China this, China that: it seems like our country’s policymakers and media outlets can’t get enough of the former Middle Kingdom. Whether it be rumors of manufacturing coronavirus in a lab or questionable stories of a Chinese coup, it seems like the spotlight is only on China when the average American doesn’t need to care. But right now, when recent events there have the ability to shake up the entire global economy, media coverage is nowhere to be found. On the horizon may be a looming repeat of the 2008 housing crisis, and it could be just a matter of days before China’s day of reckoning.

But before we can understand the true graveness of the situation, we first need to understand how Chinese real estate became so important. With the population growing at astronomical rates and the country’s economy and cities expanding even faster, real estate was a near-guaranteed positive investment for generations. Millions of children grew up with the financial advice that real estate would always be a wise investment. [1] And so, as they became working adults and formed their own families, they began investing their entire life savings into real estate, because the one thing that would never fail was real estate. The result of that mindset was a world in which real estate in China made up 70% of household wealth, a fifth of the country’s entire economic output, and 37% of the government’s total revenue. [2]

But of course, there is no such thing as guaranteed profit. To match China’s historic population growth, big construction companies have resorted to irresponsible strategies to maintain their exponential revenues. These institutions are built upon a cycle in which previous loans are paid by building and selling skyscrapers. But to build said skyscrapers, many companies are forced to take on further loans, a cycle that only compounds their debts. This scenario leaves companies desperate for more and more cash to finance their ever-expanding debt payments, and so they resort to selling houses before they’re even built. Essentially, the big players in the Chinese real estate market are participating in the world’s largest Ponzi scheme, acquiring loans to pay for previous loans, a strategy only justifiable in the environment of constant expansion of China. [2] 

It’s pretty understandable why this cycle was unsustainable. The instant housing demand plateaus, the instant construction is delayed, or the instant this unwavering confidence in housing falters is when the entire Chinese real estate market comes crashing down. Unfortunately, it seems like all three of these conditions have been triggered in recent times: China’s shrinking population has capped housing demand, COVID-19 and China’s lockdown policies have shut down construction sites, and regulators have cracked down on risky lending practices. [3]

And as a result, large cracks in the Chinese real estate market have formed. Just last month, China’s largest real estate developer, Evergrande, defaulted on $300 billion worth of loans and filed for bankruptcy. [4] And just last week, it seems all but confirmed that China’s biggest private sector developer, Country Garden, is headed towards the same fate. [5]

And sadly, the implications of this mess aren’t centered around these companies’ CEOs and their rich shareholders, but rather on vulnerable Chinese families and individuals around the world. Parents, like 38-year-old Huailan, are now asking if their families are going to be homeless. Construction workers, like Fu, are wondering if their paychecks will ever come and whether or not they can put food on the table this week. [5] For those more fortunate, they’re stuck paying mortgages for houses that may never be built. Hundreds of thousands of such (almost) homeowners have banded together, boycotted their monthly payments, and staged online protests on social media. Now, banking institutions are laden with unpaid debt and are increasingly weary of handing out new mortgages. [6] 

But why should you, somebody living in the suburban mess that is New Jersey, care? For high schoolers specifically, the inherent interconnectedness of China’s economy and its foundation on risky balance sheets means that this crisis isn’t likely to end in real estate. Your favorite brands, like Apple and Shein, will likely be forced to cut production in an economic downturn. A weaker Chinese economy also means a lesser appetite for the production of raw minerals, agriculture, oil, and other building blocks of industry. Prices of staple goods, like rice, gas, and electronics may increase as a result. [7] For any teachers or adults reading, this crisis’ implications on the stock market may be of concern. As the source of 40% of global economic growth, and decline in consumer spending in China hurts the bottom line and processes of companies around the world. While reactions from global investors have been quite muted thus far, the spiraling nature of this collapse and secrecy from the Chinese government might make this an issue that only generates reactions when it’s far too late. [3]

[1] https://www.nytimes.com/2023/10/16/business/china-evergrande-country-garden.html

[2] https://www.economist.com/finance-and-economics/2022/09/12/chinas-ponzi-like-property-

market-is-eroding-faith-in-the-government

[3] https://www.nytimes.com/2023/08/21/business/china-economy-real-estate-crisis.html 

[4] https://www.bbc.com/news/business-58579833 

[5] https://www.bloomberg.com/news/features/2023-10-23/china-property-crisis-country-garden

-distress-crushes-investors-homebuyers

[6] https://www.nytimes.com/2023/08/20/business/china-property-crisis-country-garden.html

[7] https://carnegieendowment.org/chinafinancialmarkets/87751