The Chinese government refuses to bail real estate companies out, says developers should go bankrupt when necessary.
China’s real estate developers should go bankrupt if necessary, Minister of Housing and Urban-Rural Development Ni Hong said on March 7. The announcement came days after the “Two Sessions” conference in Beijing, where the country’s highest officials met to discuss future goals and strategies.
The real estate market amounts to 25-30% of China’s GDP according to some estimates. However, after a meteoric growth that fueled China’s rise as the world’s second-largest economy, the real estate market now faces conspicuous hurdles.
The Chinese property market was built on decades of speculation, which eventually burst into a bubble in 2021. Evergrande, China’s largest real estate company at the time, defaulted on its offshore debt, causing ripple effects across the whole economy.
After several years of floundering, Evergrande failed to amass enough liquidity to keep afloat. In 2023, it finally filed for bankruptcy and its liquidation was ordered by a Hong Kong court.
Most Chinese real estate developers now face a similar fate. Country Garden, the developer replacing Evergrande as China’s largest, will face liquidation in May.
UBS estimated that real estate now amounts to just 22% of China’s GDP, a figure set to plunge deeper in coming years. This entails a deep restructuring of the economy, one already presented at the “Two Sessions” conference last week.
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Beijing has always conducted a hard line against indebted developers. “Houses are for living in and not for speculation,” has been the CCP’s slogan for almost a decade.
In recent years, Beijing cracked down on financially insolvent companies. In its view, there is no “too big to fail” firm: everyone must face their responsibilities. And although it tried saving Evergrande for almost three years, the Chinese government always refused to bail them out.
However, there was no mention at the “Two Sessions” of the real estate crisis, leading observers to think Beijing was abandoning its typical hard line.
Ni Hong’s statement last Saturday swiftly canceled these speculations. Beijing has every intention to let insolvent developers fail. “Minister Ni has made it clear that non-functional developers that are insolvent should go through bankruptcy or a restructuring process,” Nomura analysts Jizhou Dong and Riley wrote, “as the government’s priority is to ensure delivery of property projects, not to protect the business of property developers.”
However, climbing out of the real estate hole will be an arduous challenge for China, one that will set its economic tone for decades to come.
