What Comes Next in China's Property Crisis

Earlier this year, Chinese media started to report that the country's biggest property developer, Country Garden, is in trouble.

Actually, she's the haughty King.

Paisangani in the eastern province of Shandan, a thirty five year old mother of two starts to freak out. She's already paid hundreds of thousands of yuan for a new Country Garden apartment. It's supposed to be finished by the end of the year.

It was an an August evening. She scrolled through their phone for information all the way till one am.

Her name is Huilan. She didn't want us to record her voice, but she was willing to let Bloomberg's Lulu Chen tell her story.

And then next morning, she drives down to the construction set, climbs eighteen floors up to the rooftop of a nearby building, and she looks out onto this construction project and she sees slabs of cement and ankle high grass, idle prayes, and a big muppit.

It was so far from what she'd imagined for herself and for her family.

Her daughters are asking her when can they move into the new apartment, and she doesn't know what to say to them.

How do you explain to a child that China's real estate market has crashed. Developers had been in the red for a while, but in October, the biggest of them, Country Garden, told its bondholders that it could not pay them. This is a remarkable reversal. The country's real estate market was once valued at more than fifty trillion US dollars. It made up a full quarter of China's entire economy, and it made millions of people really rich. Now it's

So Huilan grew up in the nineteen nineties. She lived in a mutt hut rain wood seep through she get frostped in during winter, drank water from a nearby wall. And she grew up in this rural area in Shandong Province and her only dream was to live in a home made of concrete.

So a mud hut in the nineties, is that a was that common at that.

Time for rural China. That was very common. Also, you have to know that this was before China introduced the concept of private property. So in the city, most of the people lived in dormitories given out by state owned companies or government bodies, and in rural regions, building your own home was very common.

But then at the end of the twentieth century, China starts to open up and the government lifts its restrictions on owning private property.

This is the first time when the government was able to sell land and generate revenue for local bureaucrats. And then the developers jumped on the opportunity became a money making machine.

The government's making money, developers business is booming, and for the first time, home buyers can join the gold rush too.

The mentality of property pricing was that it could only go up, and it was a sure but a short investment. That's why you have families ending up owning seven to eight property units per household.

There's a cultural expectation driving home ownership too. Single people rent, married people they own. So when WiLAN got married, she and her husband started to look for an apartment and it was expensive.

Absolutely. It took her and her husbands both of their parents to help and chip them for the down payment. So for many families in China, in order to own property, the wealth needs to come from generations.

Even with the help of their families, Whilan and her husband could only afford a starter apartment and it was fine for the two of them, but once they had the girls, she starts dreaming of something better. Then Country Garden comes to town.

In twenty twenty one. It finally arrives in Wayland's hometown and she goes to their sales side. She sees the brochures, the three D rendered images, the French windows, and she thinks, this feels good. I can finally call this place home. And she thinks about how she can move her two daughters into separate bedrooms that can have their own space, and she puts the down payment in.

By that point, Country Garden had been around for a while. It was founded in nineteen ninety two by a guy called yung Qua Quing. He had also grown up extremely poor.

He likes to tell this story that before the age of eighteen, he never owned a pair of shoes, and that he would walk for an hour or everyday back home for lunch just to save money. And he raised cattle when he was growing up as a young person in the countryside.

In the beginning, Country Garden was a plain vanilla construction company building apartments for the government. But when China opens the door to private property at the end of the nineties, Young jumps. He buys land and starts building apartments for a whole new generation of buyers. There were other developers too, but they were just putting up one building at a time. Young and a Country Garden offered something more.

He would also build these schools, facilities, gyms around the housing complex to spice up the value or the lure of his residential projects, and he made a name for himself in the Guandong area, became somewhat of a local entrepreneur hero.

So at its peak, describe for me how Big Country Garden got well.

At his peak, Country Garden was the nation's largest developer. It employed more than one hundred and thirty thousand people and constructed more than three thousand projects across the country. Sin Huai even interviewed Jankokan at one point and the title of the story was the making of a Chinese property legend.

Wow, they are state on media? Do I have that right?

Suhua is state owned? Couldn't be. You can't get more official than su Hua.

So when they write that story about him, this glowing profile.

It's an endorsement from the state as well. Yeah, so being a property developer, being an entrepreneur was something that was celebrated in China in those days.

