Why is there a real estate crisis in China?

The Chinese real estate sector has a debt problem. Major property developers like the beleaguered Evergrande have racked up massive debt, leading to construction stoppages and many angry buyers.

Amid the turmoil, buyers across China have banded together and threatened to stop paying mortgages on more than three hundred unfinished housing projects. The Chinese government could release bailout funds worth up to $148 billion aimed at enabling developers to complete their buildings. Marketplace Morning Report host David Brancaccio joined Marketplace China Correspondent Jennifer Pak to review the latest developments in the crisis.

The following is an edited transcript of their conversation:

David Brancacio: So what are unfinished dwellings? What is it like to sit there? If you see one of these, the foundations and maybe piles of cinder blocks and cranes are somehow sitting there?

Jennifer Pack: Yes exactly. And part of the reason they stopped is because of the COVID lockdowns. But mostly because property developers are strapped for money. You may have heard of Evergrande. So they would go to smaller areas, pay top dollar for the land, and then sell the condo projects before they were built. And usually they took big down payments, usually 30%. But sometimes we’ve heard of 50% and then they use that money to build condos. And almost all developers did. At a time. They also got cheap loans. And so they started investing in areas where they had no expertise. Evergrande, for example, started bottling water, electric cars, even bought a football team.

Brancacio: And those cheap loans, those are drying up.

Bundle: Yes exactly. Chinese regulators were very concerned about this reckless spending. So they cut off access to easy credit. And then the Chinese economy also started to slow down. So investors started to look carefully at these condos, are they really worth the price they were paying? Home sales therefore also fell. The developers therefore ran out of money. And that’s when global investors got really worried.

Brancacio: Why, I mean, other than human concern for other humans? I mean, from what I understand, American investors are generally not too involved in the Chinese real estate market.

Bundle: You’re right. But real estate is an important part of the Chinese economy, and the Chinese economy is connected to the rest of the world. So if Evergrande and other developers don’t pay their suppliers or their construction workers, then those people in turn don’t pay their bills, layoffs started happening. It’s a real snowball effect. And finally, you’re going to get the impression that in the United States, Chinese officials really don’t want more buyers to join this boycott, so they’re censoring the news. It was very difficult to assess the number of people involved.

Brancacio: And there is a kind of distinction here. These protesting owners are not in default on their loans, but they are threatening to boycott the payment of their mortgages. What is the difference?

Bundle: Yeah, well, in China, if you don’t pay your debts, it could land you on a so-called deadbeat list, which is going to make your life miserable. And two, home buyers, they still want those condos. For example, if you are a man, you need an apartment to be considered marriage material. You need a condo to enroll your child in a good school. And if you belong to the middle class, which is often the case, real estate remains the only form of investment available to you. So threatening not to pay the mortgages is really a way of getting the government’s attention rather than actually defaulting.