Evergrande, a Chinese real estate company founded in 1996, rolled closer toward formal default this week after failing to meet further payments toward its $300 billion debt. Evergrande isn’t alone — real estate developers in China carry an estimated $5 trillion in debt, and other Chinese property firms this week reportedly defaulted or struggled with repayments.
So what does the Evergrande crisis reveal about the challenges and distortions within China’s “state capitalism” model? Under this top-driven economic system, the Chinese government and Communist Party intervene throughout the economy, creating conditions for real estate developers to rise high and fall hard.
Real estate construction, property management services and related industries account for a quarter of China’s economy. These four factors help explain how this crisis evolved.
Government policies have distorted the land market
Local government intervention shapes the supply and price of land in China. City and county governments exercise a near-monopoly over the supply of land for the primary urban land market. By law, only the government can convert rural areas into urban land that can be used for residential and commercial real estate or industrial parks. As cities expand, real estate developers generally pay high prices for the rights to use the surrounding land, generating large windfalls for local governments.
Policy changes proposed in 2013 would have eliminated this government monopoly. In theory, farm households could sell the rights to use their land directly to real estate developers. However, these proposed changes — which were unpopular with local governments — have made almost no headway.
China’s fiscal policies leave local governments with few options
Local governments don’t want to give up their power to take rural land and sell it to developers, because they rely heavily on windfalls from the sale of land to fund government projects and services — and because they exercise a lot of discretion over these funds. Last year, local government receipts from land sales topped $1.3 trillion, equivalent to 46 percent of total government fiscal revenue, up from 30 percent in 2017.
China’s unitary fiscal system centralizes control over revenue in Beijing but places most expenditure responsibilities on local governments, leaving a large fiscal gap. Local governments fill this gap not only with revenue from land sales but also by borrowing via “local government financing vehicles,” using land as collateral.
New policies proposed over the last decade would have put in place a new property tax to provide a more solid fiscal foundation for local governments. A functioning property tax system would likely reduce local government windfalls from land sales, and would likely dampen real estate speculation. But no new property tax measures appear on China’s 2021 legislative agenda.
Urban development doesn’t reflect actual demand
Local governments also face top-down political pressure to meet economic growth targets. As real estate development and construction projects are important drivers of growth, local governments have a strong incentive to encourage housing developments, particularly in smaller, “lower-tier” cities beyond the largest 35 metropolises.
Local governments use their political power to artificially boost demand for housing developments and construction, driving urbanization by mobilizing rural households to give up their homesteads and move into new high-rise apartment complexes. In the process of relocation, millions of rural households pay money over and above the compensation they receive for their old houses in order to resettle. Government intervention determines the timing, scale, pace and location of resettlement.
This “rural revitalization” is an official policy promoted by the central government — and by President Xi Jinping. Past statements from China’s State Council emphasized that participation was voluntary. But numerous reports suggest that local governments persist in forced demolition and relocation.
Financial repression fuels real estate speculation
A government strategy to keep wealth in China also helps drive real estate speculation. Individual investors face tight capital controls that restrict opportunities to invest abroad, but banks offer low interest rates on household deposits.
For many Chinese, real estate has become a favored investment. Most urban households own their homes — and many families invest in second and third apartments, counting on higher returns than they can get in savings accounts.
Moreover, until late last year, China’s state-owned commercial banks directed lending to real estate firms and related sectors.
China’s state capitalism is in crisis
China’s government-directed economic growth model has left property firms, local governments and urban households deep in debt. The system has also resulted in oversupply of housing, reflected in vacancy rates around 20 percent in lower-tier cities and many empty high-rise developments evocatively referred to as “ghost cities.”
The Chinese government response, beginning in late 2020, was to ease the real estate bubble by targeting developers with restrictions on borrowing, captured in the slogan “three red lines.” The “red lines” set limits on firms’ liability-to-asset ratio, net-debt-to-equity ratio and cash-to-short-term borrowing ratio. Companies such as Evergrande that fail on all three of these measures have been barred from receiving additional bank loans. For Evergrande, this policy intervention triggered the current liquidity crisis and potential default.
My research on China’s political economy shows that China’s interrelated land, fiscal, financial and political systems constitute the backdrop for Evergrande’s rise. But these government-directed systems are also a reason the Chinese government isn’t likely to let Evergrande collapse completely. Failure in this sector of the economy would hurt urban homeowners and local governments as much as private developers.
