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The Red Scare, Part 1

The Unprecedented Turmoil in China's Property Market

China’s once-booming property market, which had long been the cornerstone of its economic growth, is now in unprecedented turmoil, with far-reaching consequences that threaten the broader economy. The root of this crisis can be traced back to a complex interplay of factors, from excessive borrowing and overbuilding to sudden regulatory interventions. As the world watches, the Chinese property sector’s woes send ripples across various economic sectors and financial markets, raising concerns about the future of the world’s second-largest economy.

The Tiger Boom

For decades, China’s rapid urbanisation and economic growth led to a surge in property demand. Developers could not construct modern apartments quickly enough to accommodate the population flocking to cities in search of better opportunities. The property sector became a key driver of China’s transformation, employing millions and serving as a reservoir for household savings. At its peak, the property sector contributed over a quarter of the country’s economic activity.

However, this reliance on real estate has transitioned from being an asset to a liability. The combination of excessive borrowing and regulatory moves to curb risky practices have shaken the foundation of the property market. As China navigated its way out of pandemic-induced lockdowns, the vulnerabilities of the sector were exposed. With less spending power due to housing price slumps affecting savings and diminishing job opportunities tied to construction and related industries, a ripple effect spread through the economy.
One of the contributing factors to this crisis is the government’s dual approach to the sector. For years, regulators permitted developers to amass significant debt to drive growth, only to abruptly shift tactics in 2020 to prevent a housing bubble. The sudden halt in easy money access left many of the largest real estate firms grappling with cash shortages. Over 50 Chinese property developers have defaulted on debt payments in the past three years, revealing a flaw in the borrow-to-build model—it only works when property prices keep climbing.


The authorities have not responded with large-scale bailouts, signalling a departure from their usual interventionist stance. Instead, they have taken more measured actions such as relaxing mortgage requirements and cutting interest rates. Policymakers’ calculated restraint aims to avoid exacerbating the moral hazard problem and creating a cycle of dependency on government support.

This turmoil has not only raised questions about the short-term stability of China’s economy but also ignited concerns among global investors. Hong Kong’s stock market has taken a beating, while billions of dollars have been pulled out of Chinese stocks. The tremors have extended to the shadow banking sector, where financial trust companies, seeking higher returns, have been caught in the crossfire. The consequences of these upheavals extend beyond China’s borders, underscoring the interconnectedness of the global financial system.
In the next part of this series, we’ll explore the outlook for China’s property market, the strategies policymakers are adopting, and the potential implications for China’s economic trajectory.