Welcome to Foreign Policy’s China Brief.
The highlights this week: Two former executives from property giant China Evergrande Group are detained by Chinese authorities, a renowned Uyghur scholar who was disappeared in 2017 is imprisoned for life, and some dialogue resumes between the United States and China.
This week, Caixin reported that the former CEO and CFO of crisis-stricken property giant China Evergrande Group were detained by Chinese authorities; Xia Haijun and Pan Darong both resigned last year amid connections to a finance scandal. Their arrests follow detentions of staff from subsidiary Evergrande Wealth Management, and together they indicate that it remains a very risky time for China’s property sector—and for the bankers and officials tangled up in it.
Evergrande seems to be lined up for a potential liquidation, with other property developers also on the chopping block. The firm faces many creditors, both at home and abroad, who are growing impatient with the lack of a new debt plan and fear the firm’s restructuring efforts are doomed. An Evergrande subsidiary missed a $547 million bond payment on Monday, while the firm said slow sales meant a previous restructuring plan would have to be abandoned. The company’s shares dropped by a further 19.1 percent on the news.
Evergrande wasn’t alone: Overall property developer shares fell by 7.1 percent on Monday. A brief August bounce from favorable government policies toward the sector hasn’t led to any real recovery, especially with public confidence in China’s economy so low. House prices continue to fall even as they are being artificially propped up by local governments setting price floors out of fear that a property market collapse would cause public panic. Sales are flatlining, causing shudders throughout the economy.
Chinese officials need people to blame—or else risk taking the fall themselves. Because the property sector, banking system, and local government debt are so interconnected, the stakes are high. For years before the current crisis, local governments sold land as a main source of revenue, making up between 20 percent and 30 percent of their funding. Real estate developers bought it, mostly on credit from banks that expected easy returns; Chinese investors saw property as a safe bet. The local governments also ran up debt premised on future sales.
Everyone involved in this system was also personally connected: Developers, bankers, and government officials wined and dined together. There was corruption at every stage, from direct bribes to sweetheart deals. It even crossed over into the world of organized crime. China’s property sector makes up as much as 30 percent of China’s GDP. This didn’t just come from families investing in homes; many companies with spare cash put it into real estate instead of reinvesting in their own sectors because the returns were so high.
As the sector crumbles, the government needs scapegoats. So far, the authorities have mostly targeted real estate executives and banking officials. In the last week, there has been a swath of arrests of provincial bankers as well as targeting of former high-level bankers; this week, a senior banker from Nomura Holdings who formerly held a state banking job was forbidden from leaving the country. These moves follow high-profile arrests in the tech banking sector over the summer.
However, it doesn’t seem likely that the fallout from the property sector meltdown can be contained. Those bankers and developers had government partners. There have been plenty of purges under Chinese President Xi Jinping already, but the scramble to not be blamed for the real estate crisis will get intense among local government officials, especially as Beijing tries to work out just how much was accumulated and how much money was stolen. These officials will start throwing each other to the wolves—and more people will end up in jail.
Uyghur scholar imprisoned for life. Uyghur folklorist Rahile Dawut, whose disappearance nearly six years ago was one of the first signs of China’s attempt to destroy the Uyghur intelligentsia, has been sentenced to life imprisonment for “endangering national security,” according to documents seen by the Dui Hua Foundation. At the time of her disappearance, Dawut, now 57, was an internationally renowned scholar; the news of her sentence has prompted outrage, including calls for universities who worked with her to reconsider their relations with Chinese institutions.
Like many of the Uyghur academics, professionals, and businesspeople who have disappeared, Dawut was once accepted by the Chinese Communist Party establishment, appearing in photo-ops with top party leaders. As a senior professor, she ran an institute dedicated to studying Uyghur culture, a subject once somewhat sheltered by China’s minority policy, which until the early 2000s attempted to preserve local languages and traditions, albeit within a Marxist-nationalist framework.
China has since adopted an assimilationist policy in which work on traditions not associated with the Han ethnic majority is considered dangerous, especially in areas where China has tenuous historical claims, such as Xinjiang and Tibet. Uyghur-language material produced by state-authorized scholars in the early 2000s is now used as cause for imprisoning their authors on charges of separatism and terrorism.
U.S.-China dialogue. The Biden administration’s repeated dispatch of senior figures to Beijing seems to be paying off—at least when it comes to getting China to talk more. The countries have established two new economic working groups, and it’s possible Xi will visit the United States for the first time since 2017. But there also seems to be some contention inside China about the moves, with security agencies warning against a visit by Xi.
There is certainly little sign that Beijing is willing to accept Washington’s still-growing security role in East Asia. Unsurprisingly, Chinese state media criticized new deals between the United States and Vietnam after U.S. President Joe Biden’s visit to the country this month. The Chinese Navy’s provocations around disputed islands near the Philippines have escalated, including using a water cannon against a Philippine ship and erecting barriers.
My sense is that economically minded officials in China are desperate to stanch the bleeding and ready to work with the United States to do so, but that security officials see that as conceding to the enemy. In general under Xi, security always wins.
Where’s Huawei’s new phone? Chinese media hailed Huawei’s new phone, the Mate 60 Pro, as a sign that the U.S. semiconductor restrictions blocking domestic Chinese producers from making 5G phones had failed. But after a major press conference was oddly light on details about the product, Chinese consumers have questions. It’s possible that the phone was made using multi-patterning techniques that slow down the production process, limiting availability and making costs higher.
Meanwhile, South Korea is lobbying hard to get U.S. chip restrictions clarified—fearing its own exports to China will get caught in the crossfire. Samsung and SK Hynix won a yearlong waiver from Washington, but it’s about to expire. The United States has been more successful than expected at getting allies such as the Netherlands and Japan on board with tech restrictions targeting China. But persuading other countries that they should sacrifice their own business to slow down Beijing is a tough sell.
De-risking speeds up. On the other hand, doing business inside China looks like an increasingly unattractive proposition for foreign firms. For now, they are mostly postponing investments, rather than reshoring, and China is doing its best to lure firms back in with more favorable policies. But concerns about the safety of both investments and personnel are growing.
The sensitivity of fields such as semiconductor manufacturing makes them especially risky and poses a dilemma for Beijing. It wants to attract foreign talent—even as the United States tries to restrict talent entering the Chinese market—but laws targeting foreigners and foreign entities are likely to put those who enter such sectors in danger.