Real Estate and Debt in China: One Road to Discontent
China is walking a fine line to avoid a housing market crash.
- China has relied heavily on the real estate market to support growth, resulting in surging housing prices, an oversupply of housing and dependence on construction companies as politically important entities to provide jobs.
- On account of its centralized economy and land monopoly, the Chinese government has more tools with which to intervene in the real estate market than many other countries do; however, all of the tools carry implementation risks.
- While China has previously intervened in the real estate market with some degree of success, the combination of declining corporate profitability and growing corporate debt has increased off-balance sheet securities. Furthermore, an increasing housing inventory makes it more difficult to manage rapid changes in housing prices.
- Increased interdependence of the financial system and the real estate market through opaque off-balance sheet instruments has exposed the broader economy to increased risk stemming from downturns in the real estate market.
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Buildings under construction near the People’s Bank of China in Chongqing, China. China Photos/Getty Images