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Economic domino: The Chinese real estate crisis, a threat to the world

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  • Reading time:51 mins read


Economic dominoesThe Chinese real estate crisis, a threat to the world

Debt-ridden developers and buyers who now refuse to pay their monthly payments: real estate in China is going through a crisis that could become global.

Buildings under construction in Guangzhou A. Evergrande, the former number one Chinese real estate company strangled by an abysmal debt of some 300 billion dollars, is the promoter.


Real estate in China is going through a crisis, which could affect the entire national and even global economy. State of play of a sector that has been suffering for many months.

How big is real estate in China?

Colossal. In a broad sense, real estate accounts for about a quarter of China’s GDP. The housing reform (1998) in China, which created a genuine real estate market, led to a meteoric boom in the sector, maintained by social norms, the acquisition of property often being a prerequisite for marriage.

Banks financed this frenzy with loans to developers and buyers. Even today, mortgages represent nearly 20% of outstanding loans in the Chinese banking system, according to a recent report by ANZ Bank.

In China, most developers sell homes through a pre-sale system, where properties are purchased before construction begins. The country thus has 225 million square meters of housing to be completed, according to the financial information agency Bloomberg.

Where does the crisis come from?

The rise of developers has been accompanied by soaring house prices. This situation has long worried the government because many Chinese no longer have the means to buy property. The massive indebtedness of developers, which poses a risk for the economy and for the financial system in China, is also a major concern for the authorities.

To reduce the sector’s indebtedness, Beijing thus tightened the conditions for access to credit for developers in 2021, which dried up the sources of financing for groups already in debt. A wave of payment defaults followed, in particular that of Evergrande, the former Chinese number one in real estate, strangled by an abysmal debt of some 300 billion dollars.

The uncertainties linked to Covid-19, which weigh on household income, also deter individuals from buying a property, further aggravating the crisis.

How are buyers reacting?

In September 2021, the decline of Evergrande triggered protests by worried buyers outside the group’s headquarters in Shenzhen (southern China). In June this year, a new form of protest emerged: the home loan repayment strike.

Evergrande customers protest in Shenzhen on September 15, 2021.

Evergrande customers protest in Shenzhen on September 15, 2021.


Faced with the delay in the work, owners of homes purchased before construction have announced that they will cease all payments until the work resumes. In one month, this payment strike has spread to more than 300 real estate projects in 50 cities in China.

Should the world be worried?

China is the world’s second largest economy. Given the country’s interconnectedness with the rest of the world, any contagion from the real estate crisis to China’s financial system will have international repercussions, analysts say.

“If payment defaults increase, there could be great and serious economic and social consequences,” warns the rating agency Fitch Ratings. Already in May, the American Central Bank (Fed) estimated that a worsening of the real estate crisis in China could have consequences for the country’s financial system. In such a scenario, the crisis would affect world trade, the Fed pointed out.

What solutions?

Analysts say a bailout for the sector is unlikely. Such a bailout operation would have the perverse effect of “putting all the risks on the banking sector or the government”, underlines Ken Cheung, analyst for the Japanese bank Mizuho. At the risk of causing the opposite effect than that sought.

Property owners and developers, seeing the state intervene, would be tempted to evade their responsibilities and stop their payments, underlines Mr. Cheung.

Local authorities, developers and owners could on the other hand negotiate, on a case-by-case basis, exemptions from interest or deferrals of monthly payments, recommends analyst Chen Shujin, of the American investment bank Jefferies.