China’s Second Largest Property Developer is Tanking– What Should China Do About it?

Connor Baumgardner, Author

What happens when the second largest property developer in China finds itself knee deep in 300 billion dollars of debt, with no easy way to pay it off? The DOW drops by 1.8% in a day, that’s what. The Evergrande Group is currently facing the consequences of what happens when China’s modern day risk-reward real estate business goes wrong, and the Chinese Government frankly needs to do something to alleviate the financial trouble their downfall is inflicting on the vast number of investors and contractors who staked their hopes on the company. 

So what exactly happened to the Evergrande Group? It’s rather simple in context. Basically, the way that Chinese property developers work in modern times is that they buy land, sell unbuilt houses to Chinese residents who seek to profit on them in the future, and use that money to further buy and develop land (Feng). This wheel and deal style of business has propelled property to become 70% of China’s current urban wealth, and it’s also why Evergrande is currently in such a tough spot (Li, Fan). 

Of course, China’s government has always begrudged this way of operation– they never really took much action on it, though. They’ve implemented a few measures, like the three lines system last year (basically, it’s an attempt to balance debt and money on hand with lending), but due to both the highly lucrative nature of real estate and the huge amount of control it has on the economy, China has their hands tied (Lee). On the one hand, they can’t just let these businesses die– that could potentially demolish the economy– but at the same time, they can’t exactly let these businesses continue to creep house prices– especially if Xi Jinping, their leader, wants to be consistent with his claim that “housing should be lived in, not speculated” (XinhuaNet). 

So in this conundrum, what actions should China take? It’s hard to necessarily say– there’s so many conflicting issues that there’s no definitive answer. What should China do in the future if other real estate companies fall into a similar situation? What should China do for the people and companies affected? What about overseas investors? All of these and more are all issues the country needs to work through. 

The easiest method would be for China to step into the business and pilot it until it gets back on track (albeit using a different business model). As it stands, China can’t just leave everyone the company has contracted and all the people who’ve invested in the company to fend for themselves– controlling and funding Evergrande until all the currently purchased houses are built (no new houses) and until each contractor or company that has been hired is reimbursed would solve the immediate issue cleanly. After that, it should be up to Evergrande to rebuild itself, and it should be up to the government to slowly reform the real estate industry to become less about buying for the sake of future investment (which in turn will force current companies to slow down house manufacturing as demand decreases). 

No matter how China acts on this issue, it’s going to set a large precedent (and in the case of non action, it’ll have quite the economical impact too)– Evergrande’s situation is something that should certainly not be overlooked. 

Work Cited: 

Feng, Emily. “The Evergrande Group’s Debt Issues Could Be A Drag On China’s Economy.” National Public Radio, NPR, 22 Sept. 2021, www.npr.org/2021/09/22/1039617477/evergrande-china-financial-system

Lee, Amanda. “China’s ‘three red lines’ strike delicate balance between curbing real estate debt and local government finances.” South China Morning Post, 6 Oct. 2021, www.scmp.com/economy/china-economy/article/3104366/chinas-three-red-lines-strike-delicate-balance-between

Li, C., Fan, Y. Housing wealth inequality in urban China: the transition from welfare allocation to market differentiation. J. Chin. Sociol. 7, 16 (2020). https://doi.org/10.1186/s40711-020-00129-4

“Interview: Minister reaffirms “houses for living in, not speculation”.” XinhuaNet, 6 Jan. 2021, www.xinhuanet.com/english/2021-01/06/c_139646693.htm