China's property sector navigates transition to sustainable growth

Editor's note: Warwick Powell is an adjunct professor at the Queensland University of Technology and advisor to former Australian Prime Minister Kevin Rudd. The article reflects the author's opinions and not necessarily the views of CGTN.

The delisting of Evergrande from the Hong Kong Stock Exchange on August 24 marks a striking milestone in the ongoing reshaping of China's property sector. Once the poster child of aggressive expansion, high leverage, and speculative ambition, Evergrande's exit is a vivid reminder that financial maneuvers – no matter how globally sourced – cannot escape the constraints imposed by the underlying economy.

At the same time, the broader real estate market shows no appreciable turnaround, and there should be no expectation of one. Prices in major cities continue their measured tapering, and sales remain subdued. This is not a crisis in the conventional sense; rather, it is the normalization of a sector that had been inflated beyond its sustainable capacity. What is remarkable, however, is how the economy has adjusted in the process.

For years, real estate accounted for roughly 25 percent of China's GDP. Its expansion had been fueled by an intricate web of domestic credit, shadow banking, and speculative pre-sales, creating a financial shell that increasingly outstripped the material economy of construction, labor, and household incomes. Between 2017 and 2020, policymakers recognized that this overextension carried systemic risks. The then head of the People's Bank of China, Zhou Xiaochuan, warned of the risks of a Minsky Moment in late 2017, reflecting on the possibilities of a credit-induced financial crisis. A deliberate campaign of deleveraging was launched to bring balance sheets, speculative borrowing, and developer activity back into line with real demand and productive capacity.

At first, the deleveraging was pursued via signalling. Some developers took heed and began selling assets – many offshore or non-core – to reduce debt accumulation. Sector credit growth year on year had expanded to nearly 18 percent by mid-2018. Thereafter, it was unceremoniously brought back down to earth within a couple of years. By early 2020, year-on-year credit growth for real estate was less than 2 percent. The real estate bubble had been pricked. The sector's prominence across the economy was consequently curtailed.

Yet, while the real estate's share of GDP fell from around 25 percent to roughly 15 percent over five years, the broader macroeconomy remained remarkably stable. Unemployment rate stayed steady at about 5.2 percent, and real household income continued to grow. This suggests a highly effective structural transition: The economy was able to reallocate credit and investment toward other productive sectors, including high technology, robotics, renewable energy, and advanced manufacturing, without precipitating an overall economic downturn.

The Evergrande episode illustrates a broader lesson. When domestic credit channels were tightened, some developers sought to circumvent these restrictions by turning to international bond markets, issuing high-yield dollar-denominated debt to maintain liquidity and pursue expansion. Western investors, hungry for yield in a low-interest-rate environment, provided capital on the assumption of implicit state guarantees. After all, the aftermath of the western financial crisis of 2008 saw bailouts of many profligate credit providers. This offshore borrowing temporarily inflated the financial shell beyond domestic regulatory oversight, allowing Evergrande to continue aggressive land banking and pre-sales. Yet the company's fortunes remained inextricably tied to the material realities of China's property market. When pre-sales slowed and domestic demand failed to support speculative expansion, defaults became inevitable. The delisting of Evergrande serves as a clear reminder that virtual capital cannot  indefinitely escape the underlying productive constraints of the real economy.

Crucially, this deleveraging has taken place with negligible financial contagion. While the "mop-up" phase continues – construction projects are increasingly being taken over by financially robust state-owned enterprises to ensure that housing development projects are completed – the broader system has remained stable. Financial balance sheet adjustments are still ongoing, but it is clear that foreign speculators are last on the list; they gambled on inflated expectations and suffered losses. "Houses are for living in, not for speculation" – a principle now visible in the engineered tapering of prices and restructuring of the property sector. The result is a stable housing market that reflects the material reality of sustainable demand and production, rather than speculative excess.

The tapering of real estate prices itself is instructive. It reflects a market adjusting to the feasible limits of supply, demand, and purchasing power, rather than a sudden collapse or panic. Developers and buyers alike are now operating in a more rational environment, where valuations align with income levels, construction costs, and sustainable returns. The decline has been gradual, not catastrophic, because the broader economy has been able to absorb the contraction in real estate activity. Credit has been redirected to sectors with higher productivity and technological content, ensuring that growth remains rooted in real, sustainable production rather than inflated asset prices.

This deliberate transition also serves a strategic economic purpose. The deleveraging occurred against the backdrop of growing US efforts to contain China economically and militarily. By scaling back a sector vulnerable to credit and regulatory shocks and redirecting resources into high-quality productive forces – robotics, AI, advanced manufacturing, and clean energy – China has mitigated external risks while expanding trading relations with non-Western partners. This structural shift has strengthened both domestic resilience and global economic influence, demonstrating that deliberate policy guidance can transform potential vulnerabilities into sources of strategic advantage. A highly leveraged real estate sector was of limited use in the face of an unfolding trade war.

What makes this transition especially noteworthy is the macroeconomic outcome: The economy has continued to grow without widespread unemployment while real household incomes continue to rise, despite a large-scale contraction in one of its previously dominant sectors. Real estate now plays a more sustainable role in the economy, and investment has shifted toward sectors that generate long-term productivity gains. The coordinated adjustment of credit and investment has ensured that the economy has weathered the reduction in speculative activity without systemic disruption.

Evergrande's downfall, the measured tapering of real estate prices, and the successful transfer of projects to state-owned developers together illustrate a critical lesson: Financial shells – whether domestic or international – may expand, migrate, or persist temporarily, but they cannot escape the constraints of the underlying economy. Speculative excess may flourish for a time, but over the medium term, the realities of production, income, and sustainable demand assert themselves. China's approach demonstrates that engineered deleveraging, strategic reallocation of credit, and policy-guided structural transition can stabilize markets, safeguard employment, and maintain household income growth – even in the context of large, previously over-leveraged sectors.

The delisting of Evergrande is thus not an endpoint but a symbol: A sector finally brought into alignment with sustainable fundamentals. It shows that careful policy and disciplined financial oversight can prune inflated financial claims, protect the broader economy, and channel growth into sectors that enhance productivity, innovation, and resilience. The engineered tapering of prices, the stabilization of employment and income, and the expansion of credit into high-tech and productive industries together offer a blueprint for managing the transition from speculative, debt-driven growth to stable, innovation-led expansion.

In short, China's real estate deleveraging can be seen as a successful planned rebalancing. The market is being guided toward levels that reflect real demand and productive capacity, speculative excess is being removed, and the macroeconomy continues to grow robustly. Evergrande's collapse, while dramatic, underscores the principle that financial leverage, no matter how sophisticated or globally sourced, is ultimately constrained by real economic fundamentals. By aligning credit, investment, and regulation with sustainable demand and productive forces, China has demonstrated that it is possible to navigate structural transitions successfully, even in highly leveraged and globally interconnected economies.