China real estate nightmare is not over yet, professor warns

China's real estate crisis represents a much broader problem for the country than the collapse of Evergrande Group and problems with repaying creditors.

Writing in World Politics Review this week, Mary Gallagher, an expert on Chinese law and a professor at the University of Michigan, writes that China's leader Xi Jinping He said it was up to the country to abandon the blame game and take the lead in repairing long-term economic rifts created by the central government.

In January, a Hong Kong court ordered Evergrande, the world's most indebted developer facing a real estate sector crisis, to liquidate its assets. Evergrande is the first insolvent mega-developer to default on its debts, but it won't be the last, and the shockwaves continue to reverberate across the country, where about 70% of household wealth is invested in real estate.

“Given the scale of the current crisis, over 1.5 million homebuyers are still waiting for homes they have already paid for in Evergrande. Other viable real estate developers willing to take over unfinished projects. The onus may still be placed on local governments to find the right “in their area,'' Mr Gallagher said.

But local governments are also struggling with the “same frenzy of real estate development and land sales,” as well as the costs of implementing China's strict pandemic-era policies and regular COVID-19 testing for the entire population. Since then, I have been covered in debt.

She pointed out that compulsory public services such as social security and schooling are exacerbating the plight of cash-strapped local governments.

The scholar acknowledged that corrupt local officials during the bubble period actually became rich through corruption and overinvestment.

However, during the bubble period when housing prices soared, local governments became dependent on land speculation and real estate development because of the pressure on local governments that were unable to raise sufficient funds from national revenue. has brought in much-needed revenue, she said.

“Long-term solutions will require changes to the tax system so that they receive enough tax revenue to pay for the disproportionate governance imposed on them,” Gallagher said.

Crackdowns on corruption have been one of Xi's flagship policies since he came to power in 2013.

But now is the time to accept that “these problems are not just rooted in the bad behavior of corrupt officials, greedy capitalists or overextended households,” Gallagher said. Rather, the bad actors are motivated by the incentives set by China's development model of rapidly developing land and real estate to sustain ultra-high growth.

“Underlying demand for new homes is expected to fall by almost 50 per cent year-on-year.”
Over the next 10 years,” the International Monetary Fund said in a report released this month, some regions will see even more dramatic declines.

Gallagher pointed out that while a contraction in the real estate sector is necessary, it will be a big hit to many Chinese people's wallets. This is compounded by the blow to industries that rely on real estate construction, from landscaping to interior design, she said.

Consumer confidence and spending are expected to plummet, weighing down already weak domestic demand. This will lead China to pursue overseas markets more aggressively, many of which are already wary of widening trade deficits with China.

Again, Mr Gallagher said the central government needed to do more to strengthen “China's underfunded and shallow welfare state”.