Why squatters in unfinished apartments spell trouble for Xi Jinping : The Indicator from Planet Money Xi Jinping was reappointed as China's leader over the weekend. He faces a housing market crisis that could put China's overall economy at risk.

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The mess at the heart of China's economy

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Lee Shin (ph) bought his apartment nine years ago. He paid for it in full with a mortgage.

LEE SHIN: (Through interpreter) When I bought this house, I looked with pride at what I'd accomplished.

WONG: But his apartment is still only half finished, so he's paying his mortgage and rent to live somewhere else.


Having your own apartment in China is kind of crucial for young men like Shin who want to be attractive marriage prospects. You know, like Shin grew up poor in the countryside. He now has a good job at marketing in the big city in Xian. But an apartment can really seal the deal.

WONG: And he did get married. But while they're waiting for the apartment, they've put off having kids. And at the same time, they're watching house prices in China skyrocket.

SHIN: (Through interpreter) I'll never have the ability to buy an apartment again. I really can't afford the price today.

WOODS: And Shin's problem may soon become President Xi Jinping's problem. Xi was just reappointed over the weekend, and China is in a real estate crisis. This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.

WONG: And I'm Wailin Wong. The biggest asset class in the world is Chinese property, and it's in trouble. Today's show, a potted history of real estate in China and how this economic bomb is detonating.


WOODS: As President Xi Jinping was reappointed over the weekend, there was mixed economic news coming out of China. Third-quarter GDP numbers were finally released, and we had economic output growing at a healthy 3.9% from a year earlier. At the same time, the Chinese stock market took a dive.


PRESIDENT XI JINPING: (Non-English language spoken).

WOODS: And in his speech announcing his reappointment, Xi Jinping spoke of new challenges and tests.

WONG: And I'm guessing top of mind for him is the catastrophic loss of confidence in real estate developers. New sales of homes have plummeted, and developers are going bankrupt. Forty percent of homes bought over the last several years remain incomplete.

WOODS: And to fully understand this mess, you kind of have to go back to the start of the 1990s, when only about a quarter of the population lived in cities. And as the economy opened up from central planning, more people came from rural areas into cities to work in factories. And the housing shortage was massive. Millions of people were moving every year into cities, and each person had on average just over 76 square feet to themselves - so, like, the size of a bed and not really much else. There's a lot of dormitories. It was cramped.

WONG: And so China needed to build, but property developers faced a huge hurdle. Don Weinland is the China business and finance editor for The Economist newspaper.

DON WEINLAND: The idea of a Chinese company going overseas to get funding from capital markets - pretty much nonexistent. And then, yeah, within China, especially for private companies, accessing bank finance or something like that, you know, it was very difficult.

WONG: So in 1994, the Chinese government created a new policy so that private developers could raise the cash needed to build apartment compounds. It set up a system where developers could sell apartments and projects when only a quarter of the construction had been completed.

WOODS: And for those who don't buy houses off the blueprints, that's not usually the case in places like the U.S.

WONG: That's right. And the money that homebuyers paid, usually through a mortgage, would go to an escrow account overseen by the local government to make sure the developer was using most of this for the construction of that project.

WOODS: But in practice, it was quite different. Property developers use this money essentially as loans to grow their business. Like, yeah, they plan to build that apartment sometime in the future. But in the meantime, let's use that cash to buy up a bunch of new land and use it as collateral for borrowing even more. We'll find some new buyers, rinse and repeat.

WONG: Were all the apartment complexes shaped like pyramids?

WOODS: Yeah. You got to get on the top floor.

WONG: (Laughter) I got a great deal for you. It's the penthouse.

WOODS: And amidst all this kind of financial exuberance, one property developer stands out, and that's Evergrande. So right now, it has $300 billion in debt. It is the most indebted company in the world. And so fueled by pre-sales, speculative investors and support of state-owned banks but also genuine demand - like, there was a huge need for housing - property over the last 30 years has been booming.

WEINLAND: What it looked like was 50, 60 cranes on the horizon. Like, if you were in any mid-tier city in the mid-2000s, you know, there were just tons of construction sites all over the place.

