Massive buildings collapsed, stirring up clouds of dust. Fifteen high-rise apartment buildings, which had been left abandoned and unsightly for seven years due to halted construction, were demolished in just 45 seconds. Shortly after, a string of bad news began to emerge from the Chinese real estate market. A month after the demolition, the second-largest real estate development company in China, Evergrande Group, declared bankruptcy, shocking the market. Subsequently, the third-largest real estate developer, Sunac China, and a subsidiary of the Wanda Group found themselves in crisis. Recently, even the top private real estate company known for its stability, Country Garden, declared bankruptcy. The sparks of this crisis spread to the financial sector, and the world increasingly viewed China with unease. The first to sense the crisis was the Taiwanese media. Taiwanese TV reported on China's vacant homes, particularly those that have been abandoned.

Reports have been pouring in about the Lawei Lou phenomenon. Real estate developers, after receiving down payments, began constructing homes but halted when funding dried up, leaving unfinished buildings to decay across China. There are apartment buildings rotting away, and homeowners who have poured all their savings into these properties are protesting, having received nothing in return. With nowhere else to go, some residents have set up tents in abandoned buildings, and there are even reports of people raising cattle in these derelict structures. Among the most shocking images is that of an apartment complex that has turned into a memorial site. In the Binhai New Area of Tianjin, a residential complex that the Chinese authorities ambitiously developed is now dotted with columbariums, effectively transforming it into a graveyard. It is reported that as many as 100,000 urns are housed in 16 buildings in the area. The phenomenon has turned apartment prices into burial grounds. So, how many abandoned homes are there in China's lower regions?

According to data from Southwest University in China, as of 2018, 20% of apartments in China, which amounts to 130 million units, were reported as vacant. Since then, the supply has exceeded demand by 30% to 50%, so it is safe to say that no one knows how many more vacant homes have accumulated during this time. This situation is partly due to the haphazard development of new cities, commonly referred to as the ghost city phenomenon. It is reported that there are over 50 such cities across China, including in Inner Mongolia, Yunnan Province, Hangzhou, and Tianjin. A representative example is the city plan for Erdos in Inner Mongolia, which was designed for a population of one million. The situation is similar in Splendor City in Kunming, Yunnan Province. The strangest aspect is the counterfeit trio imitating New York, Paris, and London. Earlier, I mentioned that a columbarium was built in a place known as the Manhattan of China, which refers to the Binhai New Area in Tianjin.

The cities in China that aim to be like Paris, such as Hangzhou, and the Testa in Shanghai, which imitates London, have seen a slight increase in population later on. However, they have deviated significantly from their original plans and continue to be mocked by Western media as ghost towns. This is not just a situation in China; a case outside of it is Forest City in southern Malaysia. This new city, built by the real estate development company Country Garden, aimed for a population of 700,000 residents. However, due to a collapse in real estate prices, construction was halted, and it has now become a ghost town with only 9,000 residents. It's not just that apartments were left unfinished; a wooden hotel here had an investment of 34 billion won for construction and was ambitiously promoted as a tourist attraction in the area, but it now lies in ruins. This is the Golden Finance 117 building in Tianjin, which has seen construction stop and start since 2008 and finally came to a halt in 2015 due to a small funding shortfall.

Behind it, lightning strikes, leaving it abandoned as the tallest eyesore in the world. In fact, the issue of real estate bubbles in China is not a new problem; there have been criticisms in the past regarding such development practices, like building empty structures in vast, barren lands. However, it was a remarkably successful approach. The biggest challenge for a developing country is capital procurement. China addressed this issue through a familiar method: pre-sale. When real estate development companies sell apartments that have not yet been built, consumers can borrow money from banks to pay the developers, who then use this money to construct the apartments. Since developers do not need a large amount of capital upfront, they can easily start their businesses, which in turn invigorates the market. Of course, the downside is that if a developer goes bankrupt, all the losses fall on the homeowners who purchased pre-sale apartments. This is the reason behind the emergence of Ranwei Lou. This system facilitated ultra-fast growth.

