How China’s Property Developers Got Into Such a Mess

Real estate has been the main engine of China’s economic growth since President Xi Jinping came to office a decade ago. Now the industry is in a slump, major developers have defaulted on their debts and the government is trying to organize a bailout. Economists say the intervention should be enough to hold off a disorderly crash of the property market and may even generate a slow recovery. The stakes are high, as a total collapse could undermine China’s financial system and jolt the world economy. A mortgage boycott by people angry that homes they paid for weren’t finished underscores the risk of unrest if it all goes wrong.

In 1998, China created a nationwide housing market after tightly restricting private sales for decades. Back then, only a third of its people lived in towns and cities. That’s risen to two-thirds, with the urban population expanding by 480 million. The exodus from the countryside represented a vast commercial opportunity for construction firms and developers. Money flooded into real estate as the emerging middle class leapt upon what was one of the few safe investments available, pushing home prices up sixfold over 15 years. Local and regional authorities, which rely on sales of public land for a chunk of their revenue, encouraged the development boom. This also helped the central government to meet its annual targets for economic growth, which often hit double digits.