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Real estate sector collapse as one of the factor causing China's looming economic collapse

Updated: May 31, 2023

Author: Anastasija Ivancova

Date of Publication: 23/11/2022

The tough economic situation in China, the second largest economy in the world, is getting worse every day. These concerns have been around for some time. And if the collapse of the economy does occur, the consequences will be felt throughout the world.

China's economy has skyrocketed over the past 20 years, but will grow more slowly now

China joined the World Trade Organization in 2001 and its economy has become increasingly integrated with the rest of the world. In fact, China's economy has grown so much that it has become the center of the global trading system. For example, China's share of world exports quadrupled during this time. However, there are fears that as a result of the lockdowns, the Chinese economy will grow more slowly in the coming years.

Not only lockdowns caused the slowdown in China's economy

Yet covid lockdowns aren't the only reason for China's impending collapse. Basically, China's problems originated during the 2008 global financial crisis. In particular, the government instructed banks to actively lend, which led to a sharp jump in bank lending in 2008. The main part of the loans was directed to real estate, which led to an increase in prices in the market. More specifically, the real estate sector accounts for up to 30% of China's GDP and has been paralyzed by the government's recent campaign to curb reckless borrowing.

Evergrande has taken on more debt than it can pay, which is affecting the e ntire economy of China

Evergrande, one of China's largest real estate developers, owns the majority of real estate with millions of apartments in hundreds of cities across China. Evergrande also has huge financial obligations, hundreds of unfinished residences and suppliers who have mothballed construction sites. In its heyday, Evergrande was at the height of a real estate boom in China that resulted in the urbanization of large areas of the country. In fact, the real estate market has grown so much that most of the funds of Chinese residents have been invested in real estate. As a result, this gave Evergrande influence in an economy that began to rely on the real estate market for accelerated growth.

Due to the company's success, banks continued to lend to the company for further growth and expansion. Consequently, Evergrande ended up with more debt than it could repay. The company found itself knee-deep in trouble and debt, which forced it to pay off delinquent bills with unfinished properties. What’s more, Evergrande has faced lawsuits from homebuyers. Meanwhile, vendors and lenders are demanding hundreds of billions of dollars in bills.

The Chinese government is pressing on the company, continuing to crack down on developers' reckless borrowing habits. And it looks like they want to make Evergrande the main troublemaker. Over the years, foreign investors and lenders have confidently invested in the company because they believed the Chinese government could always intervene to defuse the situation. But due to the government's recent decision to curb China's unsustainable debt problem, it appears that Evergrande will not receive bailouts.

Unfortunately, the failure of Evergrande also affected the economy. Home buyers and investors are in a panic, fear has spread to the real estate market and hit prices. The situation shook the global financial markets as well. However, that's the only part of the problem. Because of the real estate situation in China, thousands of deceived citizens have started a movement to stop paying mortgages on their unfinished homes in order to pressure the Chinese Communist Party and banks to treat them fairly. Banks also threaten the economy as they borrow at high rates to finance developers and attract deposits from citizens by offering high interest rates.

It looks like China is heading towards the collapse of its financial system. Due to the mortgage crisis, Chinese banks are dealing with almost $10 trillion in loan risk. So if the situation worsens, it could lead to China's economic collapse. So, the real estate and mortgage situation has affected millions of households in the country, and will probably cause a colossal crisis that could be much worse than the 2008 financial crisis. Time will tell how China handles such a big economic crisis.


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