburg. The facility has four berths and 14 container gantry cranes and is connected by five tracks for onward transport to the countryside. In terms of growing rail traffic, networking with China is also in the interests of Hamburg, which certainly considers itself part of the New Silk Road. Upon request, the economic authority reports new Silk Road container train connections in the first half of 2021, for example from Hamburg to Shijiazhuang in Hebei and Wuwei in Gansu. “On almost every weekday, cargo from Xi’an reaches the port terminals,” the authority said. There is also a direct connection to Zhengzhou, the capital of Henan.
In any case, all involved in the Hanseatic city see the Cosco deal as solidifying Hamburg’s role as a central European hub for Chinese commodity traffic. The usual criticism of investments by Chinese state-owned companies does not apply in the Hanseatic city. Hamburg’s First Mayor Peter Tschentscher already expressed his support for Cosco’s entry in July. Hamburg has a strong interest in ensuring that its port continues to participate in Europe’s trade with China in the future, the economic authority told China.Table. The Tollerort entry was also a “strong commitment to Hamburg” by Cosco, which also has its European headquarters in the Hanseatic city. Only trade union Ver.di expressed concern about working conditions and a growing “influence of shipowners on local logistics conditions” resulting from such stakes (China.Table reported).
The strategic goal of this cooperation is to bind Cosco to Hamburg in the long run in an environment of growing competition among European ports, HHLA spokesman Hans-Jörg Heims told China.Table. The battle for cargo is said to have grown significantly in recent years. “The cooperation will ensure that future growing cargo flows from China will continue to be routed via a German port and that jobs in the Port of Hamburg will be secured at HHLA,” Heims said. For HHLA, the deal means more planning security.
HHLA’s supervisory board has already approved Cosco’s entry. Now, according to HHLA, “various approvals under competition- and foreign trade law” are still required. According to the economic authority, these include the reviews of the investment under the Foreign Trade and Payments Act, as well as approval from the Federal Cartel Office and Chinese authorities.
China is Germany’s most important trading partner, and thus also Hamburg’s. According to its economic authority, one in three containers handled in Hamburg originates in or is destined for China. In the first half of 2021, the Port of Hamburg’s seaborne cargo throughput – i.e. not coming in from the countryside – with China increased by 14.2 percent to just under 1.3 million TEU, despite cargo ship congestion. This was more than four times as many as the Number 2, the US, with 0.3 million TEU. According to Hafen Hamburg Marketing, all major terminals in Hamburg handle ships from China – including its heavy, bulk, and general cargo terminals. All major shipping companies offering Far East services call at Hamburg, according to the report, with a total of around a dozen liner services. In addition to Cosco Shipping, these include Hamburg Sued, Hapag-Lloyd, Maersk, OOCL, Evergreen, CMA CGM, Yang Ming, and others.
Hamburg, however, is not the first port that receives Chinese capital. Cosco and its partner company China Merchants have already invested in 14 European ports. These include majority stakes in Valencia and Bilbao, as well as shares in the North Range ports of Rotterdam, Antwerp, and Zeebrugge. The so-called North Range, which consists of important continental European ports at the North Sea, handles about 80% of European imports and exports. However, China’s most important project in Europe is the Greek port of Piraeus near Athens (China.Table reported). Here, Cosco received an operating license for two quays in 2008. In 2016, the company took over the majority of shares in the entire harbor – and has since expanded it massively. Between 2008 and 2020, container throughput in Piraeus increased thirteenfold; the once ailing port now ranks fourth in Europe in terms of cargo throughput – behind Rotterdam, Antwerp, and Hamburg, and even ahead of Bremerhaven.
In Germany, Tollerort is now the second Chinese project. In Wilhelmshaven, Germany’s only deep-sea port, China Logistics signed a leasehold contract for 20 hectares in the Jade-Weser-Port Wilhelmshaven freight center to build a logistics center called “China Logistics-Wilhelmshaven Hub”. However, construction was delayed by Covid. From Wilhelmshaven, the Ocean Alliance and 2M shipping associations serve China with container ships.
Brussels, meanwhile, is growing concerned about the increasing number of port holdings by Chinese companies in Europe. There has been criticism that Cosco’s entry into Piraeus has led to lower wages, higher rents, and discrimination against local providers. None of that is going to happen in Hamburg. According to the economic authority, this transaction will not affect existing wage agreements and works agreements. The concerns of the trade union Ver.di about working conditions in the future are unfounded, also says Heims of the HHLA: “To secure employment in the port in the future is the exact reason why we have sought cooperation with CSPL.” As the majority shareholder, HHLA retains executive control.
HHLA also sees Cosco’s involvement in Tollerort as the mere beginning of a long-term partnership. This should “have an impact beyond the Port of Hamburg”, says Heims. “With a growing mutual interest, both companies can also more effectively manage the logistics flows of goods from China through Europe by rail.” Which in turn, will further strengthen Hamburg’s role as a hub.