The lack of progress on policy changes to the existing land market, fiscal and financial systems that have been under discussion throughout Xi’s first two terms in power suggest that his administration is hesitant to alienate two key constituencies: local governments and the urban middle class. A decline in the real estate sector would reduce local government revenue from land sales. And a major correction in housing prices would undermine the wealth of China’s urban middle class.
Instead, the government has tried to rein in large private developers, precipitating the current crisis. But the deep systemic flaws in China’s government-directed growth model remain unaddressed.
Susan H. Whiting is professor of political science at the University of Washington in Seattle, where she also holds adjunct appointments in the Jackson School of International Studies and the School of Law. Her current book project with Cambridge University Press is entitled “Illiberal Law and Development: Property Rights and Conflict over Land in China.”
FAQs
Analysts have long been concerned that a collapse of Evergrande could trigger wider risks for China's property market, hurting homeowners and the broader financial system. Real estate and related industries account for as much as 30% of GDP.
Why China's Evergrande crisis could be worse than the US? ›
Without real estate, there will be far fewer profitable enterprises for Chinese banks to lend to, meaning China will be vulnerable to the next recessionary shock that comes along. So China's real estate situation is fairly different from that of the U.S. and Japan in their housing crashes, but in many ways it's worse.
How much does Evergrande contribute to China's GDP? ›
The group is a significant part of China's economy; as of 2021, their liabilities alone were equivalent to about 2% of China's GDP. The urban Chinese have nearly 78% of their wealth tied to residential property, while 20% of China's overall GDP is related to real estate (Xie and Bird 2020).
Will China's real estate woes push the country into a severe economic recession? ›
China's economy is unlikely to experience an economic meltdown of that severity. But it could be on track for a protracted slump that drags on global growth in the coming years, according to analysts.
How will Evergrande collapse affect us? ›
The issues surrounding Evergrande are among several financial risks the Fed said had the potential to hit the US. Other risks include a potential worsening of the public health situation and a sharp rise in interest rates.
Why would it matter if Evergrande collapses? ›
Reportedly, Evergrande also owes money to about 171 domestic banks and 121 other financial firms. Therefore, if the company defaults completely, there will be consequences for the banking system. A credit crunch could follow, analysts fear, which would be bad news for China and the global economy.
Is China an economic threat to the United States? ›
The counterintelligence and economic espionage efforts emanating from the government of China and the Chinese Communist Party are a grave threat to the economic well-being and democratic values of the United States. Confronting this threat is the FBI's top counterintelligence priority.
Why is the world worried about China's property crisis? ›
Why is there global concern? China is the world's second-largest economy, with deep global trade and finance links. If the property crisis spreads to China's financial system, the shock would be felt far beyond its borders, analysts say.
Is China's real estate market collapsing? ›
If you look at land sales, Chinese real estate is in dire shape. As a result, there was a two trillion yuan ($290 billion) decline in income from land sales last year. And that drop continued into the first two months of 2023.
Who owns most of Evergrande debt? ›
NEW YORK, Sept 21 (Reuters) - Fund giant BlackRock and investment banks HSBC and UBS were among the largest buyers of the debt of embattled Chinese real estate developer Evergrande Inc, Morningstar data shows.
The global economy could feel the effects of China's Evergrande crisis. Here's what investors should know. Chinese officials are expected to stem the spillover from liquidity issues at Evergrande, the country's largest property developer, before it slams the banking system and bleeds into foreign financial centers.
Will Evergrande affect the economy? ›
A slowdown in the Chinese real estate sector, which accounts for a significant proportion of the country's economic output, could have ripple effects on global growth. Evergrande's woes have rocked stock markets -- and the real estate sector makes up much of distressed dollar-denominated debt internationally.
Will real estate crash if there is a recession? ›
Will house prices go down in a recession? While the cost of financing a home typically increases when interest rates are on the rise, home prices themselves may actually decline. “Usually, during a recession or periods of higher interest rates, demand slows and values of homes come down,” says Miller.
What is the average price of a house in China? ›
In 2021, the average sales price for residential real estate in Shenzhen was over 61.6 thousand yuan per square meters. It was the highest price among all major cities in China. The average price across the country was 16,533 yuan per square meter.
