The Real Estate Market Crash in China

-By Sanit Jain

There are plenty of lessons that nations can take from China, ranging from the rapid pace of industrialization, a powerful state, and an efficient mix of power between industry and government. Another important lesson that will fill Chinese history books will talk about the curse of overambition and dangers from companies ‘Too Big to Fall”.

History: The Real Estate Market Bubble

The real estate market bubble in China is largely attributed to wide-scale urbanisation and the fast pace of industrialization. In the 2000s, China saw a huge increase in the urban population caused by the massive migration from rural to urban areas. While in the 1980s, only 19.39% of the Chinese population lived in urban areas, this ratio skyrocketed to 42.99% in 2005. In China, land can only be owned by the state, which led to massive demand for houses in urban areas of China.

Seeing the rising demand and rising property prices, several players entered the Chinese real estate market. So did Xu Jiayin, the founder of Evergrande, the first piece of the large Domino Fall. The massive boom in the real estate sector saw the support of the country’s financial sector as well as the government.

Construction, being a capital-intensive business, largely depended on huge sums of debt. The banks in the country were willing to lend money to these construction companies owing to a high profit margin in the sector, booming demand, and rising prices. Property Development Loans in China rose by 3.2 times from 202.89 bn Yuan to 665.74 bn Yuan in 2003.

The government also supported the boom in the sector because of the large-scale employment generation in the sector and the overall growth of GDP. The growth in the real estate sector also meant growth in several allied sectors, such as cement, glass, bricks, etc., which further fueled the economy and led to a rise in GDP.

The rising price of property did not stop people from buying houses. Several behavioural aspects also helped in sustaining such a demand. In China, often owning property symbolises growth and status. Several social relationships and even social inclusion in China largely depend on property ownership. Moreover, property was considered to be the most secure form of investment owing to the continuous rise in price. These factors, while working in tandem, created the real estate market bubble in China during the 2000s.

What went wrong?

The market bubble allowed several players to enter the real estate market. Evergrande emerged as the largest property developer in the country, making it capable of initiating an entire economic crisis.

Evergrande started borrowing huge sums of money. The money was used not to complete existing projects, sell them off, and gain revenue, but to fund new projects. This led to the development of ghost cities in the country. Since funds were used up to start new projects, several projects had to be stopped midway due to the rise in liabilities caused by the “Three Red Lines” system introduced by the Chinese government. Consequently, as per Nomura, only 60% of the houses pre-sold to the buyers were actually delivered.

The “Three Red Lines”

In order to leverage Chinese real estate players, Chinese President Xi Jinping introduced the “Three Red Lines” system. The system categorised developers as per the debt they already hold, consequently putting constraints on them on how much they can now borrow.

As per the policy, three major criteria were introduced by the government:

  1. The liability-to asset ratio should be less than 70%.
  2. The net gearing ratio should be less than 100%.
  3. The cash-to short-term debt ratio should be at least 1.

If a developer fulfilled all the criteria, it could grow debt up to 15%; two criteria, then up to 10%; one criterion, then up to 5%; and if it breached all the criteria, then it could not grow any debt. Due to its prodigal practices, Evergrande breached all three criteria, putting constraints on its debt-raising capacity. Since revenues were not coming in, it had to stop all of its projects and ultimately set the background for an impending financial crisis in China.

Evergrande: Too Big to Fall?

The Chinese real estate sector represents 70% of the country’s household income and 30% of its GDP. The impact of the fall of the biggest player in the sector, Evergrande, spilled all over the economy. In December 2021, Evergrande reported liabilities of $305 billion, making it the most indebted property developer in the country. Other Chinese developers, such as Kaisa Group, Shimao Group, and Sunac China, also reported debts of up to $20.5 billion. The Chinese real estate sector also supported several other sectors, such as cement, bricks, glass, paint, etc. Due to a lack of funds, several players in the sector had to stop projects midway, which meant a massive fall in the demand for commodities in these allied sectors. Moreover, due to a lack of funds, these suppliers have not made their payments and are under an immense cash crunch. This led to massive unemployment and a fall in household income across China. The sector financed its activities through the large sums of money loaned from the banks. The real estate market crash has led to a massive increase in the number of non-performing assets in the country, forcing a massive cash crunch in the financial sector. Apart from this, several house buyers have refused to pay back mortgages on the loans they have taken by providing the pre-booked property as collateral. The banks in the country have invested $9 trillion in the sector in the form of loans to property developers as well as mortgage loans.

Evergrande’s fall caused an immense drop in the demand for property as well as land in the country. This meant falling prices for property, another hit on the largely struggling sector, and also a fall in income for the local government due to a lack of proceeds from rented land. All these factors, while working in tandem, meant the start of an overall economic crisis in China.


The Chinese government is undertaking several steps to protect the industry and eventually prevent a financial crisis. In order to protect the developers from a cash crunch, the government has announced a provision of $29 billion in special loans and an economic stimulus package of $44 billion. The real estate sector crash stemmed from the over-ambitious approach followed by the players, especially Evergrande. Prodigal use of funds, unsustainable financial practices, and a lack of foresight can be attributed to the main causes of the current state of the industry. A single channel for real estate finance meant a concentration of risk and burden on commercial banks, capable of causing a collapse in the entire system. An underdeveloped financial system coupled with an over-ambition approach only meant a brutal fall, something the country is currently struggling with.