An Extravagant Unveiling of Crumbling Foundations: the Drastic Hit on the Chinese Real Estate Market
by Xing Liao | Grade 10 | Scholastics 2024 | Critical Essay | Silver Key
“Because China is now the №1 commodity consumer in the world, the impact [of the debt crisis] is going to be pretty, pretty big” -Larry Hu, Hong Kong based chief China economist for Macquarie (Goodman).
China’s track of economic growth and prosperity has benefited its citizens in recent years, but now it’s falling to an ultimate low. Every thriving economy needs diverse and high-paying jobs, demand from consumers, and restrained regulation. For decades, China’s economy relied on the flourishing real estate market to furnish an exemplary economy by creating jobs that will provide youth the ability to thrive through life. Now, China faces massive losses and debt from missed bank payments, creating a dent in the economy. A major surplus in unoccupied real estate due to unregulated lending to major real estate companies, and unemployment in the wake of the COVID-19 crisis threatens, severely accelerates China’s economic recession and decline. The NBER’s Business Cycle Dating Committee defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. Ordinary people are feeling the effects as well” (Finance & Development), exactly what China’s real estate market is experiencing. Just months before the real estate corporation Evergrande experienced financial downfall, a woman named Guo Tianran, from Hanan, described her experience in buying an apartment for her son. She intended to give it to him prior to his graduation, but then the real estate collapse began. She voiced her sorrows stating, ‘I used some of my retirement money for the down payment. We will be paying [off the] mortgage for the next 30 years,’ (Mao). Mrs. Guo’s experience with the real estate market truly expresses the disparities that the crisis is breeding in Chinese society.
Background:
Before economic discontent began in the present day, the history of China’s real estate market began in the 1980’s, when it became an open market. China’s previous public housing system included rental or state-owned land (Real estate law). In April of 1980, Chairman Deng Xiaoping introduced reforms that allowed individuals to purchase homes (People’s Bank of China). Since living spaces were provided to citizens in China, housing was seen as an essential right. Because of the economic shift towards privatized housing and the massive increase in apartment complexes, real estate is now viewed as an investment or even a luxury. Today it is estimated that 51.5% of investment in fixed assets came from real estate and up to 70% of household wealth is in property (What’s happening).
Two Powerhouse Companies Generating Disorder:
Two major real estate companies, Evergrande and Country Garden, are borrowing money at high rates while not paying back their outstanding loans, causing deeper political and social issues. The crisis stems from the government’s leniency on borrowing. Almost 40% of bank loans in China are related to property, highlighting how much the economy depends on real estate (Bradsher). Evergrande is the world’s most indebted developer, and this is taking a huge toll on the Chinese economy as government-controlled banks are losing money from d loans. Meanwhile, China has so much empty housing that the present population cannot fill the housing surplus. Population growth fueled the real estate market’s growth in past decades, but with employment rates dropping because of strict COVID-19 regulations, fewer people are financially stable and able to buy homes. In this destabilized housing industry, companies like Evergrande and Country Garden are left unable to pay their debts.
Ultimately, the crisis is caused by the fact that the government neglects oversight for property corporations while exerting excessive control over individuals through unemployment and COVID-19 policy, resulting in high percentages of people who bought apartments as investments and have no one to sell them to. In addition to a weakened real estate sector, the real concern is how the social chaos of homelessness, poverty, and increased class inequality will affect the domestic and global economies.
An unprecedented number and scale of legal and economic problems, ranging from corporate overborrowing to government inaction, are resulting in a derailing economic system. Evergrande has been at the root of these problems. BBC News states that “In September 2021, Evergrande failed to repay more than $100 million to offshore lenders. At that time it was estimated that the firm had more than 1.5 million unfinished homes” (Mao). The company’s failed loans are stimulating a loss of faith from the public. China’s driving economic resource was the housing market, however, Evergrande’s real estate problems have created a crack in the industry. Evergrande’s projects are not seeing demand and are not bringing in profit. China’s financial system includes trends of unrestricted borrowing to support real estate development. But now, the borrow-to-build model — banks continuously feeding companies with loan money, with no set borrowing limits or regulated loan durations — has triggered economic depreciation. This creates a question: when do companies have to start paying back loans? Evergrande is triggering bad debts in the economy and impacting the banking system in China, especially as the government is not introducing effective policies to end this behavior.
