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China’s Real Estate Crisis Has No Easy Fix—Just Ask Chinese Soccer Fans

8 minute read

Ignominy comes quickly in China. Just a few years ago, Evergrande Group was the pride of the nation. The real estate giant was for a time China’s biggest constructor with more than 1,300 projects in 280 cities to date. And through sport, specifically soccer, it became the poster child for a new era of Chinese dominance. Guangzhou Evergrande soccer club won eight Chinese Super League (CSL) titles, including seven back-to-back between 2011 and 2017, as well as two Asian Champions Leagues, thanks to a galaxy of handsomely remunerated European and Latin American stars. It also ran the world’s biggest soccer school, whose “goal is to revitalize Chinese soccer and cultivate soccer stars, not only for the Evergrande group, but also for our country,” principal Liu Jiangnan told TIME in his office in 2016.

Back then, investment in soccer was smart politically. In 2015, Chinese President Xi Jinping unveiled a 50-point reform plan to develop grassroots soccer with the aim of China hosting and ultimately winning the World Cup. Evergrande even paid the bulk of former Italy manager Marcello Lippi’s salary as China coach from 2016 to 2019. In April 2020, Evergrande broke ground in Guangzhou on a new $1.8 billion, state-of-the-art 100,000-capacity stadium, which would be “a world-class new landmark comparable to the Sydney Opera House and Dubai Burj Khalifa,” Chairman Xu Jiayin told reporters.

In August, Evergrande filed for bankruptcy protection in the U.S. and last week Xu was arrested in China on suspicion of “illegal crimes” related to his firm’s precipitous collapse. Since a high in July 2020, the shares of Evergrande—the world’s most indebted developer—have plummeted 99%, wiping out almost $47 billion in market value, owing to a housing slump and regulator crackdown on excessive liabilities. Xu remains under investigation at an undisclosed location. That half-completed “landmark” stadium, meanwhile, has been seized by the local government toward servicing the firm’s estimated $300 billion of debt.

Evergrande’s global profile, owing in large part to its all-conquering soccer team, has only amplified China’s dire economic woes to the world. Meanwhile, the recent high-profile purge of top-ranking officials, bankers and generals has decimated the confidence of investors already reeling from the punitive investigations of consulting and accounting firms, bankers forced to do ideological study sessions rather than productive work, executives at foreign companies barred from leaving the country, and new draconian controls on exporting data. In the second quarter of the year, foreign direct investment into China was just $4.9 billion, down 94% compared with the same period in 2021, according to the Nomura financial services group.

Xu’s detention only adds to this unease, even if it was entirely predictable. Whenever a large Chinese company gets into financial trouble, the arrest of the top boss is never far behind—just look at Anbang, HNA Group, Huarong, Fosun, and many others. Sung Wen-Ti, an expert on Chinese politics at the Australian National University, says Xu’s arrest shows “cross-ministry coordination remains very much a work in progress” in China. “At the precise time when economic ministries are trying to resuscitate the real estate market by waiving a lot of requirements, more security-oriented portfolios are pursuing a high-profile target that’s likely going to make foreign investors wary.”

Evergrande’s woes leave an estimated 1.5 million customers with unfinished homes, but the problem goes much deeper. As real estate accounts for some 30% of national GDP, as well as up to 80% of household wealth, the crisis is cascading through the wider economy. China’s property developers collectively owe more than $390 billion to various suppliers, according to Gavekal Research. “We’re really only at the very beginning of the fallout of what’s happening in the property sector,” says Dinny McMahon, head of China markets research at Trivium China policy research group. “Real pain and real stress will be caused to ordinary people and firms.”

Read More: China Faces a Familiar Economic Downturn. But Its Crisis Is Worsened by the War in Ukraine

The question is how to fix things, and analysts agree a painful correction is needed before China emerges with a slimmed down real estate sector based on need, rather than investment potential. To that end, China has already decided to allow certain bad apples to wind down while supporting around half-a-dozen firms that are commonly regarded as well-run with perks such as foreign currency loans to meet their offshore debt obligations and state guarantees for domestic bonds. However, such is the severity of the crisis, even these—such as Country Garden, China’s biggest developer today—are also in distress.