HHLA is also active overseas. It holds a majority stake in a multifunction terminal at the Italian seaport of Trieste, operates a multifunction terminal at the port of Muuga, near the Estonian capital Tallinn, and Ukraine’s largest container terminal in Odessa on the Black Sea. Cooperation with Cosco in Trieste or other ports in Europe is not planned, however, according to Heims.
China’s economic champions are conquering global markets: In 2020, for the first time, the Fortune 500 list featured more Chinese than US companies, and this trend continued in 2021. Chinese state-owned enterprises stand out in particular. The discussion Series on economic relations with China at the Kiel Institute for the World Economy (IfW) therefore asked: “China’s competition for European companies: Fair competition or illicit subsidization?” Economist Juergen Matthes and law professor Dietmar Baetge presented answers on Thursday.
Juergen Matthes, head of the International Economic Order and Business Cycle competence area at the Cologne Institute for Economic Research (IW), stressed that there was clear evidence that China was subsidizing its economy to a considerable extent. However, a lack of transparency on the Chinese side makes it difficult to grasp the range of subsidies, Matthes said. The state supports the entire value chain. The effects can also be seen in overcapacities that are sometimes created. They are extraordinarily large and lead to considerable distortions – not only in China but also on the global market, warned the economist, as the Western solar power industry has learned so painfully.
For Western companies, this is already reflected in increasing competitive pressure, according to a survey of more than 1,000 German companies conducted by the IW. Competitive pressure has great relevance, especially for companies with a high export share, Matthes explained. “In industrialized companies, competition is even a more pressing problem than protectionism.”
Matthes has already presented the results of his study in China.Table: China’s exports are increasingly penetrating key German economic sectors, such as mechanical and automotive engineering. This is confirmed by a look at market shares of the People’s Republic and Germany in EU imports between 2000 and 2019.
According to Matthes, China’s shares have risen very significantly here, while Germany’s shares have declined slightly since 2005. For sophisticated industrial product groups, in which Germany is more specialized, the contrast is somewhat more pronounced than in commodity trade as a whole. In addition, Chinese exports have shifted very clearly towards sophisticated industrial goods, according to Matthes.
However, the economic expert warns against hasty conclusions about causality. Whether the advance of the People’s Republic is the main reason for the moderate decline on the German side has not been examined. “However, there is a certain indication that China is increasingly closing in on us here,” Matthes said. Both the study and survey of companies should be considered as a representation of the state of current developments.
The conclusion of the respondents is clear, especially among export-focused companies: The problem of competitive pressure is increasing. In terms of Chinese competitive pressure, only around one-seventh of all companies surveyed responded that they considered the competition to be “rather large to very large”. “This is not surprising, however, as many companies are focused on the domestic market and are not internationally active,” Matthes writes in the study.
In the case of large companies with more than 250 employees or mainly manufacturing companies, the proportion is significantly higher, at just under a third of rather affected or very affected companies. The situation is similar for companies with an export share of more than 25 percent or with foreign production. “Obviously, the perceived competitive pressure is significantly greater when companies are active on the global market.”
Matthes and Dietmar Baetge, Professor of International Trade Law and Private Commercial Law at Wildau University of Applied Sciences, expect this development to increase in the coming years – because state-owned enterprises will continue to gain in importance under the “Made in China 2025” (MIC 25) strategy. The People’s Republic also maintains trade barriers.
Unfortunately, Baetge is convinced, that there is no easy way to readjust the competitive screws – because China’s main advantage is state capitalism. “And at a global trade level, each state is free to define its economic system.” However, organizations and mechanisms that could at least tangent to the problem are currently checkmated: The debate over the dispute settlement procedure of the World Trade Organization (WTO) has paralyzed the process. Apart from that, the WTO-China relationship is a complex one: “The WTO has no guidelines as far as a particular economic system is concerned,” says Baetge, and thus no leverage for state-owned enterprises exists. Moreover, there is no general competition policy for subsidy rules.
The investment agreement CAI by the European Union is also no “knight in shining armor”, says Baetge. “Many issues with the CAI remain unresolved.” The goal of creating a level playing field with the agreement has failed. The CAI is currently on hold anyway. According to Baetge, unilateral measures such as the anti-coercion instrument planned by the EU Commission are also not an ideal solution: “If we can enact unilateral measures, so can others.” Anti-dumping duties are now also said to be a highly political matter.
The two experts conclude: There is a lot of work that needs to be done on multiple fronts in order to stand up to the Chinese distortion of competition. On Baetge’s to-do list of recommendations for the WTO: renew the dispute settlement, reduce China’s advantage as a developing country, a comprehensive ban on subsidies and establish general competition rules. There could also be a focus on cooperation between the EU and the US, as was the case this week with the “EU-US Tech and Trade Council” (TTC) in Pittsburgh (China.Table reported).
However, both experts stressed that solutions must be found. Ultimately, it is the consumers who suffer from the increasing distortion of competition.
The next discussion in the series will take place on October 21, this time in English: 40 Years of Poverty Alleviation in China (TBC). Participants will include Martin Raiser, China Director of the World Bank. Registration will be open from the beginning of October.
