Anatomy of China’s Housing Crisis: Ending Financial Repression

James A. Dorn

During Mao Zedong’s rule, there was no private housing. All private property was deemed illegal and against Marxist principles. The failure of communal property led to experiments with various forms of ownership under Deng Xiaoping. Today private ownership of housing is widespread, accounts for about 25 percent of China’s GDP, and represents the largest form of household wealth, estimated at nearly 70 percent.

However, slower economic growth, the COVID-19 lockdowns, and a drying up of credit to property developers put a sudden stop to the hot housing market. New construction starts fell by 2 percent in 2020 from the previous year, 11 percent in 2021, and 39 percent in 2022. Meanwhile, local government revenue from land sales has gone from more than 40 percent prior to 2021 to 37 percent in 2022 (He 2023).

The liquidity squeeze, initiated by China’s paramount leader Xi Jinping, late in 2020—to stem speculation in housing and excessive leverage (borrowing) by developers—has led to defaults, most of which have been on offshore debt. Of the 50 developers with the most dollar‐​denominated bonds issued in Hong Kong, two‐​thirds have defaulted on interest payments. Consequently, the market value of those bonds has largely evaporated, losing nearly 90 percent of their value ($136 billion) over the last two years (Wilkins 2023).

The Fall of China’s Largest Developers

Two of China’s largest developers, both private, face possible liquidation. Evergrande and Country Garden have both defaulted on dollar bonds and have liabilities that have grown far beyond their assets. In December 2021, Evergrande failed to pay two dollar‐​bond coupons. It is the most indebted developer in China, with liabilities of nearly $330 billion, including $20 billion of offshore debt.

Evergrande chairman Hu Ka‐​yan has been detained for possible financial crimes, and his company faces liquidation if it cannot come up with an acceptable restructuring plan for its offshore debt by December 4 (Ao and Yu 2023).

Financial regulations prohibit Evergrande from issuing new bonds, as it is already overleveraged, and its future looks dismal. Its financial reports for 2021 and 2022 came under scrutiny by Prism, a small accounting firm Evergrande hired in January. Upon inspection, Prism could not verify the accuracy of those reports. Moreover, it concluded that, for the first half of this year, there were too many uncertainties to issue a conclusive earnings report. This lack of transparency is endemic in China’s market socialist economy.

Country Garden, which has about $11 billion in dollar‐​denominated bonds, missed making a $15.4 million interest payment on its 6.15 percent dollar bond, which was due on September 17. The 30‐​day grace period has now ended and the company is in default. The market price of its 6.15 percent note has tanked to about 5 cents on the dollar. Consequently, a cross‐​payment default on other dollar bonds seems likely unless Country Garden can come up with an acceptable restructuring plan (Tobin 2023).

Another large developer, China Vanke, has seen the value of its dollar bonds fall sharply following Country Garden’s default. Vanke’s Hong Kong‐​listed shares have fallen by 50 percent this year as sales have slumped. Monthly contracted sales reached a high of 100 billion yuan in 2021, but are now around 30 billion yuan.

The Sources of China’s Housing Crisis

Debt‐​fueled development, the lack of investment alternatives for households in a socialist market economy, a thin social safety net, and government policies that helped support the housing sector all combined to create a housing bubble prior to 2020. It is estimated that 96 percent of urban households own at least one house or apartment.

As housing demand increased and prices rose, the widespread expectation was that prices would continue to rise. That expectation was dramatically changed with Xi Jinping’s decision to impose new regulations to stem speculation.

Xi’s Three Red Lines

In August 2020, regulations called the “Three Red Lines” were enacted that required property developers to keep their liabilities (debt) at less than 70 percent of their assets; maintain a debt‐​to‐​equity ratio of less than 100 percent; and a ratio of cash to short‐​term debt of at least 100 percent. Banks were also heavily constrained in making loans to developers. The result was a collapse of the housing bubble as credit dried up to overleveraged developers. In September 2023, sales at China’s 100 largest developers fell by 29 percent from a year ago, with Country Garden’s sales falling 81 percent (Fung and Yoon 2023).

Slower Economic Growth

China largely escaped the global financial crisis (2007–09) by boosting domestic demand to counter the loss of exports. The housing market was an important component of China’s policy to stimulate the economy. However, with slower economic growth—due to the pandemic, inefficient state‐​owned enterprises, Xi Jinping’s deviation from market‐​based development, the aging of the population, financial repression, and the lack of capital freedom (i.e., the free flow of capital and a free market in ideas)—China’s future development faces many challenges.