The roots of the crisis are manifold: Chinese people typically see property as a better store of value than pensions or stocks, bolstered by cultural perceptions of homeownership as a prerequisite before marriage. Massive overcapacity at state-owned steel and cement firms—aggravated by government stimulus following the 2008 financial crisis—meant low material prices that incentivized developers to keep building. Meanwhile, the state pumped money into the construction industry to boost the economy.

But today, marriage and urbanization rates are falling, alongside China’s overall population. When China’s banking regulator tried to quell the market by reducing the credit flowing into the property sector, China’s “shadow banks”—trusts, securities, asset management companies—stepped in to lend the cash instead. What changed in 2020 is that regulators imposed hard limits on how much the developers themselves could borrow, sparking an almighty credit crunch.

Today, China is trying to encourage house purchases by slashing interest rates, mandatory deposits, and other red tape. But the problem is that housing prices also need to fall to the point that buyers see real estate as a good investment again. And in China, local governments really don’t like falling prices that threaten to undermine investor confidence and social stability. Not to mention the fact that selling land to property developers comprises a significant chunk of local government budgets—which are currently drowning in $12.8 trillion of debt largely due to the strident Zero-COVID lockdowns and testing demands of Beijing.

As such, property developers are only typically allowed to cut prices by a maximum of 15%. In May, two companies in the city of Kunshan near Shanghai offered discounts of up to 25% and were heavily fined. But without prices being allowed to drop, it’s very hard to stimulate demand. Not least because China’s real estate market is 85-90% new build (compared to typically 20% in the U.S.) Most new builds are sold on a pre-sale model, but with confidence across the sector decimated, it’s even harder to convince buyers these represent a sound investment when the developers themselves may not exist in a few months’ time.

Chong Ja Ian, a China specialist at the National University of Singapore, says that a problem is the Chinese leadership’s impulse to address every problem by increasing control. “That might work in terms of a Leninist system and the individuals within an organization,” he says, “but it doesn’t quite apply to the market.”

But even if housing prices were allowed to fall, another problem arises. China already has at least 50 million empty homes—or 12.1% of the entire housing stock—that owners sit on for capital appreciation rather than renting out for peanuts. (The value of a new home in China plummets as soon as it’s been occupied, much like driving a car off the dealership lot.) Were the prices of new-build homes from developers to drop significantly, these existing owners would be incentivized to mitigate their losses and sell up, flooding the marketplace and delaying a recovery.

Of course, the collapse of China’s real estate market wasn’t a surprise to anyone who followed Guangzhou Evergrande—or the fate of Chinese soccer more broadly, which has long been tied to the health of its real estate industry. In 2021, 11 of the 16 teams of the CSL were owned by property developers—and nearly all now face funding crises. Since 2020, at least 39 professional soccer clubs have folded in China, while eight were barred from joining this year’s season due to financial irregularities such as unpaid player wages. Guangzhou Evergrande, after once burning so bright, was relegated from the CSL last year.

Its academy, too, never did “cultivate soccer stars” for the country, as principal Liu claimed it would back in 2016. Only one graduate has played for Guangzhou Evergrande in the CSL (for a token five minutes) and none for the Chinese national team, which failed once again to qualify for last year’s World Cup in Qatar. The Evergrande Football School has, however, courted controversy to rival its illustrious parent company: in December, it was embroiled in a match-fixing scandal when the opposing team in an under-15 tournament final stopped trying, leading six academy staff to be banned from soccer for life.

Ultimately, China’s soccer ambitions were built on the same real estate bubble as four-fifths of its people’s wealth. It’s a big problem if the latter goes the same way.

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Write to Charlie Campbell at charlie.campbell@time.com