RPT-BREAKINGVIEWS-China's property reset comes with a heavy price

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Ka Sing Chan

HONG KONG, March 10 (Reuters Breakingviews) - There is no doubt that China’s real-estate bubble needed popping. Beijing has spent nearly a decade letting air out of the country's historically speculative property market, which at times powered a quarter of the world’s second-largest economy. However, the structural distortions that fed the bubble still exist, while the cleanup is exerting a lasting drag on growth.

For years, real estate soaked up Chinese savings, drove urbanisation and bankrolled local governments, who partly relied on land sales for income. Easy credit, perceived implicit state backing and a lack of attractive investment alternatives all pushed households and developers to bet on ever-rising prices. So entrenched was the mania that few people took Xi Jinping seriously in 2016 when the Chinese president declared that houses are for living in, not for speculation.

The real estate market only started buckling in 2020 when Beijing unleashed its “three red lines” policy, which limited developers’ debt-fuelled growth by testing their borrowings against assets, equity and cash. By that point, the problem was acute. Floor space under construction amounted to over five times annual sales, implying a giant backlog of developments that would take years to shift, if they could even be sold at all.

Xi's ensuing crackdown upended the decades-old property order by deflating prices. In economic terms, the seismic shift faintly echoes the Communist Party’s early efforts, beginning in the 1940s, to reshape the distribution of wealth by uprooting the landlord class.

China Evergrande, a colossus of the boom years, went into liquidation in 2024 under the weight of $300 billion in liabilities. Its founding chairman Xu Jiayin, once listed as China’s wealthiest man, is under police control. Virtually all other major developers in the private sector have defaulted.

After much upheaval, China’s property debt reduction drive now seems to be over. Local media reported earlier this year that the "three red lines" policy has effectively been shelved.

The five‑year deleveraging campaign has proved transformative. Property investment has declined from about 12% of GDP in 2021 to roughly half that share today. The financial system’s exposure to a sudden, uncontrolled real‑estate blowup has therefore reduced.

The combined debt of the 46 largest developers listed in Hong Kong and mainland China stood at 5.19 trillion yuan ($753 billion) in 2025, down 17% since 2020, according to data from investment platform FSMOne. Much of the leverage reduction, FSMOne data shows, reflects up to $50 billion in offshore restructurings, referring to debts that were issued outside of mainland China. Creditors were forced to accept steep haircuts or swap their claims into equity.

Yet the real-estate bubble, despite being largely deflated, is having lasting consequences. Homebuyers' confidence has crashed, while a collapse in revenue has left developers in a worse position to service their debts. Contracted sales among the top 100 developers last year plunged to 3.36 trillion yuan, down from 13 trillion yuan in 2020, based on figures from UBS. The combined net profit margin of 26 major listed developers fell from 10.7% in 2020 to -1.1% in 2024, according to UBS.

Worse, five years after the start of the crackdown, the weakening property market continues to drag on growth. According to Andrew Batson of Gavekal Dragonomics, the sharp fall in construction and property investment shaved about 0.1 percentage points off China’s 5% GDP expansion last year.

After slipping into contraction in early 2022, property investment has now posted four straight years of declines, according to the National Bureau of Statistics. It culminated in a record 17.2% year‑on‑year drop in December 2025. That compares with a more sedate 2.2% decline in infrastructure investment last year.

Property prices continue to fall, even though Beijing is trying to push in the other direction by nudging local governments to absorb excess inventory. Official data does not disclose the full scale of the slump, but new‑home prices in 70 major cities have fallen year‑on‑year for 31 consecutive months as of January 2026, property research firm China Index Academy data shows. UBS analysts reckon the downturn could run to 2027 - even after a 40% national property price fall between 2021 and 2025.

The slump is eroding household wealth, prompting more precautionary saving and less consumer spending. With no strong social safety net and few attractive investment alternatives, many homeowners rushed to repay mortgages early, which counteracted the central bank's efforts to spur spending by injecting liquidity into the economy. Regulators responded with a raft of stimulus measures in September 2024, aimed at reinflating stock and property prices.

True, Xi’s administration has succeeded in channeling more funds into equities, partially dislodging households' historic obsession with property investment. The benchmark Shanghai SE Composite Index .SSEC has climbed about 50% since September 2024.

But less than 10% of household wealth sits in equities, according to 2023 research by the China Academy of Social Sciences, versus nearly 70% in property and 20% in bank deposits and insurance policies. Savers remain jittery as the housing downturn eats into the value of their biggest asset. Even falling interest rates have not coaxed them out of cash. Household bank deposits soared to 166 trillion yuan last year, up 120% from 2020.

That has intensified calls for more forceful steps to halt the property slump. It's especially relevant now that policymakers have made higher consumption a strategic priority for the next five years. Households are unlikely to go out and spend more on goods and services if they feel their net worth is fading due to falling property prices.

A Communist Party journal in January even described real estate as having “pronounced characteristics of a financial asset”. It's a tacit acknowledgment of the property market’s centrality to economic confidence, and reflects the fact that the forces that fed the bubble are still present.

During his annual policy readout to lawmakers, Premier Li Qiang last Thursday pledged that his administration would stabilise the real estate sector, by controlling new supply and reducing inventory. The lesson is that bursting bubbles is the easy part. Dealing with the fallout, and rebuilding confidence, is harder.

(Editing by Una Galani and Liam Proud; Production by Aditya Srivastsav)

((For previous columns by the author, Reuters customers can click on CHAN/ KaSing.Chan@thomsonreuters.com))