by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Evergrande, one of China’s largest real-estate developers, filed for bankruptcy last week, the latest sign that the nation’s once high-flying real-estate market is falling apart. China’s economy is heavily influenced by its real-estate market, and China’s continued struggles will undoubtedly harm the broader world economy.
The ruling Chinese Communist Party’s (CCP) policies have always driven the boom and bust of China’s real-estate sector. The party abolished private property rights and nationalized land and home ownership after it took control of China in 1949. Before 1980, the Chinese government controlled all housing in urban areas, including construction and distribution. City dwellers received public housing allocations through their work units based on needs, seniority, and social class (for example, people classified as counter-revolutionaries wouldn’t qualify for public housing). Most of these public housing units were small and poorly built, and their only attractive feature was the low rent due to government subsidies.
In the 1980s, the CCP recognized it had to grow China’s economy to keep the party in power. The Chinese government began to loosen its control over the housing sector by privatizing public housing, encouraging homeownership, and welcoming private companies to develop residential and commercial real estate. China began to embark on a four-decade construction frenzy.
The Chinese government stimulated demand for housing through its urbanization movement, aiming to transform excessive rural laborers into industrial workers in cities and better control the Chinese population. As of 2011, over half of the nation’s 1.3 billion people lived in urban areas, compared to less than 20 percent in the 1980s. More urban dwellers meant more demand for urban housing. …
… [O]ther than parking their money in state-owned banks and earning next-to-nothing in interest income, buying a house is how most Chinese people build wealth and save for retirement. About 90 percent of Chinese families own their homes, and nearly a quarter own more than one property.