In 2020, one of the world’s most heavily traded bonds was a 2025 note for China Evergrande Group. Investors loved the debt of the Chinese real estate conglomerate for several reasons: It was liquid; it was tied to one of the biggest companies in the country; and it gave them a piece of the world’s second-largest economy.
It also heralded a major transition for China, symbolising an era of turbocharged growth that had put it on a path to one day surpass the US. No longer was the country going to be merely a factory to the rich world—it would have its own consumerist middle class, with beautiful apartments and all the furniture, appliances and electronics to go in them. Evergrande was building that dream, apartment tower by apartment tower—along with theme parks and business lines in bottled water, electric vehicles, health-care services and even a soccer club.
“Houses are for living in, not for speculation.“: Chinese President Xi Jinping Xi wants to create a more resilient housing market.Credit: Bloomberg
Now the Evergrande bond trades for pennies on the dollar, and its fate tells the story of an epic crash that’s affected everyone in China. For decades, real estate has been a surefire way to make money in the country—for homeowners who bought first, second and even third or fourth apartments as prices kept rising; for property companies borrowing to build projects to match demand; and for local governments relying on land sales to provide cash and infrastructure projects to help meet Beijing’s ambitious economic growth targets.
In 2020 there was one problem with that bet: President Xi Jinping was ready for it all to change. When the crackdown on property speculation began, very few understood what was really happening and just how painful it would get. In fact, the first signs of change didn’t amount to much more than a set of financial rules—known as the “three red lines” companies couldn’t cross—and a request for a dozen developers to report their finances monthly to regulators.
Since then, China has run one of the biggest economic experiments since it opened up in the 1980s under Deng Xiaoping. Several dozen developers have defaulted on their debt, leaving hundreds of projects unfinished and even triggering a wave of boycotts on mortgage payments by homeowners protesting incomplete construction. In China, it’s common for buyers to pay for units before they’re finished and then hope they get what they paid for. Meanwhile, about 5 million workers face unemployment or lower incomes by 2026 if the housing sector continues to shrink, Bloomberg Economics estimates.
For investors and bankers, the debt squeeze marks the end of a once-in-a-lifetime boom, when Hong Kong financiers could cut deals while taking weekend junk boat trips around the island and traders enjoyed juicy yields from a sector that, until Evergrande’s collapse, had only ever seen one major default.
Beijing wants to pop its own market bubble to end speculation that’s led to a strange combination of unaffordable housing and oversupply, as the demand to get a piece of the red-hot market meant construction outpaced actual need in some places.
Xi’s mantra: “Houses are for living in, not for speculation.” Evergrande epitomised the risks Beijing wants to fix. The company borrowed with apparent abandon to expand, while rumours of its hidden debt load threatened broader disruption to the financial system.
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