Behind the glittering modern skyline of many of China’s cities lies an ugly truth that the communist party does not want to deal with: the country’s miraculous economic growth was due primarily to its speculative real estate market. In particular, the China Evergrande real estate fiasco is shaping up to be the equivalent of what happened to the United States in 2008, except China’s fate will be worse. For years the China Evergrande real estate company has been engaged in a Ponzi (pyramid-like) scheme: homes were sold in advance to the public, and then those funds were used to finance new housing projects. The only problem was: most of the current projects were never completed. To make matter worse, people were required to start making mortgage payments to the banks as soon as the property had been purchased. Huge numbers of people were buying real estate: at least 75% of China’s household wealth is tied up in its housing market. No doubt China Evergrande was allowed to run a Ponzi scheme without any oversight from government officials, as its CEO, Xu Jiayin, was well connected to the communist party.
Home buyers are furious with their politicians who have done little to solve the problem. More buyers are now refusing to make their mortgage payments, which has placed many Chinese banks in financial jeopardy. China Evergrande owes money to over 170 domestic banks and to over 120 financial institutions. Home buyers are taking to the streets protesting this injustice, only to be met by police who arrest them. Home prices in many of China’s cities has declined by over 20% and more decreases are being forecasted. Throughout China there are millions of unfinished and vacant apartments and buildings, so many that they have created “ghost cities.” Property developers do not have the money to complete housing projects, people are withdrawing their savings from the banks, the banks are running out of funds and in turn freezing everyone’s deposits. It is a nightmare scenario that has no solution in sight.
China’s youth have become known as “Bai Lan” youth (meaning “let it rot”). More and more of them are disillusioned with the corrupt communist party and the status quo. Western politicians and businesses need to realize that China’s success is more image than substance. With the economy rapidly deteriorating, investing in China is now a huge risk.