Jung is a state sanctioned hero and Country Garden is a national brand name. People trust them. That's really important because the company's business only works if buyers are willing to put big sums of money down for apartments that aren't built yet. Country Garden uses that money to pay for construction, but also to buy more land so they

I think at this point the entire system is so reliant on real estate that it becomes something that's an addiction that's hard to get rid of. At this point, because.

This bubble, it starts to build on itself, and prices only go up as long as they go.

Up exactly never sustainable.

Nothing goes up forever. After the break. When the bubble bursts in the twenty tens, the Chinese government starts to worry that there's a real estate bubble forming. It doesn't want to pop it, but it also doesn't want it to get bigger.

So the goal was always to make sure that the bubble kept going, but not so big that when it popped it would create tears and pain. So the government starts introducing property curbs, measures that limit the buying capabilities of individuals and households. And this is the period where interesting stuff like fake marriages, fake divorces start popping up up for families to buy more property.

Eventually, President sheejin Ping starts to say very plainly, houses are for living in, not for speculating on funds to that, but no one listens. Buyers are still piling into the property market, and developers just keep building and borrowing. Then it's twenty twenty, the pandemic hits and the tide starts to turn. Banks pull back on lending, and smaller developers start to run into trouble. Then one of Country gardens main competitors, Evergrand defaults.

So when they default, it has this rippling effect across the financial markets first, and then the offshore bond market also dries up because global investors are really worried that their money will never get paid back. So the developers are in a really challenging place at this point because they have no financing.

This isn't good for Country Garden either, but it wasn't in trouble yet. It had a national reputation, it was a name brand and enough money to keep expanding into China's smaller cities. And then people stop buying.

COVID happened, so people couldn't travel, and at this point a lot of families already owned multiple properties, so it no longer made sense for them to keep piling into the sector this type of assets unless they were sure that the prices would still double or generate the same amount of returns like in the old years. And this fact that Czinping has signaled that housing is not for speculating, it also dampens that sentiment. So the chain reaction causes people to hold back on buying.

When that happens, the developers lose their last source of funds. By August, Country Gardens starts to miss payments and reports that they're in trouble are starting to surface in the media. And this is when Wylin and thousands of other people start posting on social media and they are furious at the developers.

And they'll post the latest photos and videos of their unfinished homes on doing every day. And we've talked to people who've said that their parents have cancer, they have medical bills to pay, they have kids to feed, and they've lost their jobs and their homes are not being completed, but they're still putting in the mortgages. And then there's also people who got laid off by Country Garden, by all the developers, and there's construction workers who have yet to be paid as well.

Loul, what's the government going to do?

As of November, the government has come up with a fifty developer white list. We've been told by sources the list is expected to include a variety of state back firms but also private firms, and once they get on that list, they will be eligible for financial support. I think even though getting on this list would help, it doesn't guarantee their survival. But if they don't get on this list, then these companies will definitely be in trouble.

So here are fifty companies that could make it, and everybody else is pretty much out of luck.

That's right.

What the government does or doesn't do next will be a big deal. Financial firms lent to developers and to home buyers. Now they're exposed.

So people are just waiting at this point.

Because against this backdrop, the broader economy has slowed. We're still coming out of COVID, interest rates are arising. It's not a great time for housing markets carryuid, and the implications go beyond housing because property isn't just a big part of GDP, it's a major component of personal wealth. Home values make up about eighty percent of average household wealth in China. When prices fall, people feel poorer and they spend less. Another hit to the economy.

Exactly, and then that in itself, the dropping of household assets because of the plunge and property values is in itself also affecting the other driver that the government I was hoping to count on, which is consumption.

And we talked about how real estate became this major engine of economic growth, does that change and if it does, is there anything for China that takes its place.

Well, China is in a crucial transition moment because real estate is not working. X force are slumping and it's still trying to find the next anchor for growth. And consumption would have been one of those anchors, but we've talked about why that's not working right now.

The government has told Country Garden in no uncertain terms, to deliver the apartments they've promised or else, but that won't be easy. They have more than three thousand projects in development and no easy source of funding. That means for people like Wylan, it could be a very long wait and maybe never. She told us that seeing the construction site, that was when it really started to sink in.

That was the moment before that she always thought maybe they would delay the delivery of the project, but that was the moment where she thought, maybe my home will never be built.

That's it for today's show. This episode was produced by Young Young. The reporters for this story are Emma Dong Jungle and John Leu. We had help from Donsau Selena Schu and provi Our editors are Emma O'Brien and Caitlin Kenney. Blake Maples is our sound engineer, and Sage Bauman is Bloomberg's head of podcast