In 2020, the darling of bond investors was called Evergrande. Investors loved the debt of the Chinese real estate conglomerate. It was liquid, linked to one of the country’s largest companies, and allowed exposure to the world’s second-largest economy. It also signaled a major transition for China, symbolizing an era of accelerated growth that put it on track to eventually surpass the United States. The country would no longer be just a factory for the Western world; it would have its own consumer middle class. Evergrande embodied this dream.
For decades, real estate had been a fail-safe way to make money in the country, for homeowners, for builders who borrowed to construct projects to meet demand, and for local governments that financed themselves through it. In 2020, this bet clashed with President Xi Jinping’s determination to curb speculation. The government introduced a set of rules known as the “three red lines.”
Since then, China has conducted one of the most extensive economic experiments since its opening in the 1980s under Deng Xiaoping. Several dozen developers defaulted on their debts, leaving hundreds of unfinished projects and even triggering a wave of mortgage repayment boycotts by owners protesting incomplete construction. In China, it’s common for buyers to pay for units before they are completed and then hope to receive what they paid for. Nearly 5 million workers are expected to face unemployment or income reductions by 2026 if the housing sector continues to contract.
President Xi aims to create a more resilient real estate market that better serves the Chinese population and reduces the risk of a massive price crash. In fact, he wants to rewrite the model by moving away from debt-fueled growth to something much more sustainable: a model focused on stimulating domestic consumer demand and new technologies like electric vehicles and batteries. However, the ongoing economic transformation proves to be a long and challenging journey.
The campaign to reduce real estate risks has shaken confidence, undermining a fundamental principle of the capitalist system: encouraging consumers to spend and invest in new businesses. For many Chinese, owning a home is an essential aspiration. Before the crisis, about 70% of household wealth was tied to real estate, making the price decline particularly painful.
As the crisis took an unexpected turn, Xi reached his tolerance for pain in the real estate sector. Regulators are compiling a list of 50 eligible real estate companies for banking support while considering a plan allowing banks to offer them unsecured loans for the first time. In October, Country Garden Holdings, once the country’s largest developer and top borrower, defaulted on its debt, making it difficult to believe that the worst is behind us. New home sales have dropped in 24 of the last 29 months. And the crisis will leave scars on the country’s real estate market.
Beijing finds itself in a delicate position. It needs to boost domestic consumption, but it still needs to manage to solve the problem of oversupply. Despite an 18% drop in real estate construction, the market is only halfway through its necessary correction. Economic signals in China are more positive these days, with signs of a return to growth, albeit fragile. But there are harder-to-quantify effects, such as the social unrest that could emerge from a crisis with no end in sight.