Never grand: Chinese property market crisis overview

What is happening?

Just two weeks after a Chinese delegation in Davos, led by the Chinese premier Li Qiang (李強), was trying to convince the world’s investors of China’s growth and stability, media headlines painted a very different picture. On January 29, a court in Hong Kong ordered liquidation of the China Evergrande Group (中國恆大集團), one of the biggest real estate enterprises in China with debts of US$300 billion in liabilities.

What is the broader picture?

In 2018, Evergrande was China’s second biggest and the world’s most valuable real estate brand. Now, in just a few years, the company has an unenviable status as the world’s most indebted property developer. Following its debt default in 2021, Evergrande’s demise helped spark the current real estate crisis in China.

Since then the company has been proposing debt restructuring plans but that recently came to an end, with judge Linda Chan concluding that enough was enough.

Evergrande founder and CEO Hui Ka Yan, also known as Xu Jiayin (許家印), who was once China’s richest man well-connected with the Chinese establishment, has been under house arrest on unspecified charges since last September.

In 2021 Evergrande made the front pages of international media with reports of customers who paid for properties in buildings which were never built while, elsewhere, empty apartment blocks languished in Chinese ghost towns. Although an estimated 20% of housing in China is unoccupied, the country still has one of the world’s biggest owner-occupancy rates, with more than 70% of asset wealth concentrated in property.

As early as 2016, when it began issuing new regulations, Beijing showed it was aware of the risk of a real estate bubble and the necessity of stabilizing the rocketing real estate sector. At his nineteenth party congress address, Xi Jinping emphasized that “houses are for living, not for speculation”. This mantra has been repeated frequently by Chinese officials since then.

In 2020, the Chinese government introduced its “three red lines” rule (三條紅線), which limits the ratio of equity, assets, and debt to cash a developer can hold. The government now limits the number of homes individuals can purchase and own and also pushes local governments to scale back their financial dependence on land sales.

Why it matters?

The real estate market, which was the engine of growing Chinese economy for decades, and accounts for approximately one quarter of the country’s economy, has been in its worst decline in almost nine years. Last year saw some of the steepest drops in house prices.

The Chinese economy still has not recovered from the post-pandemic slowdown and is struggling with high youth unemployment and an unprecedented drop in exports.

This has give rise to serious concerns over deflation and a potential knock-on effect abroad. Given global economic interdependencies, it will be important to closely monitor the steps taken by Chinese regulators, such as subsidies and other support measures, and how costly these will be.