In the 1990s, China began to emerge as the world's factory. Rapid industrialization led to an explosion in housing demand from workers flocking to large cities in search of jobs. Thanks to the introduction of the pre-sale system, the barriers to capital were lowered, allowing for an increase in supply. However, this was still not enough to keep up with the rising pace of housing prices. The speed of urbanization was incredibly fast, and the population was also increasing at an astonishing rate. Additionally, there was another variable that exacerbated the situation: the gender imbalance. As the population surged, the Chinese government, in a state of urgency, implemented the one-child policy in 1980, which resulted in an abnormally high ratio of males to females in China. This disparity became evident when these children reached adulthood in the 2000s, impacting the real estate market. Prospective grooms, eager to find brides, began to dive into the housing market. So, with such fervor...

Why has the bubble in the Chinese real estate market suddenly faltered at this point in time? Experts around the world are offering various analyses, which can be summarized into two main points. The first reason is that demand is decreasing. This may sound obvious, but the important aspect is the reason behind the decline in demand. This is due to China's population decline and falling growth rates. The labor force in China, which was 997 million in 2014, started to drop to 986 million by 2021, and it is predicted to fall to 400 million by 1999. This sharp decline in birth rates is the cause. With fewer people available to work, growth rates are falling, and youth unemployment has worsened to over 20%. Factors such as COVID-19, U.S. restrictions, and competition from emerging players like India and Vietnam also play a role. This is a graph of China's growth rates over the past 20 years.

Low growth has become evident. In this situation, supply is still based on past high growth, which approached 10%, so prices had no choice but to plummet. The second reason is more direct and, at the same time, unexpected. The situation over the past year, such as the Evergrande Group and the bankruptcy crisis of developers, and the suspension of construction on apartments worth 5 billion in large cities like Shanghai, is something that was unimaginable in the past. The reason lies with the Chinese government. The interpretation is that all this chaos was actually intentional by the Chinese government, and the market's concerns can be traced back to the announcement made in 2020. At that time, the government tightened the requirements for real estate developers to satisfy the global red line in order to receive loans. Because the standards were sudden and very strict, many companies failed to secure funding and subsequently fell into crisis. The Evergrande default incident that shocked the world in 2021 was a result of this.

This was a direct result of the measures taken by the Chinese authorities. Therefore, if we look at the situation from this perspective, the crisis in the Chinese real estate market can be interpreted not as a crisis but as a kind of restructuring process. While private companies are included, the main target of the restructuring is actually the local governments. Until now, local governments have been stimulating the economy by raising investment funds through LGFVs, which are special purpose vehicles, to build bridges, roads, and develop apartments. According to the IMF, the scale of this debt amounts to about 66 trillion yuan, which is roughly 12.4 trillion won in our currency. The Chinese authorities view this money as lazy capital that is easily made by investing in real estate instead of advanced industries. An extreme example often mocked online is the incredible failed projects. The authorities want to tighten the financial strings of local governments to ensure that money goes to productive areas instead of ridiculous investments like building elevators on mountain slopes.

One more point to consider is that just because there are numerous vacant houses in China, it does not mean that there are enough homes for ordinary people to live in. Moreover, it is often overlooked that China is a socialist country, where equality and welfare are, at least nominally, very important values. However, look at this: in Beijing, there are rooms that make you wonder if they are even fit for people to live in, yet they are absurdly expensive, leading to the daily occurrence of laborers sleeping on the streets. It has become common for young people with relatively stable jobs to give up on housing. While the price of a 30-pyeong apartment in a bustling area approaches 2 billion won, considering that the average salary for a worker in Beijing is about 1.3 million won, it is understandable. The ones who know this situation better than anyone else are the Chinese authorities, and they understand that unless they resolve this issue, a greater crisis—likely a political one—will emerge. They are aware that they must endure some chaos to address the real estate structure in China.

The real reason for the adjustment is the question of whether the Chinese government will push through with the restructuring it has set its mind on. The real estate sector is a core industry that accounts for 30% of China's GDP, and for an average Chinese family, 70-80% of their assets are tied up in real estate. Therefore, if real estate prices plummet, it will lead to a reduction in consumption. When consumption decreases, prices fall, jobs are lost, and household incomes plummet, creating a vicious cycle. The easiest way to break this cycle is through real estate support. The South Korean government has repeatedly fallen into this temptation, but if they support real estate while leaving the bubble intact, money will flow back into a non-productive real estate market, and structural reform will be lost. It seems that the Chinese authorities understand this dilemma as well. There have been some conciliatory measures, but this is why groundbreaking economic stimulus policies have not emerged. However, if the current stagnation continues until next year, what then?

Can the Chinese government resist the temptation for short-term stimulus and successfully deflate the real estate price bubble? This is an important question that could shake the global economy.

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