September 22, 2021

After years of pretending the Chinese Communist Party (CCP) was immune to market forces, there is a serious possibility of a Chinese “Lehman Brothers moment” – a major financial bankruptcy potentially triggering a cascade of defaults — creating an economic hard landing.  If giant real estate developer Evergrande does default on its $300 billion debt, then there is a real possibility of China experiencing its first severe recession in over 30 years.  This dangerous possibility is happening just one year after the CCP’s mismanagement caused a worldwide pandemic and will likely further degrade the CCP’s political standing. 

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So, what options are available to the CCP and how will this impact Xi Jinping’s ambitions?

A realistic assessment requires an understanding of both the CCP’s current standing and motivation as well as an evaluation of how previous economic disasters have impacted totalitarian states.  Despite some projections, a single major economic setback is unlikely to dislodge the CCP from power.  Crisis events in Venezuela, Cuba, Iran, and even Maoist China, demonstrate dictatorships are very resilient to being overthrown from within. 

The next consideration is the acknowledgment that the motivation of the CCP is not wealth and prosperity for China but the continued acquisition of wealth and power for the Party itself.  When one accepts that the CCP uses China like it uses everything else as a tool for power, then one will understand how the CCP will likely react in the wake of a major economic shock.

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Since Deng Xiaoping’s era, the CCP became more flexible in both ideology and management — as a means to strengthen its control, not to liberalize the country.  True liberalization would benefit China but at the cost of the CCP’s power, which is an intolerable concept to the Party’s inner circle. 

The Party’s greedy desire to prioritize itself over the nation it controls vividly showed itself during the Tiananmen Square Massacre in 1989.  The student demonstrations scared the regime enough to stop all further political reforms that started in the early 1980s and never resumed. This means that the CCP is more likely to prefer the choice of ruling over a weaker China with diminished global status than fixing China’s economy at the cost of diminishing the Party’s power.  The oft-quoted John Milton statement of “Better to reign in Hell than serve in Heaven” is the perfect motto for the Politburo Standing Committee. 

So, what will likely happen in China if Evergrande triggers a default cascade resulting in a 2008 style crisis?  The CCP already gave some indications before the Evergrande revelations.  First, President Xi Jinping announced new restrictions for private tutoring in the name of wealth redistribution, which is a fancy way of justifying a state power grab of the private education industry.  Next, Xi decried the excess profits and rogue behavior of China’s technology and IT sectors.  He then instituted more state controls under the guise of creating more social equity.  Xi then focused on more control over social activities such as playing video games or dictating social portrayals in media.  These actions are all efforts to re-centralize more state control over key sectors that could threaten the CCP’s grip on China.