A Peek into China’s Property Crisis: How It Happened and What It Suggests About China’s Domestic Economy & Xi’s Legitimacy

Xu Jiayin, Evergrande’s chairman and once Asia’s richest person, was taken under house arrest on his way to a business conference on September 27th. The reality of Xu’s arrest, however, is more complicated than financial malfeasance. Xu’s arrest highlights not only the reaction to the collapse of the domestic property market but also reveals the weaknesses and negative trends within China’s domestic economy. As a result, these issues have begun to challenge President Xi Jinping’s legitimacy and control over The Chinese Communist Party.

Before analyzing China’s current economic situation, we have to look at the history of China’s explosive economic growth in the early 2000s and the role of real estate in contributing to this growth. China’s property law maintains that there is to be no private land ownership, meaning that all land is owned by the state and local governments. This means property developers have to buy land from local governments before building and selling to homeowners. In the early 2000s, China’s rapid urbanization and transition away from its agricultural economy led to large demands for urban residence. Large property demands incentivized large urban property development projects. The unique property law and rising demands incentivized developers to engage in high-risk leverage borrowing to fund expensive land acquisitions and multiple development projects simultaneously. Initial returns from these property developments were extremely high as property ownership was seen as stable and lucrative due to continuously increasing property prices. The need to have a “home” held major traditional connotations and significance as it represented an individual’s success and marriage. Most importantly, the need to have a home in major cities like Beijing is engraved into the Hu Kou system in China. Under the Hu Kou system, only people who have a permanent residence in Beijing can gain access to local insurance for the best medical services and attend local schools. Being a resident in major cities like Beijing, Shanghai, and Shenzhen also means there are lower score requirements to attend the best local high schools and universities—Peking University in Beijing serves as an example of such incentives.

According to CNN, the property sector has “outsized” the Chinese economy such that in 2020, 70 percent of household assets consisted of property value, accounting for a majority of local government’s GDP and China’s overall economic growth. The reliance on the property market for economic growth, however, comes with dangerous costs in the face of changing domestic policies and economic stagnation. 

The collapse of the property market is largely a result of a cash flow crisis, domestic policies, and China’s reaction to the pandemic. High demand and high returns from property have created a dangerous economic bubble. Local governments began charging more and developers began to borrow at higher leverage to build and sell more. The desire to “strike when the iron is hot” even prompted developers to sell properties before construction had concluded in order to earn enough money to finance the next borrowing project. This vicious cycle of high demand and borrowing drove housing prices in major urban cities to unprecedented levels. In June 2021, the average price of residential housing reached approximately 42,344 RMB/sqm (roughly $5900 USD today). If we account for the estimated annual living expense and rent in 2023, it would take at least 23 years of saving for an average person to afford a modern 45 sqm apartment in Beijing. According to The Economist, an average house in Beijing costs 34 times the average salary, “making it one of the least affordable places in the world.”

Rising housing prices coupled with a sharp decline in demand – due to long pandemic lockdowns – creates high cash flow and debt-default risks for developers and local officials.The stagnated economy meant that there were not enough consumers willing to bear the cost of high property prices. The bubble burst in 2021 when China’s biggest real-estate developer, Evergrande, announced that it had defaulted on more than $300 billion USD. Other property developer giants such as Country Garden announced in 2023 that it will default approximately $187 billion USD. The collapse of Evergrande did not come entirely as a surprise. As early as 2016, reporters have observed the increase of “ghost towns” in China where unsold residences are left abandoned. These “ghost towns” reveal a fatal loophole within the domestic property market—high expected returns incentivize risky high leverages for expensive and rapid construction projects that eventually require consumers to pay a higher price. In other words, the speed of borrowing and building are not met with the adequate demand needed to finance these debts.  

The government has launched new domestic policies to resuscitate the property market. Authorities have adjusted credit requirements, eased mortgage loan rates in big cities, and set caps for property prices to raise the affordability of property. The government also began cracking down on “reckless borrowing” in 2020 to give companies a chance to finance and control their debts. These adjustments, however, proved to arrive too late. Real estate is hard to liquidate in a short time and property prices have fallen, which depresses the possibility of paying back the debts. Heavy debt defaulting has also resulted in failure to build residences that were previously guaranteed to investors. The vicious cycle of growth funded by borrowing has left China’s property market in a dire situation, in which existing property cannot be sold, and people who paid for unfinished projects cannot receive their properties. The loss of purchasing power is represented through viral social media statements by China’s defeated youth such as “let it rot” and “laying flat” as growing living expenses have led to lost hope for owning properties. The collapse of the property market and the declining purchase power of the Chinese further prove that China is entering into an era of stagnating economy. According to The Economist, China is “struggling to meet the government’s modest growth target of five percent for 2023.” The property sector carries debts worth 16 percent of GDP, making a property market crash especially disruptive to the domestic economy. Xu’s political title as standing committee in the National Committee Chinese People’s Political Consultative Conference, the top political advisory body in China, underlines the indispensable role property plays in China’s economic development and growth. 

 The Chinese population’s reaction to the collapse of the housing market also portrays the importance of economic stability in legitimizing an authoritarian regime. In January 2022, crowds protested in front of Evergrande’s headquarters in Shenzhen, demanding that Evergrande repay investors for their principal payments on real estate. Protests in China have been extremely rare since the 1989 Tiananmen Square Incident. According to Freedom House, China has grown increasingly repressive on freedom of expression and has increased domestic censorship to unprecedented levels. Xi’s continuous grip on power in his third term also makes him one of the most powerful Chairmans in the Chinese Communist Party’s history.

China’s economy faces tremendous challenges. Domestically, it has to resuscitate the property market and incentivize consumption and demand. Failure to do so could further result in severe political instability and financial crises. Internationally, China has to prove to investors that it is still a safe investment after Xi’s crackdowns on large domestic firms and entrepreneurship. Xi needs to leverage his priorities in combating China’s economic challenges to legitimize his continuous grip on power as the discontent of the Chinese people continue to grow.