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Lessons gleaned from China’s property market woes

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A commercial residential property is under construction in Qingzhou, China, on 23 February 2024. (Photo: Costfoto/NurPhoto)

In Brief

As China’s property sector has moved from a state-dominated model to a market-orientated approach, so too have local governments become heavily reliant on land sales, facing issues such as unaffordable housing, overcapacity, high leverage and increasing household and local government debt. China’s experience offers lessons for other Asian economies on balancing economic and social welfare, the shift towards sustainable urban development and the need to diversify beyond real estate.


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The transformation of China’s real estate sector in the decades since the country’s economic reform not only reflects its own rapid urbanisation but is also a significant indicator of broader shifts in the Asia Pacific region. The sector’s evolution from a state-dominated model to a market-oriented approach underscores a pivotal intersection of national policy and global economic trends.

The Chinese government’s evolving role, from a major landowner to a strategic market overseer, comes at a time when governments worldwide are reevaluating their involvement in key economic sectors.

Key policy shifts, particularly the 1998 ‘State Council’s Notice on Urban Housing System Reform’, the 2010 ‘Notice on Resolutely Curbing Housing Prices (Xin Guo Shi Tiao)’ measures and the 2021 ‘Three Red Lines’ policy, have been crucial to China’s urban development. Consider the implementation of the ‘Three Red Lines’ policy, which was strategically enacted to limit developers’ excessive borrowing practices. Despite its well-intentioned design, the policy triggered financial turmoil among leading real estate firms, most notably Evergrande, culminating in their insolvency. Such outcomes underscore the intricate relationship between regulatory frameworks and market dynamics.

In the context of China’s rapidly urbanising landscape, the case of Beijing is a telling example of the government’s attempts to stabilise housing markets through unconventional urban planning strategies. This has included the significant relocation of industries and universities to the periphery with the aim of reducing population pressure in the core urban areas. While such measures might seem effective in the short term, their long-term impact on housing affordability and Beijing’s socio-economic fabric remains uncertain.

The financial models underpinning local governments in China — heavily reliant on land sales — mirror a wider trend observed across many Asian economies. In 2021, land sales formed a significant part of local fiscal revenue in China, a trend with profound implications for market stability and sustainable urban development.

This financial model has contributed to the rise of ‘Ghost Cities’ like Kangbashi District in Ordos. Initially labelled as failures due to their desolation, these cities are undergoing a transformation. Government interventions — like demolishing outdated housing, incentivising people to purchase new developments and relocating prestigious schools — have revitalised real estate values in these areas.

An added complexity is the surge in household debt, primarily fuelled by the real estate sector. China’s household debt steadily rose throughout 2023, nearing the cautionary threshold set by the International Monetary Fund, with a notable percentage of this increase attributable to mortgage liabilities. This trend calls for comprehensive solutions, including the implementation of stricter mortgage regulations. Such measures could mitigate the risks associated with high leverage in the housing market and foster a more stable financial environment.

The transparency issues in China’s real estate market serve as a crucial lesson for the wider Asia Pacific region. Limited visibility into market operations often fuels speculative behaviour that exacerbates market volatility. Introducing mandatory disclosure norms for key market players is essential, not only for promoting stability within China but also in other Asian markets like Vietnam. Transparent reporting of project financing and ownership could discourage speculative investments and help stabilise market dynamics.

The impact of real estate policies on social welfare is another aspect that cannot be understated. Initiatives like China’s ‘Hukou’ system reforms, aimed at managing urban population and housing demand, offer important insights for other Asian countries grappling with urban–rural divides. But unintended consequences such as increased social stratification highlight the need for ongoing policy assessment and adjustments.

In addressing the multifaceted challenges of urbanisation, the focus must shift from solely increasing revenue to enhancing living standards. Urban planning and real estate development strategies need to prioritise the needs and wellbeing of residents, ensuring urban growth translates into tangible improvements in quality of life. This strategic shift aligns with global movements towards sustainable urban development, as outlined in the United Nations’ Sustainable Development Goals.

While China’s resolution of capital shortages exemplifies innovative practices from which other Asian economies can draw inspiration, this approach also carries significant risks. The critical challenge for China lies in diversifying its economic base beyond real estate and exploring alternative fiscal strategies for local governments. Implementing property taxes or fostering public–private partnerships could offer a more balanced approach, ensuring fiscal sustainability while maintaining market stability. Such measures are vital to mitigating the threat of a prolonged economic downturn and to supporting a more resilient and adaptive economic framework.

The Chinese real estate market is a barometer of the country’s broader economic health. The sector’s interconnections with various economic sectors, from construction to financial services, mean that its health is a bellwether for national economic stability. Policies must be carefully crafted to balance market vitality with systemic stability, ensuring that the real estate sector positively contributes to the broader economy.

For Asia’s emerging economies, China’s real estate challenges — unaffordable housing prices, widespread overcapacity, perilously high leverage within the sector and increasing debt burdens on local governments — highlight the critical need for comprehensive and flexible policy frameworks. Such policies must simultaneously restrain speculative excesses and nurture sustainable economic environments.

Kaize Zhu is a Master’s student at the Lee Kuan Yew School of Public Policy, the National University of Singapore. He was formerly a lecturer at the Global Competency Development Center, Tsinghua University, Beijing.

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