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After 1949, more than 90 percent of all urban residents in China belonged to a Danwei (单位 = work unit). It was considered the cornerstone of the socialist planned economy. Factories, government offices, residential areas, hospitals, schools, or universities were each a Danwei. It guaranteed for everyone who belonged to it not only a job for life but also a minimum level of medical care and all-around social provision.
The Danwei called itself “small but comprehensive” (小而全) and was responsible for everything, from getting an apartment to a spot in a daycare center. Its administration approved marriages or divorces. With China’s free-market reforms beginning in 1978, the Danwei lost its social and official powers. It once served as the party’s lowest administrative unit for political training, supervision, and grassroots mobilization. Beijing’s leadership now wants to revive this role as part of its re-ideologization of society.
When party leader Xi Jinping celebrated China’s victory over the COVID-19 pandemic in Beijing last September, he did not only praise himself and his CCP. He gave a number that made people sit up and take notice, saying that “more than four million people involved at the local level (社区工作者) kept watch day and night,” Xi was referring to the local neighborhood committees, remnants of the bygone Danwei of the planned economy.
Beijing had mobilized an army of neighborhood watchdogs in the city’s residential districts to ward off the infection. Equipped with special rights, the men and women locked down all entrances to buildings and houses for the ordered complete lockdown, controlled them day and night, and organized externally delivered supplies for the residents.
After their victory and the founding of the People’s Republic in 1949, China’s communists had established the so-called Danwei System in all cities. It was based on mutual property and Mao’s utopian socialist ideas of egalitarian distribution. The model for establishing Danwei in the cities of the People’s Republic was both the experience of administration in the revolutionary areas of Yan’an and the influences of traditional Confucian culture, which placed the individual in the collective extended family. As Zhou Yihu and Yang Xiaoming write in their standard work, The Chinese Danwei System (中国单位制度), the socialist Danwei only supervised urban residents. Therefore, it covered only 10 to 28 percent of all Chinese at a time when 80 percent of the population still lived as farmers in the countryside.
The book by the two sociologists, published in 1999, presented the Danwei “as a system in disintegration” two decades after the start of China’s economic reforms. The rise of the private sector and free travel allowed hundreds of millions of farmers to flock to the cities in search of work. Factories and institutes had rid themselves of all former Danwei baggage, such as the unproductive social welfare benefits. The Danwei no longer guaranteed lifetime employment. After 2003, it also lost all official functions. Chinese were released from their immaturity and were allowed to apply for passports, marry or divorce on their own – all without the written endorsement of a Danwei.
The state almost completely withdrew from its interference and control of the private lives of the Chinese, and the household name disappeared. Soon, all that remained of the former Danwei system were the neighborhood committees, which supervised neighborhoods and public order, and still helped to oversee the enforcement of the imposed one-child family policy.
Now, the relic of the planned economy seems to be on the rise again in China. Since CCP leader Xi took office, his party has been trying to revive parts of the old Danwei system and better embed it at a local level. In 2019, Beijing professor Zhou Wang allowed a neighborhood committee to recruit him as a “Danwei-Ren,” a new Danwei member. His task was to optimize the management of the neighborhood community.
Zhou, a CCP member himself, described in an essay for Caixin magazine, “Why China is dusting off its Danwei system?” that the Party wants to reassert more influence at a local level. “The return of the Danwei-Ren to community management is part of a broad initiative to intensify the reach of Party organizations over the local level,” he says, adding that the “Danwei-Rans” recruited for this purpose are called the “red blood cells of the state apparatus, carrying the Party’s will and interests like oxygen to the various local administrative bodies.” The “Danwei-Ren” formed “a large network and are a pool of resources that the Party can draw on.”
Party leader Xi, who is committed to the re-ideologization of China and absolute party rule, is also utilizing high-tech to institutionalize modern control systems that will enable him and his CCP to better monitor and mobilize the population. Since 2014, Beijing has been in the process of developing a social credit rating system through which the credit and trustworthiness of each Chinese, their family, and even any business enterprise or institution can be measured: lightning-fast and incomparably more efficient than the old Danwei administration ever was.
Beijing philosopher Zhao Tingyang warns in his book “On the Tianxia System” (All Under Heaven, Suhrkamp 2020) that humanity is in danger of globally and even voluntarily surrendering to a future “service dictatorship” and its control. “It is a completely new form of dictatorship.” Without specifically naming China or the Danwei system (but arguably alluding to them), he writes: Humanity is up to “some high-risk stuff” through “the marriage of biology, artificial intelligence, and social networks.”
Because technological systems “provide top and all-around service to everyone,” its beneficiaries accept that they “collect and monitor everyone’s information” and lead them into an “inextricable dependency.” People would “voluntarily allow themselves to be controlled because they need the total package of services provided by the technological system.”
China leads in these AI technologies. They provide the perfect setting for the re-launch of a Danwei System 2.0.
Online shopping with cat ears: An exhibitor sells her wares to fans via livestream at the International Cartoon and Animation Festival (CICAF) in Hangzhou. According to the organizers, the convention attracts visitors from around “50 countries and regions” every year. It was not known whether foreign cartoon fans attended the festival this year, given the strict Covid entry regulations.
