China’s Real Estate Bubble Started With ‘State Capitalism’
Unfinished buildings at China Evergrande Group’s Health Valley development on the outskirts of Nanjing on Oct. 22. China Evergrande Group pulled back from the brink of default by paying a bond coupon before Saturday’s deadline, giving the property giant at least another week to come to grips with a debt crisis that’s rattled investor confidence in the world’s second-largest economy.
Photographer: Qilai Shen/BloombergFor a moment, as Chinese real estate giant Evergrande teetered on the edge of bankruptcy, it looked as though President Xi Jinping might do the unthinkable: prick the greatest real estate bubble in history.
He’s right about the problem—property speculators have hijacked the world’s second largest economy. Homes are “for living in, not for speculation,” is Xi’s mantra.
But those speculators are responding to a set of incentives unique to the Chinese model of development. In fact, Chinese land and housing markets are set up in a way that not only encourages but virtually demands the speculative purchase of apartments.
If Xi really wants to put speculators out of business, he’ll have to alter a critical component of the Chinese “state capitalist” system in which the central government sets a growth target and local governments deliver by pumping up their real estate markets.