By Nina Harbison
If you were to ask an American, Canadian, or New Zealander about the state of their real estate markets, they would likely remark on soaring housing prices, rapid development, and climbing profits for developers. The real estate markets in these countries are booming, but none come close to competing with China’s; as of 2021, real estate made up roughly 30% of China’s GDP and 78% of Chinese assets. The rate of housing development has increased rapidly over the last couple decades, leading to the creation of many more houses and apartments than there are Chinese people to live in them. The Chinese housing bubble rivals the 2008 U.S. bubble, which infamously collapsed leading to the Great Recession. At the time the American housing bubble collapsed, real estate made up only 19% of US GDP and 35% of its assets. Comparing these numbers to China’s present day figures is indeed daunting, with Bloomberg going so far as to claim that “Popping this bubble would hammer China’s economy in a way that could make the Great Recession look like a spoiled gender-reveal party.”
The story of China’s housing bubble is primarily the story of Evergrande, a real estate corporation leading Chinese development, and its founder, Xu Jiayin. Since its founding in 1996, Evergrande has contributed significantly to the Chinese housing boom and became an immensely profitable company. By 2018, Xu Jiayin was the richest man in China. But now, just three years later, Evergrande’s financial success appears to be at its end. Shares in the company fell 80% in 2021 alone, and Evergrande owes $300 billion in bank loans. In a span of several years, it has become one of the most indebted real estate developers in the world. Xu is scrambling to find money; no Chinese bank will lend to Evergrande, and rumors about its impending bankruptcy are circulating. The company’s current financial peril threatens China’s economic success even as the Chinese economy continues to assert dominance world-wide. How Evergrande fell from a mighty real estate developer to a company on the verge of financial ruin is a fascinating story indeed.
Evergrande was founded in Shenzhen by Xu Jiayin during the regime of Chinese Communist Party leader Deng Xiaoping. At the time, Shenzhen was one of China’s special economic zones, a region experimenting with capitalism in an otherwise centrally-planned economy. Evergrande may not be well known in America or Europe, but the company is a household name in China. It has led the way in housing development since its founding, primarily by building apartments in cities all over China. Evergrande’s mode of development and marketing – building continuously, advertising in advance, and borrowing billions from banks and investors – has led to financial strain not just for the company, but for the broader Chinese economy.
China’s property boom is driven by public desire for new, expensive-looking housing that demonstrates China’s economic might on the world stage. Evergrande taps into this culture of conspicuous consumption by giving its developments names such as Cloud Lake Royal Garden, Empire View, and Luxury Palace. Evergrande’s business model is to sell not only real estate but also a promise of wealth and luxury to the Chinese people.
However, Evergrande’s promise of prosperity comes at a price. Along with other companies, Evergrande has created a surplus of apartments and has contributed to an excess of housing that is unaffordable for the majority of Chinese citizens. Some estimates indicate that as much as ¼ of China’s housing is unoccupied today; to contextualize this, there are enough vacant homes in China to house 90 million people. The surplus of unaffordable housing created by corporations like Evergrande, combined with low demand for such homes and a slowing in Chinese population growth, has created a financial bubble that is on the brink of collapse.
When a market bubble collapses, its effects reverberate around the economy. As Evergrande becomes more indebted, the company is likely to default on their loans to banks and stop paying interest. Other real estate development companies like Evergrande will be affected by a popping market bubble in the same way, defaulting on loans and failing to pay interest to banks. The typical response to this from a banking perspective is to raise interest rates across the board in order to compensate for the losses Evergrande’s financial demise will incur. Higher interest rates discourage borrowers from taking out loans and economic growth across the Chinese economy will likely stagnate to some degree. This “credit crunch” effect – which was obvious in the 2008 financial crisis – can lead to a recession. After decades of exponential economic growth in China, the Chinese Communist Party would likely be hard pressed to alleviate the impacts of the housing market bubble’s demise on the economy.
In August of 2021, the Chinese Communist Party summoned Evergrande officials to a meeting. While no direct action was taken against the company by the party’s current leader, Xi Jinping, Xi made it clear that he was willing to make an example out of Evergrande’s imminent collapse. Surprisingly, some analysts believe it is unlikely that the CCP will bail out Evergrande, even though its failure could have negative impacts that would resonate throughout the Chinese economy. The CCP hopes to mitigate the exodus of Chinese degree-holders out of China, since many young people have found fault with growing wealth gaps between rich and poor citizens and extreme government oversight on issues like freedom of speech. Declining population growth also poses a threat combined with large portions of newly-graduated young adults leaving the country; soon the Chinese labour market may be too small to support its growing economy. In order to keep China’s youth in the country, the government must ensure that a new generation of Chinese see a future in China, and an abundance of unaffordable housing is not helping their case.
Analysts believe that it is likely the CCP will allow Evergrande to collapse without an economic bailout, sacrificing China’s short-term economic success for long-term political stability. Ultimately, allowing Evergrande to collapse would send a message to a younger generation of Chinese civilians, demonstrating that China is adhering to its theoretical socialist roots and punishing those like Evergrande who take advantage of the system. In a country that prides itself on economic equality – or, more accurately, a facade of socialism – Evergrande’s reckless profiteering with little thought to the Chinese economy’s overall welfare is sure to come under harsh criticism.
Ultimately, the impacts of the Chinese real estate bubble’s collapse are still to be seen. The extent of the collapse, what it means for other sectors in the Chinese economy, and whether or not the Chinese government takes action to mitigate economic losses will be important issues to watch in coming months.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.