Price Supports Prevent Markets from Eliminating the Excess Supply of Housing

In a free market, an excess supply of housing would be eliminated by allowing the price of housing to fall until a new equilibrium is reached at which the quantity supplied and demanded are equal. China’s adherence to market socialism has steered it toward using price supports to prevent decreases in demand (i.e., a leftward shift in the demand curve) from lowering prices to clear the market. Figure 1 shows that by putting a floor under the price of housing (at P1), an excess supply emerges when demand falls. The price of housing must fall to P2 if the market is to clear.

Figure 1: A Price Support Leads to an Excess Supply of Housing

Housing supply and demand graph showing the effect of China's housing policies

Existing homeowners obviously are against any fall in the price of housing, so there is political pressure to maintain price supports. Yet, policymakers recognize that with nearly 80 million housing units now vacant, prices need to be lowered. Cao Li reports that housing authorities are beginning to allow property developers more freedom to lower prices to eliminate the large excess supply of housing. Creating a freer market in housing by ending price controls would go a long way to help stabilize the housing market.

Financial Repression

China has long suppressed deposit rates and strictly limited investment choices by using capital controls. The lack of a free capital market supported by a genuine rule of law and a trusted, transparent financial system have made private housing one of the best alternatives to park savings. As Wall Street Journal columnist Joseph Sternberg observed, “The financial repression that suppressed interest income from household savings to subsidize lending to politically well‐​connected companies helped stoke outsize demand for real estate as an alternative investment.”

Faced with discriminatory policies against foreign firms, including a clampdown on access to official economic data, capital is fleeing China. Much of it is heading for the United States, prompted by a strong dollar, high US bond yields, and trusted institutions. For the first time in 25 years, China has seen overall foreign direct investment turn negative as capital outflows have exceeded inflows by nearly $12 billion in the third quarter this year.

Although China has made some progress in strengthening its financial markets, much remains to be done. Ting Lu, chief economist at Nomura Securities China, argues that “the removal of restrictions and the restoration of market‐​driven resource allocation, including the allocation of funds and land resources,” is of “paramount importance.”

Aerial view of apartment construction site in China


China’s housing crisis is part and parcel of market socialism, which puts the power of the Chinese Communist Party (CCP) above economic and personal freedom. This was made clear at the meeting of the Central Financial Work Conference in October. As Xinhua reported, “The conference stressed the need to adhere to the centralized and unified leadership of the Party Central Committee in financial work”; be “guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era”; and follow “Marxist financial theory” in developing “Chinese‐​style finance.”

Such vagueness allows plenty of room for the CCP to control key policy variables while paying lip service to the rule of law and open markets. It also creates great uncertainty about the fate of markets and prices in the allocation of credit. If Shanghai is to become a global financial center, China will have to institute a genuine rule of law, adopt transparent accounting standards, end price and capital controls, and move toward a free market in ideas. There is little evidence that Xi will do so.

It is more likely that Beijing will end up bailing out the housing sector, deepening the already significant moral hazard problem, which was created by China’s debt‐​driven housing boom and the expectation by lenders that they would be bailed out.

The Benefits of China’s Market Reforms and Opening to the Outside World Should Not Be Forgotten

James A. Dorn

China’s strong economic growth following its shift from state‐​led development (central planning) to marketization in 1978, and its drive to join the World Trade Organization (WTO), are testaments to the idea that widening the range of choices open to people—via internal and external trade—is a winning strategy. This blog post draws on my essay, “China’s Post‐​1978 Economic Development and Entry into the Global Trading System,” which is part of Cato’s Defending Globalization series.

From Plan to Market

Under Mao Zedong, private property was outlawed, private entrepreneurs and landlords were treated as criminals, and Soviet‐​style central planning dominated economic life. Industrial policy and central planning under Mao proved to be a massive failure; they did not bring about sustainable economic growth or widespread prosperity.

Deng Xiaoping recognized the failure of state‐​led development. He took a pragmatic approach to reform. If open markets could help improve life for the Chinese people, then it made sense to try that option—even in a socialist state. His mindset was that, “It doesn’t matter if a cat is black or white, as long as it catches mice.” The Chinese Communist Party’s (CCP’s) primary focus became economic development rather than class struggle.

The impetus for marketization came from those who were harmed the most under Mao’s disastrous policies—namely, people in rural households who had been forced into communes and suffered from the Great Famine. Some farmers began to contract with local authorities to gain rights to lease land from the collective and sell produce in private markets once official quotas were met. As the informal contracting system gained popularity, it was eventually sanctioned by officials. In 1982, Deng recognized the new institutional arrangement and labeled it, “the household production responsibility system.” See Kate Xiao Zhou, How the Farmers Changed China: Power of the People (1996: 3–4).

