China’s Real Estate Crisis

Background

For several decades, the Chinese real estate market has grown exponentially, so much so that a housing market bubble has formed. This bubble deflated in 2012 because of the government’s actions to reduce demand and speculative investing. The slowdown in home sales was partially to blame for China’s economic slowdown that year.

Ten years later, Evergrande, the second largest property developer in China, defaulted on $300 billion of debt. This was the start of a crisis in which other major property developers were affected by the tightening of regulations on debt limits. The demand for housing was extremely high before the crisis due to cultural ideologies and the desire for investments in real estate. People bought houses with the belief that the booming market would allow them to make a profit off the rising prices. However, the COVID-19 pandemic slowed down demand and building which sparked the ongoing real estate crisis.

Ongoing Crisis

China’s real estate market is currently in a massive crisis due to many people being unwilling to pay off their mortgages. This is because many people have put their life savings into their homes and have been paying rent and mortgages even though their home has not been finished yet. Most homes in China are sold before they are built, which generates cash flow for the developer. Developers use this cash flow to buy more land so that they can sell unbuilt houses which creates this unsustainable debt cycle. But because people are not paying their mortgages on unfinished properties, the banks end up having to eat the costs because they cannot repose the home as an asset and sell it.

Most banks use a fractional reserve banking system which means that the banks loan most of their deposits out and only keep a fraction of money in reserve. This leaves the banks vulnerable to a bank run, which is why banks are currently limiting withdrawals which decreases consumer trust. People are angered over their frozen bank deposits, which have sparked protests around the country. In response, the CCP has ordered tanks and police to squash these protests while simultaneously censoring the news. The CCP has been criticized for not regulating these real estate companies’ spending as the companies overleveraged themselves and relied on debt for growth. 

CCP Response and Economic Implications

All of this has caused a loss of confidence in the Chinese property market, which affects future investments in the industry. Chinese real estate companies have been involved in risky business practices as they use their cash flow to lease more land instead of building properties. The real estate market is dangerously overleveraged, which means that it has borrowed too much money that it cannot repay. This is why the CCP has already injected cash into saving companies such as Evergrande and is considering injecting more cash into the sector.

The ongoing crisis may be the worst since the 2008 financial crisis and comparisons are already being made to the collapse of the housing market of that year. Back then, banks were seen as too big to fail, but once Lehman Brothers (a large investment bank) went under, the US government was forced to bailout other banks as the consequences would have been detrimental if no action was taken. Now, the Chinese economy is at risk here because the real estate industry makes up 30% of its GDP. The sector has been crucial to the economy since 1990 when restrictions were lifted on private sales. With globalization linking the economies of countries throughout the world, China’s economic collapse would spell trouble for nearly every country as it is the largest exporter of goods in the world. That being said, the news of this recession has not gathered much attention as the CCP  has censored most information. Fearing for their position in power, top leaders pray that the house of cards does not collapse in hopes that this crisis will resolve before a recession hits. Is this the decade that the CCP will fall?