Evergrande Shows the Risks Lurking in China’s Drive for ‘Common Prosperity’

(Bloomberg Businessweek) -- In the past few months, China has been pushing for “common prosperity,” which means reducing income inequality and reining in billionaires. Instead of shareholder capitalism, China is talking up stakeholder capitalism, where customers, employees, and even local governments have a say in how companies do business and distribute their earnings.

Before President Xi Jinping woke the nation to its socialist roots, one billionaire was already talking about and acting on them. That man was Hui Ka Yan, founder of China Evergrande Group—the world’s most indebted real estate developer, now on the brink of collapse. Hui, a party member for more than 35 years, used the “common prosperity” slogan in a 2018 speech. For years he was ranked as China’s most charitable person, donating billions of dollars to good causes such as medical research.

When Evergrande was starved for cash, it wanted its employees to become stakeholders, too. Earlier this year it nudged them to give it a short-term loan or risk forfeiting their bonuses. Now hundreds of workers have joined panicked homebuyers to demand their money back.

China’s real estate business always had a bit of stakeholder capitalism. To buy land, developers often borrow from trust companies, which in turn ask senior management responsible for that project to become investors in these trust products. Construction and mortgage loans from the banks come only much later. Only five years ago, trust products that invested in Evergrande’s projects could offer 30% annual yield, according to local reports at the time.

But as Evergrande grew bigger and became more financially stretched, co-investing trickled down to mid-management and eventually to lower-tier worker bees. Financial terms got worse, too. Wealth management products that Evergrande sold were offering only 5% to 10% yields. In addition, these products aren’t necessarily tied to the housing project the employee works at, which means she really has no idea about the quality of the investment her money went to.

In a debt restructuring, a company can still operate normally. While creditors and shareholders haggle, employees can still lead a normal existence, as long as they get paid and not laid off. Evergrande’s strong-arm nudge changed their lives. Now they’re also creditors, who are stacked against powerful banks and have no idea where they are in the pecking order. No wonder some went into the streets to protest.

Proponents of common prosperity say that a business needs to share some profit with its workers. That’s noble. But China’s policymakers also need to be mindful of a corporate culture that’s addicted to debt. Evergrande has borrowed from everyone—its customers, employees, and suppliers. Common prosperity can turn into shared poverty very quickly.
 
Ren is a columnist for Bloomberg Opinion.
 
Read more: Evergrande Debt Crisis Is Financial Stress Test No One Wanted

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