Evergrande’s Fall Exposes the Deeper Fault Lines in China’s Property-Led Growth Model
The sentencing of Hui Ka Yan, Xu Jiayin, founder of the China Evergrande Group, to life in prison marks the conclusion of more than just the fall of one of China’s biggest businessmen. Hui was found guilty of eight offenses, including fraud, misappropriation of funds, securities violations, and bribery. Evergrande, formerly the largest real estate developer in China by contracted sales, turned to almost all of its $300 billion plus liabilities. Hui’s trial may mark the end of a significant legal case, but the Evergrande case does not end the massive economic case Evergrande came to represent. China’s real estate bubble was not a tale of just increasing house prices. It involved a tightly connected system of households, developers, banks, and local governments. Property became the main wealth purchasing and saving vehicle for Chinese households. In a survey by the People’s Bank of China, 59.1% of urban households’ assets were held in the form of housing, and the home ownership rate was 96%. Increasing house prices had an effect beyond an increase in construction. House prices had a positive effect on household wealth perceptions, confidence, and consumption. For developers, the system was designed to incentivize expansion. Land was bought and presold apartments, loans made it possible for developers to start new projects, and growing property evaluations enabled more borrowing. Evergrande was one of the developers who pushed the system the farthest. It can be described as the “three highs” consisting of high turnover, high costs, and high leverage. Evergrande’s model was to raise capital, buy land on a massive scale, and begin development while also borrowing against their land and starting the cycle over. So long as lenders continued to lend and buyers continued to buy, investors and developers alike continued to benefit from the cycle and the land and housing prices continued to grow. Local government interests were aligned with the developers. After the 1994 tax-sharing reform, the central government gained more revenue, leaving local governments shouldering a greater financial burden. To offset some of the burden, local governments sold land to developers and used land as collateral for loans. By 2019, it is calculated that local governments’ reliance on land finance was at 38.6 percent, with over 50 percent in many large cities. Property prices and local government finance and debt fuelled a cycle of increasing infrastructure spending. This outlines how vital property investment became for China. The IMF put the contribution of property to the economy at up to 20 percent. However, this number does not even come close to capturing the extent of property’s reach. Building property creates the need for the transport of raw materials. That includes steel, cement, and glass, as well as the machines to build the property, appliances, and furniture. Glass and machinery need to be transported using logistics and financial services. Property building employs contractors. Developers take out mortgages and corporate loans. Local governments earn money from the sale of land. So, property not only includes one of many sectors of the economy, but becomes a complete economic system. It becomes very clear how this system would collapse if the opposite of what is expected were to occur. This is the nature of a bubble. Every apartment does not become worthless. It means that the cost of the property, along with construction and the loans used to finance the purchase, became more dependent on whether people thought the price and demand for property would continue to rise. If people begin to think the cost of property will fall, then the same thing happens in the opposite order. Buyers will delay purchases, developers will not earn presale income, government revenue will fall, and banks will be more cautious of extending loans. Beijing recognized the risks so they began to tighten financial regulations starting in 2016. In 2020, The “Three Red Lines” Framework was established. Beijing’s goal was to limit debt for highly leveraged developers. From a macroeconomic standpoint it was necessary to limit debt. The problem was that leverage had become endemic throughout the system. It was really wishful thinking that it would discipline poorly managed developers because it made the business models of other driven companies more dependent on constantly selling new property and taking out new loans to continuously refinance debt. Evergrande exemplified the most famous case of China’s real estate collapse. Their failure impacted far more than themselves. Suppliers weren’t getting paid, construction companies went bankrupt and halted their projects, buyers had to wait to get their newly financed homes, and the creditors began to doubt the feasibility of their investments. Media states that Evergrande’s liquidation is slow and only $255 million of assets were sold by August of 2025 with claims against those assets totalling $45 billion. The possibility of China suffering a sudden replication of America’s 2008 “Lehman moment” is low. China’s financial system is more state-controlled, and the major banks are capable of being directed to provide support. Further, the capacity of Beijing to avoid excessive failure is far higher than the capacity of America at that same part in its history. The more likely threat is a prolonged balance-sheet adjustment where weakness in the property market will slow economic activity for many years. This trend continues through 2026. In July, Chinese new-home prices fell by 3.2% compared to the previous year. Of the 70 cities monitored, only 17 showed an increase in prices from the previous month. The first 7 months of the year also showed declining trends in property sales, investment, and new construction. During this period, the revenue of the Chinese government from land sales declined by 31.5% and was recorded at 977.8 billion yuan. These figures show a weakening trend in property and reflect declining private investment and local government finances. This trend is most problematic for households. When the primary investment of a household falls in value, households become more conservative. Household wealth falls and household members that own houses feel poorer, even if they have no intention of selling.
