Real estate is something that has always interested me. Understanding balance sheets, costs of production, equity, leverage and borrowing, and interest rates are a fascinating concept to wrap your head around. China, over the last 20 years, has seen an economic boom. Large scale city projects, a large population, and billions if not trillions of dollars to be made and invested in real estate development led this economic upturn in China’s real estate development market. By 2020, real estate development accounted for nearly 30% of China’s GDP or gross domestic product. Following 2020, China’s real estate market saw a quick, abrupt downshift in real estate development as a country and has had a far reaching effect on both Chinese and global economics and economic policy because of companies such as Evergrande.
Evergrande or China Evergrande Group was founded by Xu Jiayin in Guagzhou, China in 1996. By the 2000’s, it became one of China’s fastest growing residential developers, focusing on mass-market apartments in smaller cities. In 2009, it was added to the Hong Kong Stock Exchange, raising 722 million US dollars. This optimism sparked even more economic expansion and diversification of the Evergrande portfolio of assets and industries it became a part of. From 2010-2017, Evergrande began a business policy of massive land acquisitions fueled by debt borrowed both domestically and abroad. As a result of the influx of debt capital, it began diversifying into electric cars, tourism and theme parks, health, bottled water, agriculture, even a soccer club known as the Guangzhou Evergrande. By the mid-2010’s, Evergrande was the 2nd largest property developer by sales.
Between 2017-2019, Evergrande continued to borrow more and more capital to continue its expansion in land development and non-core business operations. By the end of 2019, there were reports stating Evergrande’s liabilities, or what they owed to creditors, exceeded 300 billion dollars. So what did China do, what was the turning point in this unsustainable growth and development? In August of 2020, Beijing, the capital and host of the central government authority, introduced the “Three Red Lines” which was a debt control policy. China’s housing and real estate boom had fueled massive borrowing by developers. The government worried about the financial risk of such borrowing as well as skyrocketing home prices, so the three red lines aimed to force companies to deleverage or reduce their debt to income ratio. The first policy or first red line restricted borrowing, saying that the liability to asset ratio must be less than or equal to 70%. The second red line called the “Net gearing” ratio stated the company's net debt or total debt minus cash must not be more than the company’s equity. The third red line, Cash to short term debt ratio, stated that the company must have at least enough cash to cover all debts due within a year. Much to the dismay of the Chinese government and foreign creditors, Evergrande crossed all three lines, basically freezing new borrowing. Without new borrowing, Evergrande could not remain solvent as a company, fueling speculation of default on its debt. The government policy marked a turning point, after years of debt fueled expansion in a capitalist market, China’s property sector faced growing government regulation, falling home prices, and less access to new financing.
By the summer of 2021, reports again surfaced that Evergrande was running out of cash, all the while protests erupted by citizens whose homes were not finished as well as suppliers who were not getting paid. Attempts were made to restructure debt after the company missed interest payments and ratings agencies downgraded Evergrande’s credit to junk status. By the end of 2021, Evergrande was forced to declare default on overseas debt. In the following year, the company was taken off the stock exchange due to failures to file earnings reports. In 2023, Evergrande filed for Chapter 15 bankruptcy protection in U.S. courts. On January 29th of 2024, Hong Kong High Courts ordered them to liquidate all assets, citing failure to present a workable restructuring plan. In May of that same year, Chinese regulators fined the main-shore company for financial misconduct, and finally in August of 2025, Evergrande was formally taken off the stock exchange after 15 years.
So what are the repercussions of the bankruptcy of Evergrande Group in China and the world as a whole. As previously stated, China went on a 20+ year boom of real estate development. It saw widespread economic growth in home sales and home prices. As a result of Evergrande amongst other real estate developers going insolvent without any government bail out in sight, it caused widespread panic in the home buying industry. Millions of Chinese families delayed or canceled home purchases after seeing unfinished building projects. As a result, home buyer confidence fell dramatically. In addition, home sales dropped in many cities, causing a downshift on home prices and reducing new construction projects. Families lost significant net worth because 60-70% of families net worth came directly from real estate holdings. Subsequently, investors and banks pulled credit accessibility to the country and its real estate developers as investment seemed too risky to take. In addition to loss of access to credit, many corporate firms and banks lost billions as a result of developer default. In an industry that once made up 25-30% of GDP, the crash of the real estate market in China saw a slowing of China’s long standing economic growth. Some economists estimate the real-estate downshift has caused a 1-2% decrease off of China’s annual GDP since 2021.
Not only has the real estate downturn had an effect on home buyer and investor confidence, it has had a significant effect on local governments as well. Since real estate developers bought land from local governments, it has had a spiraling effect on local government economics. Local governments, who once relied on land deals as a source of income, have now become overleveraged themselves as a result of the absence of cash flow from land expenditures. Subsequently, infrastructure and other budget cuts must take place to balance government budgets in the short term in order to maintain long term stability.
What is the central government doing to protect its citizens in such an economic disaster? Beijing’s top goal in all of this is to make sure homes purchased are delivered to consumers. State run developers have come in to finish homes and deliver them to market. The central government has also changed homebuying policies to make home ownership easier. For example, the central authority lowered the required down payment ratios in many cities, relaxed mortgage interest rates, and reduced restrictions on who can buy second homes or invest in other cities. Despite these steps, consumer confidence remains low.
In the end, China has begun to shift its economic resources elsewhere in order to sustain long term economic growth and stability which is paramount to the central Authorities vision of success. While the real estate market has cooled, China has continued to invest in manufacturing, green technology, semiconductors, and domestic consumption to spur economic growth towards its GDP. Instead of looking at the short term picture, China has doubled down and has now begun to look at the long-term vision of the central government and private business to fuel another stepping stone towards growth and prosperity for the Chinese people.
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