A real estate market engulfed by greed

Xi’s China is taking over major private companies one after another. This is another logic driving the Country Garden crisis.

HAN WOO-DUKThe author is a senior reporter of the China Lab. In 1978, when Deng Xiaoping raised the banner of reform and opening, a young man from the rural region of Shunde, Guangdong Province, came to a city looking for a job. His name is Yang Guoqiang. He went around the construction sites, laying bricks and tiles.

The migrant worker started his own business in 1992, when Deng declared the second reform and opening. This is how China’s largest private real estate developer Country Garden was born.

Yang’s success is symbolized by the “345 model.” The company starts selling apartment units three months after the construction, finishes the sales in four months and uses the money to secure another plot and develop it within five months. It was once praised as the best business model.

It was possible because there was a “cartel of greed.” Local governments had to sell as many land rights as possible to secure tax revenue. Corrupt officials cut land prices and got apartments in return. Once sales began, speculators bought apartments with bank loans. Banks would lend 70 percent of the housing prices — in some cases, up to 90 percent. But there was nothing to worry about because the housing price would go up anyway.

Through the Covid-19 pandemic, the market cooled down. After the “three red lines” of financial health guidelines for developers were implemented in 2020, the myth of guaranteed success fell apart. As the money flow was cut off, the “345 model” no longer worked and drove the company into collapse.

Greed has no boundary. Country Garden CEO Yang Huiyan, second daughter of Yang Guoqiang, donated 20 percent of its stake in Country Garden Services — a subsidiary of Country Garden — to Guoqiang Public Welfare Foundation. The gift is 6.4 billion yuan ($874.3 million) in market value. The welfare foundation is a charity organization the Yang family runs in Hong Kong. In the market, there was a rumor that the family was diverting money from the failing company to launder funds.

President Xi Jinping has no intention of compromising moderately. He sent a message, “I will save the market from corruption and speculation, and the consumers should bear with me even if it is hard.” The banner of “common prosperity” is hoisted high.

What will happen to Country Garden? Let’s look at the case of Evergrande — the second-largest private property developer in China — which fell into crisis two years ago. Evergrande has to transfer its assets and development projects to the “big hand,” or the government, after exhausting its capacity to hold on.

Nationalization seems to be the next step. Xi’s rhetoric is “the state advances, the private sector retreats” when the market is in jeopardy. Xi’s China is taking over major private companies one after another. This is another logic driving the Country Garden crisis.