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China's Housing Conundrum

The Chinese government may yet succeed in insulating the broader market from the financial crisis at real estate giant Evergrande. But the larger challenge is to rebalance an economy that has depended for far too long on the bloated housing market for jobs and growth.

CAMBRIDGE – The impending bankruptcy of Chinese real estate giant Evergrande, with its $300 billion in debt, has roiled global investors. Analysts have focused mainly on whether the Chinese government will succeed in ring-fencing the problem, so that it does not spill over into a broader Western-style financial crisis.

Given the government’s deep pockets, including over $3 trillion in foreign-exchange reserves, and its ability to dictate restructuring terms without long court delays, few would bet against such an outcome. But concentrating only on near-term financial stability misses China’s larger challenge: rebalancing an economy that has depended for far too long on its massive real estate investment sector for jobs and growth.

The outsize impact of real estate and related services on Chinese GDP – a staggering 25%, and only slightly less after adjusting for net exports – is even larger than the property sector’s share of the Spanish and Irish economies at its pre-2008 peak. Because of its knock-on effects on other sectors, a significant slowdown in China’s real-estate sector could easily cut 5-10% from cumulative GDP growth over the ensuing few years.