What does Evergrande's collapse tell us about China's economy?
#64: With Ling Chen and Jeremy Wallace
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Amidst China’s broader post-pandemic economic slowdown, the real estate sector has been a major headache for Beijing. Last August, Evergrande, once the world’s largest real estate company, filed for bankruptcy. We ask what the company’s collapse means for China’s economy.
We’re bringing you this edition with two contributions because, as we were waiting for a third answer, China’s top securities regulator accused Evergrande and its founder of a $78 billion fraud. The two answers below were provided to us before the fraud accusation was made public.
Evergrande’s collapse indicated that the Chinese economy was overly reliant on the windfalls from selling land, and the real estate sector contained too many bubbles. This growth model was fundamentally different from the model that drove China’s development in the first two decades of the reform. Local governments that played a key role in economic activities used their control of the land to drive over-investment in real estate. However, the remedy for such a problem is not simply to contain the role of the local bureaucrats or suppress their development initiatives, but to divert investment to other more productive sectors.
China’s impressive economic machine, powered by exports and investments, has produced record growth over the past four decades but is now sputtering. Chinese developers took on huge debts to build real estate as if market demand was insatiable and government protection inevitable. However, the Chinese government finally had enough. It faced the remarkably strange situation of a simultaneous housing glut and shortage. Millions of empty and unfinished apartments encircle China’s second, third, and fourth tier cities, yet apartment prices are so high that many struggle to afford them. Allowing Evergrande into bankruptcy is an early step in unwinding this mess.
Further reading:
Evergrande’s Alleged $78 Billion Fraud Is Among Biggest Ever, Bloomberg, N.A.
Timeline: Worsening crisis at Evergrande, Reuters, N.A.
Does Evergrande’s Collapse Threaten China’s Economy? Council on Foreign Relations, Zongyuan Zoe Liu
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