Deserted shopping malls,
half-empty apartment complexes,
abandoned construction sites.
These are all signs of the crisis that has gripped China's property market.
And also an illustration of how dramatically the fortunes of the sector
have changed in the last few years.
Homebuyers are afraid of
not getting the home that they paid for.
The problems China have now
are deep-seated structural ones.
I think the consensus is already that for China,
the property sales may not go back to yesterday.
China's property market is in a bunch of trouble.
And because property is the single-biggest contributor to China's GDP,
when the property sector is in trouble,
the rest of the economy is in trouble as well.
To understand why the property crisis has happened now,
you have to go back a few years.
In the early 2000s, there was an enormous construction boom here.
Skyscrapers, apartment complexes,
they were going up everywhere.
There was this fundamental belief that property prices could only go up.
That belief has been shaken tremendously.
And when you speak to people now,
there’s a real worry that maybe what follows a boom is bust.
The privatization of property that began in the 1990s
created one of the largest explosions of wealth in the country’s history.
China’s housing stock was dilapidated and low quality.
Many people living in worn out dormitories
or housing provided by their state-owned enterprise or government ministry.
China was urbanizing,
with tens of millions moving from the countryside to the city,
and China was getting richer.
All of these things together
would already have driven an enormous boom in China’s real estate.
The trouble was, other factors also contributed.
Domestically, the stock market has been tumultuous.
There have been people who have made a lot of money in the stock market
and also a lot of people who have lost a lot of money.
At the same time, property was steady,
it just continued going up, up and up.
And so people began buying homes,
not to live in them, but as a way to invest their money.
For years there had been warnings
about the borrowing binge
and the building binge in China’s property sector.
Chinese developers would launch a project for pre-sales,
get the money from the homebuyers,
and immediately invest a sum of money
into new land parcels to keep expanding.
It all worked fine until sales suddenly tumbled.
New cash stopped coming in
and developers find they don't have enough cash
to finish the construction of homes previously pre-sold.
The build up of the bubbles went on unchecked,
but as long as people kept buying,
and there’s a lot of investment demand
snapping up the oversupply of housing,
investors and developers felt great.
That’s until the party stopped.
In comes Xi Jinping.
In the beginning of his second term as China’s leader in 2017,
he really starts putting his shoulder into this mantra
that homes are for living in, not for speculating on.
China’s efforts to tighten regulation over its developers
culminated in the unveiling of what’s become known
as the three red lines policy in 2020.
It greatly limited the ability of those firms to get financing.
A lot of smaller companies ran into trouble almost immediately.
Then Evergrande, once the country’s biggest developer,
warned of a potential cash crunch.
A year later it was in default,
sending shockwaves through global markets.
The day has finally come, Shery.
We've been circling around this
what has very recently felt like a complete inevitability, right?
But Evergrande now is declaring officially in default.
Problems at Evergrande were well recognized.
Hedge funds had been shorting the stock for years.
The surprise though was the shift in government policy
from standing behind the debts of big property developers
to allowing them to go under.
Dozens of private developers have since collapsed,
raising not only questions about the future of the property market in China
but about the health of the entire economy.
The latest to struggle, Country Garden
was once the country’s largest developer by sales
and a company many saw as too big to fail.
Country Garden, obviously the latest
poster child of the property sector woes.
The fallen fortunes of Country Garden you can basically see it in a 10-year chart.
The two debt crises is very different.
Country Garden has over 3,000 projects across China,
and that’s four times Evergrande.
For Evergrande, when it went bust in 2021,
the government can still call it an isolated event
and it’s due to the company’s own management and reckless expansion.
For a developer of Country Garden’s status to stumble,
it’s more detrimental to sentiment
because it’s telling you that something is fundamentally wrong
with China’s housing market
that’s pushing even formerly healthy developers to the brink of collapse.
As the developers suffered, construction stopped.
Homebuyers realized the properties they had already paid for,
had taken out a mortgage to buy, were not being built.
Anger and protests grew.
This is really the big concern.
Throughout all of the crackdown,
is whether or not we’re going to see
social unrest and financial instability.
The government has stepped in to push banks
to continue lending to developers
so that they have the money to finish the homes
that they’ve already sold and make sure that those homes
are delivered to the buyers.
The government has also stepped in
to ask the banks to lower the interest rates they charge on mortgages.
80% of the wealth of the average Chinese household is tied up in their homes.
When that home price goes down, they feel poorer,
they spend less,
and that has been a real drag on the economy this year.
The risks to the financial system we’ve already started to see.
Zhongrong, a big trust company here in China,
a trillion yuan under management,
has not been able to pay some of its products when it comes due
because they lent a lot of money to developers
and they themselves have not been paid.
If we start seeing problems in China’s banks,
if there are concerns about a Lehman moment for China,
what we could see is a global
risk-off moment for financial markets.
It wouldn't just be Australia and Chile
and the other commodity producers that will be suffering.
It would be the big financial centers
here in the United States, in London and elsewhere.
When Lehman Brothers collapsed in 2008,
it marked the beginning of a global financial crisis.
We’ve had a historic day on Wall Street.
Lehman Brothers, the 158-year-old firm,
filed for Chapter 11 protection in US bankruptcy court today.
But there are some key differences between what happened then
and what’s happening in China today.
Banks in China are much more straightforward in their operations
than the Wall Street whizkids that contributed to the global financial crisis.
China’s banking system has very ample sources of funding
and has the government standing squarely behind it.
Does that guarantee that China will escape a financial crisis
as the real estate sector collapses?
No, but it gives them a fighting chance.
If China’s economy stumbles, the global implications will be far reaching,
touching anyone who’s benefited from having the country
as a supplier or as an end consumer.
Geopolitically, a weakened Chinese economy could force Beijing
to reconsider how it pursues its rivalry with Washington.
And if other nations begin wondering whether
China is a superpower approaching its peak,
the way the world deals with Beijing may be in for a lot of rethinking.