How will China's economic crash affect the US economy? ›
Fewer Chinese exports translate to less demand for U.S. debt. Less demand means that the U.S. Treasury will have to promise higher interest rates when auctioning the notes. That puts upward pressure on U.S. interest rates because banks base their mortgage interest rates on the 10-year Treasury yield.
Are US banks exposed to Chinese real estate? ›
No other country has reported more than 200 cases. Only banks with cross-border exposures that exceed 1% of total assets or 20% of total capital have to specify exposures to any particular country. Across the entire industry, U.S. banks have more than $110 billion of cross-border exposure to China as of Sept. 30, 2019.
What China's Evergrande crisis means for the world? ›
Yet Evergrande is more than $300 billion in debt and—despite making at least one payment to its creditors—is at risk of collapse, an event which could prove disastrous for the Chinese economy and send ripples through global financial markets.
Do banks have exposure to China Evergrande? ›
Minsheng had about 29 billion yuan of exposure to Evergrande as of June 2020, according to a letter seen by Bloomberg that the developer sent to provincial authorities that year. The bank said in September that its loans to Evergrande had dropped by about 15% since June 2020, without specifying a level.
How is Evergrande crisis affecting the world? ›
The fear of possible defaulting of Chinese real estate giant Evergrande has caused broad sell-off in global financial markets, even causing a dip in cryptocurrencies.
How could Evergrande affect the world? ›
China's Evergrande is spooking markets and the global economy faces a range of threats that could derail recovery. Soaring energy prices are disrupting production; in the background the US and China still aren't getting along.
Struggling Chinese property developer Evergrande is unlikely to cause major damage to the U.S. economy and financial system, CNBC's Jim Cramer said Monday. However, the “Mad Money” host said, “Evergrande is definitely a systemic risk for China.”
What year will China overtake the US economy? ›
The one sector where China continues to fall behind the United States is economic performance. This might be surprising since China is currently the second largest economy in the world and is poised to overtake the size of the US economy by 2050.
What is the biggest threat to the United States? ›
China's Ambitions, Russia's Nukes and TikTok: Spy Chiefs Talk Biggest U.S. Security Threats. U.S. intelligence leaders on Wednesday outlined a dizzying range of national security threats facing America, while making clear that China ranked atop the list.
Does the US have a better economy than China? ›
At the beginning of 2023, the U.S.'s real GDP stood at around $20 trillion and China's at around $16 trillion—leaving a gap of $4 trillion.
Why are Chinese not paying mortgages? ›
As property developers run out of funding to finish properties, a growing number of buyers in China have stopped making mortgage payments on incomplete homes. The boycotts are a sign of the distress in China's property market as the government seeks to rebalance the sector.
Does China store 70 of its wealth in real estate? ›
In play now in China, where around 70% of household wealth is in property, this phenomenon is weighing on the post-pandemic recovery of household consumption, which Chinese policymakers have vowed to make a more prominent driver of economic growth.
Why has China's economy collapsed? ›
China's economic growth is in long-term decline after hitting a peak of 14.2% in 2007, hampered by hurdles including an aging, shrinking workforce and growing curbs on Chinese access to Western technology due to security concerns.
Will China market recover in 2023? ›
China Earnings Expected to Rebound in 2023 as U.S. and Global Earnings Slow. As of November 23, 2022. 2022 and 2023 values are consensus forecasts. Past performance is not a reliable indicator of future performance.
What is wrong with China's property market? ›
China's real estate market has slumped in the last two years after Beijing cracked down on developers' high reliance on debt for growth. BEIJING — China needs to do more in order to fix its real estate problems, the International Monetary Fund said Friday.
How much of China's wealth is in real estate? ›
Over 70% of China's wealth is tied up in real estate.
Sep 22 2021
According to reports, major U.S. investment companies and other funds, including BlackRock, UBS, HSBC and Ashmore Group, held more than $1.3 billion of Evergrande's international bonds.
What banks loaned Evergrande money? ›
Evergrande's main lenders, led by China Minsheng Bank, have already set aside money to cover potential loan losses, according to two people familiar with the matter.
