February 1, 2023 10:50 am


The House In Crisis- Decoding The Real Estate Bubble In China

Post-2015, a phenomenon emerged in China known as the ‘Ghost city'. Projects worth billions were rendered unoccupied and the scenes of houses without residents and lush offices without workers became more visible throughout the nation.

Long Story

China’s real estate economy makes up around 30 percent of its GDP. On one hand one can see a vast world of construction filled with colors in the Chinese sector- Billionaires, political connections, expensive sports sponsorships, aesthetic lifestyles & so on.

It is just that the grim & bizarre underbelly of the industry has started to come up in the open before the masses. Somewhere around the winter of last year, Chinese authorities destroyed fifteen high rises in the southwestern province of Kunming, often referred to as a ‘ghost city’ by the people of the city.

The real estate sector constitutes the industries of steel manufacturing, inner decoration, and financing corporations among others. Any kind of a fall in demand would mean a trickle-down of that into a market recession.

Moreover, a whole bureaucratic circus has emerged around centers of power in the industry. The local administration, party workers, bankers, and developers all form a cabal around the cash flow coming from normal people. The fall of one in that case becomes a crisis for everyone involved. The case of Evergrande came into vogue exactly after one such tip of the iceberg was seen.

Evergrande is one of the largest real estate holdings in the world. Their collective liabilities amount to around 330 billion US dollars. The payment crisis will mean default on this & creation of a recession for the allied industries such as banking & steel.

It will also give a signal to the foreign investors to make a decision, a decision that may not be liked in Beijing. Evergrande itself owes around 19 billion in dollar bonds alone.

The problems faced by the sector may appear as a function of consumption-driven debt & only of a fiscal nature. However, the real problems in it stem from the very nature of the State functioning as a chief catalyst of industrialization in the domestic economy, and thus it is having political undertones as well.

Much of China’s story of success sold in the last three decades to investors both Chinese & foreign includes the rise of the hard capability developed by the country in producing goods required for construction activities.

China is the largest producer of steel, for instance, with production higher than the entire world combined. Such levels of production enthused trust among the minds of the investors in the expectation of demand which could be fulfilled. Some thirty years later, China is investing heavily in infrastructure projects throughout the third world, with the projects acting as a funnel to create demand for its own supply.

This cycle of creating trust by increasing production in China gave immediate benefits in terms of the development of new sectors in its economy. But it also brought with it a now constant feature of the latter- the redundancy of the construction sector & its permanent leverage on the economy.

This means, that the fall in real estate or even the gradual reduction in the production levels to make space for more capital to be invested in other sectors of importance would result in a painful period for the Nation.

To prevent that situation from occurring, China has issued a number of diktats for the industry- from capping the capital formation and hence the number of new construction companies in China, to incentivizing buying homes early among young couples at attractive rates.

The response to the policies has been mixed. People came out on the streets in protest against the speed of the construction of their homes, threatening the developers about not paying the next monthly installments if a set deadline is not given to them. This is considered unthinkable even among the ‘liberal’ circles of the party.

The total size of the unfinished projects in China comes roughly to around 590 billion dollars as of today. Much of them are a legacy of the ‘boom’ period starting from the late 90s to 2016- when generous capital was made available to the developers to drive demand for their industries, obviously backed by the state.

The situation transitioned to that of a decline post-2008 when another housing crisis in the US made investors burn themselves into something similar elsewhere.

The decline started to take the shape of a crisis from that period onwards to today when several companies are seeing incomplete projects with liabilities worth more than 1.3 trillion US dollars, and people becoming more desperate about getting the right value for their life savings which were invested into them.

Post-2015, a phenomenon emerged in China known as the ‘Ghost city’. Projects worth billions were rendered unoccupied and the scenes of houses without residents and lush offices without workers became more visible throughout the nation.

The redundancy which was the result of the building spree during the boom phase meant the dramatic rise of China’s debt to GDP ratio between 2008 & 2015 alone. China’s debt to GDP ratio galloped from a manageable 150% in 2008 to the excess of 270% of its GDP in today’s times.

Such sheer unchecked growth of the sector coupled with the knock off effects of the pandemic has made things worse. Despite giving several incentives to boost the consumption of the industry, the State and developers have failed miserably to arrest the fall of the prices of the houses. In some cases, houses were offered for as low as 40-50% discount with lower interest rates.

In other cases where the developers were not lucky enough to fulfil the commitments made to the customers with the intervention of the state, incidents like that of Kunming came to the fore.

The imperils of unchecked growth with vast capital available to expand under a hard state are coming to the fore.

If at all, the call for a ‘renaissance’ cannot be taken by the rooster in a Ghost city, and ‘century of humiliation’ cannot be resolved by using more state sponsored debt to maintain the price bubble from falling.

The chickens are coming home to roost one day after all, it is the question of who takes the call and decides to wake up.

Aditya Raj Sinha
Aditya Raj Sinha

Aditya Raj Sinha is a journalist working for The Indian Affairs. He is interested in the revitalization of the Indic civilization apart from culture, art, history, literature, philosophy, and geopolitics.

The intersectionality of subjects is what his forte is.

When not writing, he can be found strolling around the forests in the Himalayas & talking to the seers about the idiosyncrasies of Shiv.

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