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The Unraveling of China’s Real Estate Empire

For decades, Chinese homebuyers operated under the unwavering belief that real estate was a can’t-lose investment, driving the property sector to become the backbone of the country’s economy. However, in the last two years, a dramatic shift has occurred as massive debts crippled firms, and sales of new homes plummeted, leading consumers to develop an equally unshakable belief: real estate has transformed into a losing investment.

This loss of faith in property, once the primary store of wealth for many Chinese families, presents a growing problem for policymakers desperately trying to revive the ailing industry. The recent Hong Kong court order for China Evergrande, burdened with over $300 billion in debt, to wind up operations and liquidate the company starkly highlights the sector’s troubles.

Evergrande, a former industry leader, limped along for two years after defaulting on payments to investors, attempting to project confidence in its properties as sound investments despite lacking the cash to pay creditors. Unfortunately, the downturn, already the longest on record, is not only persisting but accelerating.

In 2023, China’s housing sales dropped by 6.5%, and December alone witnessed a 17.1% decline from the previous year. Investment in new projects also slowed, with real estate development falling by 9.6% in the same year. The impact on China’s economy is significant, as the property sector constitutes approximately one-quarter of the nation’s GDP.
The roots of the industry’s decline trace back to 2020 when Beijing, concerned about a housing bubble and its potential impact on the financial system, implemented rules to curb excessive borrowing by real estate developers. The resulting lack of access to debt left developers struggling to fulfill pre-sold properties, further exacerbating the crisis.

Despite easing some restrictions recently, China is grappling with the aftermath. More than 50 Chinese property firms, including Evergrande and Country Garden, have defaulted on debt since 2021. Country Garden, once Evergrande’s main rival, is facing a severe situation with collapsing sales and a continuous decline in presales of unfinished apartments.
Financial regulators are now urging banks to provide more support to the property sector, walking back on previous restrictions. Xiao Yuanqi, deputy director of China’s National Financial Regulatory Administration, emphasized the inescapable responsibility of financial institutions to offer strong support to the beleaguered sector.

However, the challenges persist. Nomura Securities estimates that there are still 20 million units of pre-sold homes awaiting completion, requiring a substantial $450 billion in funding. The property slump is becoming self-fulfilling, with the debt issues of developers keeping buyers at bay, resulting in pressured home sales and a deepening financial crisis for the firms involved.

As China enters 2024, all eyes are on whether the central government will intervene and take the main responsibility to halt the contagion, possibly through a bailout similar to the Troubled Asset Relief Program in the U.S. The journey to recovery for China’s real estate sector remains uncertain, and potential homebuyers like Nydia Duan in Zhuhai express reluctance, preferring to wait until the market stabilizes. The fate of China’s real estate empire hangs in the balance, presenting a complex challenge for policymakers seeking a way forward.