A model Chinese real estate developer in a sector replete with risk takers is teetering on the edge of default. Short of cash, one of China’s biggest asset managers has missed payments to investors. And billions of dollars have flowed out of the country’s stock markets.
In China, August has been a dizzying ride.
What started three years ago as a crackdown on risky business behavior by home builders, and then an ensuing housing slowdown, has spiraled rapidly this month. The broader economy has been threatened, and the confidence of consumers, businesses and investors undermined. So far, China’s typically hands-on policymakers have done little to ease anxieties and seem determined to reduce the country’s economic reliance on real estate.
“What is happening in the Chinese property market is really unprecedented,” said Charles Chang, who heads corporate credit ratings for Greater China at Standard & Poor’s.
For the last three decades, as China’s population surged and its people flocked to cities seeking economic opportunity, developers couldn’t build modern apartments fast enough, and the real estate sector became the engine of a transforming economy. Real estate employed millions and provided a store for household savings. Today, the sector accounts for more than a quarter of all economic activity.
China’s dependence on real estate was lucrative during what seemed like a never-ending building boom, but it has become a liability after years of excessive borrowing and overbuilding. When China was growing faster, the excesses were papered over as developers borrowed more to pay off mounting debts. But now China is struggling to regain its footing after emerging from the paralyzing pandemic lockdowns its leaders imposed, and many of its economic problems are pointing back to real estate.
Chinese consumers are spending less, in part because a slump in housing prices has affected their savings, much of which are tied up in property. Jobs tied to housing that were once abundant — construction, landscaping, painting — are disappearing. And the uncertainty of how far the crisis might spread is leaving companies and small businesses afraid to spend.
Local governments, which rely on land sales to developers to pay for municipal programs, are cutting back on services.
Financial institutions known as trust companies, which invest billions of dollars on behalf of companies and rich individuals, are staring at losses from risky loans handed out to real estate firms, prompting protest from angry investors.
The crisis is a problem of the government’s own making. Regulators allowed developers to gorge themselves on debt to finance a growth-at-all-costs strategy for decades. Then they intervened suddenly and drastically in 2020 to prevent a housing bubble. They stopped the flow of cheap money to China’s biggest real estate companies, leaving many short on cash.
One after another, the companies began to crumble as they could not pay their bills. More than 50 Chinese developers have defaulted or failed to make debt payments in the last three years, according to the credit ratings agency Standard & Poor’s. The defaults have exposed a reality of China’s real estate boom: the borrow-to-build model works only as long as prices keep going up.
As the crisis has worsened, Chinese policymakers have defied calls to step in with a major rescue package. They have opted instead for modest gestures like relaxing mortgage requirements and cutting interest rates.
In an editorial on Friday, the state-run Economic Daily said it would take time for recent policies to take effect: “We must be soberly aware that the process of defusing risk cannot be completed overnight, and the market must give it a certain amount of patience.”
Policymakers have tolerated the fallout of the real estate crackdown because even the companies that are not able to pay all their bills have continued to build and deliver apartments.
China Evergrande, for example, defaulted on $300 billion of debt in 2021 and yet managed to finish and deliver 300,000 apartments out of the more than one million that it had taken money for but not completed at the time of its collapse. Evergrande filed for bankruptcy protection in the United States on Thursday.
But a lot has changed in recent months. Households pulled back on big purchases, and apartment sales plummeted. That shock altered the fortunes of Country Garden, a real estate giant that was once put forward as a model by the government. The company is now anticipating a loss of as much as $7.6 billion in the first half of the year and says it is facing the biggest challenge to its business in its three-decade history.
Country Garden has just weeks to come up with the cash to make interest payments on some of its bonds or join its peers in default. It also has hundreds of billions of dollars in unpaid bills.
These developments have spooked home buyers, who were already wary. In July, new-home sales at China’s 100 biggest developers fell 33 percent from a year earlier, according to data from the China Real Estate Information Corp. Sales also fell 28 percent in June.
Investors worry that policymakers are not acting quickly enough to prevent a bigger crisis.
“I don’t think they have yet found the right solution to solve the problems,” said Ting Lu, chief China economist for Nomura. He and his colleagues have warned that falling home sales and defaulting developers risk a chain reaction that threatens the broader economy.
The fears have spread to other markets. In Hong Kong, where many of China’s biggest companies are listed, confidence has plunged so drastically that stocks have fallen into a bear market, down 21 percent from their peak in January. Over the last two weeks, investors have pulled $7.5 billion out of Chinese stocks.
The real estate troubles are also spreading to China’s so-called shadow banking system of financial trust companies. These institutions offer investments with higher returns than standard bank deposits and often invest in real estate projects.
The latest troubles surfaced earlier this month. Two publicly traded Chinese companies warned that they had invested money with Zhongrong International Trust, which is managing about $85 billion in assets, and said that Zhongrong had failed to pay the companies what they were owed. It was not clear that those investments were tied to real estate, but Zhongrong had been a major shareholder in several projects of developers in default, according to the South China Morning Post. Zhongrong did not respond to an email seeking comment.
A crowd of angry Chinese investors gathered outside the Beijing offices of Zhongrong, demanding that the company “pay back the money” and calling for an explanation. It was not clear when the protest took place; videos of it were uploaded to Douyin, the Chinese version of TikTok, this month.
The demonstration was reminiscent of other acts of defiance in China rooted in the housing crisis. Such occurrences are rare, but there are a few recent examples.
In February, thousands of retirees in Wuhan confronted officials to protest cuts in government-provided medical insurance for seniors. The cutbacks were a sign of the strain on local governments caused in part by the downturn in real estate that had hurt land sales, a reliable source of revenue.
Last year, hundreds of thousands of homeowners refused to pay mortgages on unfinished apartments. Some staged protest videos on social media, while collectives of homeowners tracked boycotts online.
Both protests drew notice, but the momentum petered out as the government intervened to limit discussion on social media, while adopting some steps to ease tensions. Last week, a new video outside Zhongrong’s offices showed no demonstrations but police cars and vans were parked in and near the facility.
Claire Fu and Li You contributed reporting.
Daisuke Wakabayashi is an Asia business correspondent for The Times, based in Seoul. More about Daisuke Wakabayashi
Alexandra Stevenson is the Shanghai bureau chief for The Times. More about Alexandra Stevenson
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