Who are the biggest investors in Evergrande? ›
Top Institutional Holders
| Holder | Shares | Date Reported |
|---|
| KraneShares MSCI China Clean Technology Index ETF | 7,881,000 | Dec 30, 2022 |
| Schwab Capital Trust-Schwab Fundamental Emerging Mkts Large Co Idx Fd | 7,014,000 | Jan 30, 2023 |
| Schwab Strategic Tr-Schwab Emerging Markets Equity ETF | 5,098,336 | Feb 27, 2023 |
7 more rowsHow bad are Evergrande's finances? Its property sales fell for the first time in at least a decade last year, plummeting 39% as sales were frozen for months before resuming in April 2022. It had about 1.97 trillion yuan ($283 billion) in liabilities as of June 2021, the most among its peers in China.
How does China make most of its money? ›
Manufacturing, services and agriculture are the largest sectors of the Chinese economy – employing the majority of the population and making the largest contributions to GDP. Since 1949, the Chinese Government has been responsible for planning and managing the national economy.
What are the predictions for Evergrande? ›
Future price of the stock is predicted at 1.0264795054264$ (256519.876% ) after a year according to our prediction system. This means that if you invested $100 now, your current investment may be worth 256619.876$ on 2024 June 07, Friday.
Is it better to have cash or property in a recession? ›
In addition, during recessions, people with access to cash are in a better position to take advantage of investment opportunities that can significantly improve their finances long-term.
What happens to my mortgage if the economy collapses? ›
Recessions and housing market crashes may cause your house's value to decrease. However, your set mortgage rates won't lower, meaning your monthly payments will be higher than your home's worth. While many may dip into their savings to help pay the steep bills, others may need outside assistance.
Should I sell my house before the market crashes? ›
Before a recession hits, home prices are typically at an all-time high. This means that selling your home before a recession will result in a higher profit between the purchase price of the real estate and the sale price, which can increase your capital gains taxes.
Is it cheaper to live in China or the US? ›
The cost of living in China can vary by location and type of purchase. On average, China's cost of living is 45% lower than the U.S according to Numbeo. Rent in China is 60% lower than the U.S. on average.
The cost of living in China can vary hugely depending on the cities, regions as well as the lifestyle you choose. If you plan to move to China, this might be something you are most curious about, so read on. You can live in most China's major cities for far less than $1,000 per month, and with a great lifestyle.
How much does it cost to live in China in US dollars? ›
According to research conducted by pandabuddy.net, the average cost of living in China ranges between $380-$1500, depending on the city. The majority of that money is spent on rent and utilities, which ranges from $250-$1000.
What if the US stopped buying from China? ›
Answer and Explanation: It is unlikely that China's economy will collapse if U.S. stops buying Chinese goods. Trade is an important part of any economy, and a very important part of China's economy. According to the World Bank, exports account for 20% of China's gross domestic product.
Is China a threat to the US economy? ›
Many Americans continue to view China as a threat to the United States, both militarily and economically: 65% say China is at least a somewhat serious economic threat to the U.S. and 57% say it is at least a somewhat serious military threat.
How long will the recession last in 2023? ›
That's the prediction of The Conference Board. But some economists project the U.S. will avoid a contraction in GDP altogether.
Can China bail out Evergrande? ›
It's still possible the Chinese government may offer a bailout to Evergrande, but there is considerable uncertainty among regulators about how to handle the company. Protesters have already gathered near the Evergrande offices demanding the government compensate investors and apartment owners.
Will China let Evergrande default? ›
China Evergrande Group was declared to be in default in late 2021, the highest-profile casualty of a broader crisis in the country's property industry. The government is now overseeing the rescue, quelling fears of a disorderly collapse that could jolt the world economy.
How will Evergrande affect the world? ›
A slowdown in the Chinese real estate sector, which accounts for a significant proportion of the country's economic output, could have ripple effects on global growth. Evergrande's woes have rocked stock markets -- and the real estate sector makes up much of distressed dollar-denominated debt internationally.
What happens if China offloads US debt? ›
If China (or any other nation having a trade surplus with the U.S.) stops buying U.S. Treasuries or even starts dumping its U.S. forex reserves, its trade surplus would become a trade deficit—something which no export-oriented economy would want, as they would be worse off as a result.
Who holds most of Evergrande debt? ›
NEW YORK, Sept 21 (Reuters) - Fund giant BlackRock and investment banks HSBC and UBS were among the largest buyers of the debt of embattled Chinese real estate developer Evergrande Inc, Morningstar data shows.
If the China bloc disposes of net foreign assets amounting to more than 20% of GDP by offloading US bloc bonds over 10 years, the IMF finds that the China bloc's domestic interest rates would fall by four basis points.
