Collapse of China’s Real Estate: How State-Owned Banks and Government Policies Are Shaking Up Everything

As of last year, China had the highest corporate debt in the world. Despite this, Chinese companies rarely go bankrupt. However, primarily, real estate firms frequently face bankruptcy.

In August 2023, Country Garden, known as China’s top real estate company in 2022, went bankrupt. At that time, Chinese media was filled with phrases like “China’s real estate-triggered economic crisis,” reminiscent of the Lehman Brothers collapse. Country Garden was not China’s first top real estate company to go bankrupt.

In September 2021, Evergrande, China’s then-top real estate company, went bankrupt, causing a significant societal impact. Following this, Chinese media reported this as “China’s real estate-triggered economic crisis,” similar to the subprime mortgage crisis.

Despite the bankruptcy, Evergrande continued its business without liquidation for three years until February 2024, and Country Garden also did not shut down. So, why did the top companies in the real estate industry go bankrupt one after another?

In response to this situation, Kim Jung Ho, an adjunct professor at Sogang University’s Graduate School of Economics, explained the background of Chinese real estate company bankruptcies on the YouTube channel Let’s Play Economics. Kim stated, “Chinese companies generally do not go bankrupt,” but he acknowledged that “recently, real estate companies in China are going bankrupt. This is intentional.”

He further elaborated that banks in China are state-owned, explaining that if they decide a company should go bankrupt, they will make it happen. Otherwise, they will keep lending to prevent the company from going bankrupt. He argued that Chinese companies don’t quickly go bankrupt because they receive loans from state-owned banks.

Recently, even top real estate companies in China have gone bankrupt. Kim highlighted this trend in Chinese President Xi Jinping’s 2019 statement that “houses are for living, not for speculation.” This government policy has been actively implemented to curb real estate speculation.

Kim also noted that “from around 2020, lending for real estate began to plummet,” while lending for the manufacturing sector saw a significant increase. This shift indicates that China is funneling resources into manufacturing rather than real estate.

China does not let companies go bankrupt simply because they can’t repay state-owned banks. The underlying cause of a company’s bankruptcy in China could be conflicts with the government.

In 2021, the Chinese government announced three regulatory policies addressing overheating the real estate market, calling for reduced investment and cash flow management. However, Xu Jiayin, founder of Evergrande, expanded investments contrary to the government’s directives due to his previous success in defying government regulations in 2016. As a result, he faced blocked loans and bankruptcy. Meanwhile, companies ranked second or lower complied with the government’s regulatory policies and did not face such lending restrictions.