How Xi Jinping Plans to Revive China’s Economy Amid a Real Estate Crisis and the Threat of Donald Trump’s Policies

 

Evergrande, one of the largest real estate developers in China, is facing a critical situation that has captured global attention. With outstanding debts exceeding $120 billion, the company’s financial troubles were already well-known. However, recent allegations by China’s Securities Regulatory Commission that Evergrande inflated its revenues by over $72 billion have further deepened the crisis. This revelation underscores the severity of the Chinese real estate market’s collapse, which is proving to be far worse than initially imagined.

Since 2021, property prices in China have plummeted, with major developers edging closer to bankruptcy. The situation is particularly alarming given that the real estate sector accounts for over 20% of China’s economy, surpassing even its crucial export industry. These developments raise pressing questions: Can a total economic collapse be averted? What steps is the Chinese government taking to address this escalating crisis?

The Link Between the Chinese Real Estate Bubble and Its Banking System

The collapse of China’s real estate bubble is intricately tied to its banking sector. Before the pandemic, the Chinese government attempted to curb the bubble, but corporate debt had already reached unsustainable levels. Real estate developers, including Evergrande, played a significant role in exacerbating the issue. This mirrors Japan’s 1990s crisis, where a similar real estate collapse caused lasting economic damage.

In 2020, under the mantra “Housing is for living, not for speculation,” President Xi Jinping introduced the so-called “Three Red Lines” policy aimed at reining in the runaway property market. These measures required developers to reduce their debt and liabilities, but most major companies failed to meet these standards. Evergrande, for instance, carried debts exceeding the limits of the “Three Red Lines” by 81%. This triggered a liquidity crisis in the real estate sector, and the pandemic further accelerated the bubble’s collapse.

The “Three Red Lines” Policy: A Failed Attempt at Control

The “Three Red Lines” policy was designed to reduce developers’ debt and ensure financial stability. However, by the time these restrictions were implemented, many key real estate companies were already drowning in debt. Consequently, the sector entered a state of paralysis, with halted construction projects and a severe liquidity shortage affecting millions of homeowners.

Ironically, the Chinese government’s attempt to manage the property bubble ultimately hastened its downfall. While officials hoped for a “controlled demolition,” the pandemic introduced an unforeseen element that deepened the crisis. The housing collapse not only affects developers but also threatens the wealth of Chinese families, for whom property ownership is the primary means of saving.

The Real Estate Bubble Burst: Far-Reaching Impacts on China’s Economy

President Xi Jinping’s current priority is to prevent the real estate sector’s collapse from spilling over into the broader economy. Housing is a cornerstone of savings in China, and a sharp decline in property values could devastate household wealth, triggering a deeper economic crisis. What began as a controlled adjustment has evolved into a significant threat to China’s overall economic stability.

China’s Response: Stimulus Packages and Debt Management

Despite earlier measures, the Chinese government has recently adopted more direct interventions. One strategy involves injecting liquidity into the economy to stave off a full-blown collapse. This has been achieved by lowering banks’ reserve requirements, enabling them to lend more freely. Additionally, the government has eased mortgage qualifications, making homeownership more accessible for citizens.

Alongside these actions, a $41 billion stimulus program has been launched to purchase vacant properties held by state-owned enterprises. But the critical question remains: Will these measures effectively resolve the crisis, or are they merely delaying an inevitable collapse?

Long-Term Solutions for China’s Real Estate and Economic Challenges

China’s most pressing challenge isn’t just the real estate bubble but its heavy reliance on exports to sustain economic growth. In an era of rising protectionism, the country must shift toward a model that prioritizes domestic consumption. For this to happen, China’s middle class needs increased purchasing power. However, the real estate crisis has significantly eroded household wealth, making it harder to boost domestic spending.

To address this, the government has introduced incentives to promote consumer spending. These include subsidies for purchasing electric vehicles and technological products, as well as increased investment in rural areas to integrate underserved regions into the broader economy. While promising, these measures raise doubts about whether China can truly transform from an export-driven economy to one fueled by domestic consumption.

The Future of China’s Economy: Navigating a Crossroads

China faces a difficult dilemma: continuing to prop up the real estate bubble risks creating a speculative spiral similar to Japan’s in the 1990s. On the other hand, its efforts to stimulate domestic consumption may fall short in the short term, given industrial overcapacity and ongoing challenges in the property sector.

In conclusion, China’s economy stands at a crossroads. While the government’s initiatives to boost domestic consumption and reduce export dependence are steps in the right direction, the real estate crisis remains a significant barrier. Time will reveal whether Xi Jinping’s reforms can prevent a broader economic collapse or whether they are merely temporary fixes that could exacerbate the situation in the long run.

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