Real estate market investment has led to construction outpacing demand providing excessive amounts of unbought houses. As of right now, there are around 648 million square meters of space occupied by unfilled housing, adding up to around 7.2 million empty homes. A former deputy head of the statistics bureau, He Keng said on CNN, “‘How many vacant homes are there now? Each expert gives a very different number, with the most extreme believing the current number of vacant homes are enough for 3 billion people’” (Even 1.4 billion people). While there is debate on how much housing is truly empty, it is clear that the population in China will not be able to fill them. Major companies have created more debt in the market as they continue to borrow for projects that remain empty. China does not have enough people in their population to fill the abundance of houses as citizens either already have their own living spaces or cannot afford to purchase new homes. Absence of demand in the real estate market stems from the population’s inability to pay for rent or buy apartments, especially when no one is getting paid.
Especially with the excess of housing, companies are now leaving apartments half-built, and construction workers fending for themselves to survive. In Tianjin, there are currently two construction sites that have been left unfinished because Country Garden failed to pay workers since Chinese New Year in January, 2023 (Chen). Many of these workers struggle to pay rent and financially support their families. Wang, a 50 year old, was one of those unpaid workers who exclaimed, ‘I have a wife and kid who’s about to return to school, as well as elderly parents … Workers can’t live on this.’ (Chen). These financial struggles contribute to broader social issues in China. Whereas before families were already facing economic insecurity, they are now unable to afford rent or even food.
Social despair from the real estate market crisis is worsening homelessness, poverty, and class inequality. Not only do these issues have domestic consequences, the resulting decrease in demand for consumer goods greatly inflated currency in the world, which is why it contributes to slowing the global economy’s growth. Country Garden’s failed payments displace household wealth as citizens are unable to finance their lives, effectively putting people out of homes. Losing their status, the working class is falling into poverty. Also, China’s slowing economy is not attracting other countries for exports and investments due to the shrinking demand from their population (Goodman). Even though only the upper class can afford commodities, they only make up 1.44% of the population while the low to lower-middle class makes up 82.06% of the population (Schrag). Class inequality is expanding and people in the middle class are not able to improve their economic standing in the economy’s downfall. Ultimately, growing class inequality further affects who can purchase the new apartments that the companies have built. Being the source of 40% of global economic growth, China has a significantly greater impact in the world economy than many other countries. However, analysts are concerned about the mountains of real estate debt and the absence of demand for goods (Goodman). Social destruction, class inequality, and Chinese global standing are all deteriorating from the enormous real estate market crisis.
The Rise in Unemployment Developed from COVID-19: The Economic Impact on China:
Furthermore, “Zero-COVID” policies have forced everyone in the country to be locked at home and without jobs, resulting in more salary-cuts and layoffs. China’s Research Center wrote, “The COVID-19 pandemic caused declining consumption, production, and all economic activities, resulting in lower economic growth in China…” due to strict public health measures (Dr. Haizheng Li). Students were not prepared to come out of these strict COVID-19 policies and find jobs. COVID-19 also furthered the housing crisis because everyone was living at home. This resulted in students not wanting to move out, especially when everything was paid for by their parents. In general, extreme government control on COVID-19 played a massive role in current unemployment. Relying on family members for survival and restricted by pandemic policies, students and young professionals face uncertain financial futures. As a consequence, their purchasing power in the real estate market has also diminished.
The youth unemployment problem is truly worsening the real estate market. In China, the youth unemployment rate has not allowed students to buy homes, encouraging them to stay in their parents’ houses. Currently, people ages 16 to 24 have reached a record of unemployment at 21.3% (Mistreanu). Because of these high unemployment rates, the new generations, drowning in the competitive nature of China’s economy, are unable to buy apartments or houses. Changes in youth unemployment would track time-wise with changes in the housing market. Time Magazine states, “In July, new-home sales at China’s 100 biggest developers fell 33% year-on-year, according to data from the China Real Estate Information Corp. The crisis is compounded by rocketing youth unemployment figures” (Campbell). Numerous unemployed young adults have come up with the solution of becoming “full-time adult children” and living off of their parents’ money (Mistreanu). In one such story about Marguerite Wang, a recent graduate, wrote, “After spending six months unsuccessfully applying for jobs in Shenzhen, the 29-year-old did something she had never imagined doing: she asked to move back home. Now she spends her days watching soap operas…” (Mistreanu). No motivation is left for these newly graduated students like Marguerite. Nearly all unemployed students now depend on their parents while looking for a job but the competitive nature of the workforce and lack of experience from students makes it hard for them to find one. COVID-19’s impact on unemployment defined the future of the real estate market as the entire system of consumer and supplier fails to accommodate for the lack of demand.
