In 2020, one of the world’s most heavily traded bonds was a 2025 note for China Evergrande Group. Investors loved the debt of the Chinese real-estate conglomerate for several reasons: It was liquid, it was tied to one of the biggest companies in the country, and it gave them a piece of the world’s second-largest economy. It also heralded a major transition for China, symbolizing an era of turbocharged growth that had put it on a path to one day surpass the US. No longer was the country going to be merely a factory to the rich world — it would have its own consumerist middle class, with beautiful apartments and all the furniture, appliances and electronics to go in them. Evergrande was building that dream, apartment tower by apartment tower — along with theme parks and business lines in bottled water, electric vehicles, healthcare services and even a soccer club.
Now the Evergrande bond trades for pennies on the dollar, and its fate tells the story of an epic crash that has affected everyone in China. For decades, real estate has been a surefire way to make money in the country — for homeowners who bought first, second and even third or fourth apartments as prices kept rising; for property companies borrowing to build projects to match demand; and for local governments relying on land sales to provide cash and infrastructure projects to help meet Beijing’s ambitious economic growth targets.
In 2020 there was one problem with that bet: Chinese President Xi Jinping (習近平) was ready for it all to change. When the crackdown on property speculation began, very few understood what was really happening and just how painful it would get. In fact, the first signs of change did not amount to much more than a set of financial rules — known as the “three red lines” companies could not cross — and a request for a dozen developers to report their finances monthly to regulators.
Illustration: Louise Ting
Since then, China has run one of the biggest economic experiments since it opened up in the 1980s under former Chinese leader Deng Xiaoping (鄧小平). Several dozen developers have defaulted on their debt, leaving hundreds of projects unfinished and even triggering a wave of boycotts on mortgage payments by homeowners protesting incomplete construction. In China, it is common for buyers to pay for units before they are finished and then hope they get what they paid for. Meanwhile, about 5 million workers face unemployment or lower incomes by 2026 if the housing sector continues to shrink, Bloomberg Economics estimates.
For investors and bankers, the debt squeeze marks the end of a once-in-a-lifetime boom, when Hong Kong financiers could cut deals while taking weekend junk boat trips around the island and traders enjoyed juicy yields from a sector that, until Evergrande’s collapse, had only ever seen one major default.
Beijing wants to pop its own market bubble to end speculation that has led to a strange combination of unaffordable housing and oversupply, as the demand to get a piece of the red-hot market meant construction outpaced actual need in some places.
Xi’s mantra: “Houses are for living in, not for speculation.” Evergrande epitomized the risks Beijing wants to fix. The company borrowed with apparent abandon to expand, while rumors of its hidden debt load threatened broader disruption to the financial system.
Ultimately, Xi wants to create a more resilient housing market that better serves China’s people and reduces the risk of a massive price crash. He wants to rewrite the playbook by moving away from debt-fueled growth to something much more sustainable — a model focused on boosting domestic consumer demand, as well as new technologies such as electric vehicles and batteries. “The ongoing economic transformation will be a long and difficult journey,” People’s Bank of China Governor Pan Gongsheng (潘功勝) said last month in an address to bankers. “But it’s a journey we must take.”
Yet the campaign to clean up real-estate risk has shattered confidence, leaving people feeling poorer and undermining a core tenet of the revamp: getting consumers to spend and invest in new businesses. For many in China, owning a home is a core aspiration. Before the crisis, about 70 percent of household wealth was tied up in real estate, so price drops are particularly painful. Another development rattling consumers is that companies once seen as too big (and too responsible) to fail are running into fresh trouble. As recently as October, Country Garden Holdings Co, once the nation’s biggest builder and an investment-grade borrower, defaulted on its debt, making it hard to believe the worst is over.
Xi now appears to have reached his tolerance for pain in the property sector. Regulators are drafting a list of 50 property companies eligible for bank support, while weighing a plan that would let banks offer them unsecured loans for the first time. Still, sales of new homes have dropped in 24 of the past 29 months.
And the crisis could leave scars on the nation’s housing stock. Unfinished buildings are to be left empty through another harsh winter after rusting through this summer, while builders would scramble to finish projects with shoddy work before their employers run out of money.
This risks thwarting the authorities’ push to clamp down on so-called tofu construction, which has become more obvious during extreme events like earthquakes and flooding. On a recent trip to survey the building sites of a developer in debt restructuring, a lawyer tested the sturdiness of a balcony railing in Guangzhou only to find it came away from the wall in his hand. He requested anonymity because he was not authorized to speak publicly about his clients. Even if a homebuyer wanted to take advantage of lower prices, there is little reason to have faith that apartments will be delivered on time or in decent shape.
Beijing finds itself in an awkward position. It needs people to spend, but it still has not cracked the nut of oversupply. Bloomberg Economics estimates that despite an 18 percent drop in property construction, the market is only about halfway through the correction it needs. Economic signals in China are a little more positive these days, with signs of a return to growth, albeit fragile, but there are harder-to-quantify effects. Officials might have one eye on a deeper social malaise tied to the housing crisis. It has reflected in a saying making the rounds on Chinese social media: “No dating, no marriage, no kids, no home.”
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