WONG: So in one respect, the policy worked. Houses for these people moving into cities were getting built, houses for people like Shin.

WEINLAND: You have kind of this emerging middle class. Owning a property, owning your own home became incredibly important.

WOODS: Chinese property values just grew and grew. It became more common to invest in a second or a third or even a fourth home - well, at least on paper.

WONG: And then you get to this situation now where even though the Chinese economy is two-thirds the size of the American economy, its property sector is worth double that of the U.S. And there's one big reason why this massive growth can't continue forever.

WEINLAND: You know, the population is not going to continue increasing over the next decade. So if developers continue to build at the rate that they are now, you know, there's just simply not going to be enough people to buy those homes.

WOODS: I mean, it's always risky to kind of call bubbles, but it does seem fairly frothy.

WEINLAND: I don't think you'd be taking a huge risk to be calling the Chinese property market a bubble. I mean, people have been calling it that for a decade.

WONG: The Chinese government saw just how inflated property values had become and just how much debt developers had taken on as they expanded and expanded, and it decided to finally act in 2020. It wanted to pop the bubble, but very slowly.

WOODS: Very slowly indeed - and so the government introduced what's known as the three red lines, which are basically just rules restricting the amount of debt that property developers could take on. And so for companies like the giant Chinese developer Evergrande, this meant that it could not finance the construction of some of the projects that it had pre-sold. And as Evergrande failed to pay back its investors, people like Lee Shin got nervous for their own projects. I mean, a nine-year wait is frustrating, but if the home that you paid for it does not get built at all, that could be devastating. So across the country, people who had paid for properties that had not been delivered engaged in some civil disobedience.


WOODS: They stopped paying their mortgages.

WEINLAND: It's very surprising to see homebuyers across the country stop paying. Yeah. In China, you know, organizing a protest is incredibly risky, and it's incredibly difficult.

WONG: Lee Shin is still paying his mortgage. He's worried about repercussions.

WOODS: But earlier this year, he and his wife had had enough. They and 300 other homebuyers from the same unfinished apartment block decided to squat - to live in their unfinished apartment. He and his wife are on the 28th floor.

SHIN: (Through interpreter) There was no water or electricity, but everyone at the time thought that - at least we don't need to pay rent anymore.

WONG: Shin was basically camping in his 28th-story apartment. So, like, they had solar-powered lighting, a camp stove, endless runs downstairs 28 floors to fetch bottled water and go to the public toilet 'cause they didn't have that hookup in their apartment.

WOODS: It sounds like a nightmare. After four months, the local government asked them to move out. So they went back to paying the mortgage and rent. But the action did seem to embarrass the local government into getting construction going again. The catch, though, is that the apartment developer and the courts are saying that Shin and the other homebuyers will probably need to pay more money to get the final legal ownership of their unfinished apartments. So far, Shin has refused.

WONG: Don Weinland says that we're not seeing property values in China crashing right now, but this is a slow-rolling nightmare for millions of homebuyers like Shin. Don says China's housing mess is symptomatic of a government that's tolerated and even encouraged wild levels of speculation for too long.

WEINLAND: I mean, really, this is the outcome of a lack of reform and poor reform and pushing off problems well into the future.

WOODS: So I guess Xi Jinping comes to a new term in some pretty inauspicious economic circumstances.

WEINLAND: Yeah. I mean, this is, you know, front and center on the list of things that he has to do to get the economy right.

WONG: I just really want Shin to get his house.

WOODS: Yeah. I mean, that should be No. 1. And I imagine Xi Jinping has a pretty long list as well.

WONG: Yeah, I would not want that to-do list. It makes my own to-do list look very nice by comparison.

WOODS: Special thanks to Aowen Cao, the real MVP of this episode. She produced this with Nicky Ouellet. Engineering by Josh Newell. It was fact-checked by Dylan Sloan. Viet Le is our senior producer. Kate Concannon edits the show, and THE INDICATOR is a production of NPR.

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