Failed Regulation and Oversight of Chinese Real Estate Companies:
While citizens and companies may cause the real estate market to falter, these issues within the real estate market show how government approach on this crisis is failing, being a significant part of the problem. Exorbitant government control on Chinese citizens and minimal loan regulation for companies is the root cause of this crisis. Loan policies and borrowing policies are not strict enough in China since it is clear that companies are bypassing them. The government is too lenient on the companies because of the large role the housing industry plays in China’s economy.
Real estate companies need to be held accountable for how much money they are borrowing from banks. It is clear that they are not paying back prior loans creating huge money loss in the banking system. Debt affects the economy by negatively impacting the value of currency, increasing inflation. Companies are taking advantage of the banks because the government has not set regulations to control this type of behavior. The housing market in China has been a slow-burning crisis but now issues are significantly increasing because of the history of the market, problems created by Evergrande and Country Garden, and the exorbitant amount of houses.
Even though the government hasn’t effectively enforced regulations on companies, they have enacted strict policies on citizens that prevent purchases in the market. To illustrate this problem, the Economist wrote, “Most of the rules employed [in the real estate market] are restrictions on who can buy a flat, how many they may purchase and the size of the down payment required” (How to escape). The previous harsh government restrictions in the hukou system in China relied on citizens being required to only live in one residence, but now people have multiple houses and real estate investments. To reverse the effects of the housing crisis, the government needs to find a way to loosen the restrictions on people that make it difficult for them to find jobs and buy homes. One example of how this might work is Chengdu’s push to increase the number of homebuyers. Laws are in place all throughout cities in China that restrict who can buy houses, except Chengdu. Instead, Chengdu attracts families by expanding the city and increasing the demand for homes. The more relaxed restrictions on homebuyers in Chengdu have already created a more steady purchase rate of apartments. The Chengdu government provided the money needed to developers to finish around 40% of apartment floor space in 2023 (How to escape). While this plan is a prominent solution, it might not be a feasible option in all cities. It is also not sustainable in the long-term for developers to rely on the city’s money. However, Chengdu’s policies towards ordinary citizens provide a prominent example of what other cities could implement to rejuvenate their housing markets and increase individual purchasing power. Lessening restrictions on buyers creates more incentives to own homes and stimulates the market. In China’s hukou system, citizens were required to register their permanent residence. The hukou status determines their rights to social welfare, public education, housing, and other services (Science Direct: Hukou). Only people who lived in a certain place could gain residence in that place. This system was extremely flawed because it limited who could buy houses. Ultimately, selling houses only to a certain demographic (hukou-holders) will not fill up all the vacant houses that China has.
The other core issue is that the Chinese government is being too tolerant of corporations that do not follow their policies. Such policies include, from Reuters, “Regulators will establish a 100-billion-yuan ($15-billion) fund to buy housing inventory to convert into rental housing, accelerate loan deployment to ensure the delivery of home projects, extend a transition period for banks to implement rules to lower their real estate loan concentration and support developers’ offshore debt repayments, Xinhua said” (China to support financing). Evergrande and Country Garden have illustrated that the crisis partly derives from constant borrowing and inconsistency in payments. Still, the companies have not followed regulations on borrowing. The government’s lack of enforcement of restrictions on big companies’ payments of loans has created a surplus of debt in the economy. The government needs to implement policies like regulations and borrowing caps to ensure that companies are paying back loans and not just riding them out, for instance, policies limiting loan borrowing before payments.
Along with more restrictions on companies, the government needs to incentivise and encourage citizens to purchase new homes. Since a large component of the crisis is the amount of empty houses in China, citizens can be potentially provided tax breaks for buying new homes and selling current investments. The current solutions, like those in Chengdu, implemented in China have not resulted in major change yet. Chengdu’s policies are extremely effective as they encourage consumers instead of deter them away and they need to be implemented elsewhere. However, with greater government regulation on loans and incentives on home-ownership, China can greatly improve its real estate market, and ensure a better economy for the future.
The real estate market is not going to fix itself without the cooperation between the Chinese government, the companies, and the citizens. The government has an obligation to require limits on borrowing to prevent the risk of the real estate market dropping even lower. If China’s economy continues like this for the next few years, homelessness and poverty will also result in an all time high, inflation will keep rising, and citizens will really be tremendously dissatisfied. Even though the government is at fault for many issues pertaining to people’s inability to buy houses, companies are also at fault due to their careless borrowing and excessive building practices. Government negligence and company carelessness have combined to result in an overwhelming surplus of houses with few people economically capable of occupying them. Solutions such as limiting money borrowing will help resolve this crisis. China’s housing crisis has revealed how no market can ever stay prosperous without collaboration.
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