The essence of the household responsibility system, as Zhou points out in her book, is that it arose spontaneously as farmers sought to gain autonomy in their everyday lives and improve their standard of living. When farmers became richer, they began to create township and village enterprises (TVEs). While some of the TVEs were associated with collectives, the most dynamic ones were de facto privately owned. In 1978, at the beginning of the reform movement, there were no legally registered private TVEs, but by 1985 there were 10 million (Huang 2012: 154).

As individuals “jumped into the sea of private enterprise,” the nonstate sector grew, and market pricing spread. At the beginning of 1978, prior to the development of a market economy, most prices were still either guided or fixed by the state. However, by 1999, 95 percent of retail commodity prices, 83 percent of agricultural commodity prices, and 86 percent of producer goods prices were set by the market, not the plan (Lardy 2002: 24–25).

In October 1987, the CCP officially recognized the role of private enterprises in spurring development—referring to them as a “supplement” to the “socialist economy.” The following year, that recognition was reflected by amending the Constitution of the People’s Republic of China (see Zhang 2015: 17).

Top‐​down privatization was not the path to marketization in China. Rather, as Barry Naughton points out in Growing Out of the Plan: Chinese Economic Reform, 1978–1993 (1995: 8–9), China grew out of the plan by allowing development of the nonstate sector. In 1984, top officials agreed to keep planned output targets fixed along with resources allocated to the planned sector of the economy. As productivity in the market‐​oriented sector grew, the contribution of the plan to national output declined.

It is striking that in 1978, state‐​owned enterprises (SOEs) accounted for nearly 80 percent of gross industrial output, but by 2016, their share had declined to 20 percent (Lardy 2018: 333).

After mass protests erupted in Tiananmen Square during the spring of 1989, the reform movement stalled. Economic growth slowed until 1992, when Deng took his famous Southern Tour of the special economic zones (SEZs), which he helped establish in the early 1980s. Deng’s main message on his tour was that, “It doesn’t matter if policies are labeled socialist or capitalist, so long as they foster development” (see Naughton 2007: 99).

Opening to the Outside World

Prior to joining the WTO in 2001, China unilaterally liberalized its foreign‐​trade sector (see Drysdale and Hardwick 2018). Domestic prices became more market‐​oriented as firms were subject to foreign competition and the international price system. Resources were more efficiently allocated, and more open markets meant the Chinese people could benefit from both greater consumption opportunities and the exchange of ideas.

Nonstate enterprises were the driving force in foreign trade. As trading rights were expanded, the number of domestic firms engaged in foreign trade increased from 12 in 1978 to more than 5,000 a decade later. By 2001, the number of domestic firms engaged in foreign trade reached 35,000 (Lardy 2002: 41). After accession to the WTO, the general tariff level fell to 9.8 percent in 2007, compared to 16.4 percent in 2000 (Wang, Fan, and Zhu 2007: 35). Marketization reached new levels and the foreign trade share of GDP accelerated. Today, China is the world’s largest trading nation.


Although much progress has been made in integrating China into the global economy, much remains to be done (see Packard 2023). The lack of an independent judiciary; overreliance on SOEs, which are about 20 percent less productive than private‐​sector firms (IMF Staff Report 2021: 12); financial repression; and abusive practices, such as cyberhacking into commercial networks and repression of free speech, threaten future progress.


China became an economic powerhouse by opening its markets, recognizing the nonstate sector, and allowing individuals to lift themselves out of poverty. Attempts at industrial policy, under the State‐​Owned Assets Supervision and Administration Commission, failed (Lardy 2018: 335–36). The lesson for China is to continue on the path of marketization and liberalization, not to revert to destructive state control and repression.

China can learn from its own history as well as from the West that economic and social harmony cannot be imposed from above. The challenge is to allow a free market for ideas, as well as for trade in goods and services, by institutional reform that protects both economic and personal freedom.

Jimmy Lai: Prisoner of the State

James A. Dorn

Hong Kong, once one of the freest jurisdictions in the world, with a rule of law that protected freedom of speech and assembly as fundamental human rights, is now under the direct hand of Beijing after the passage of the National Security Law (NSL) in July 2020. One of the victims of that law is Jimmy Lai, founder of Next magazine and Apple Daily, two of Hong Kong’s most popular and free‐​market publications.

His strong criticism of the NSL, and his support of mass protests against it, led to the shutdown of both publications and Lai’s imprisonment for “subversion.” By speaking out against the Chinese Communist Party (CCP) and its cronies in Hong Kong and defending the rule of law and freedom, Lai now faces the possibility of life in prison. Like many others before him, he is a prisoner of the state.

In honor of his valiant effort to uphold the principles that made Hong Kong a bastion of freedom and his courage in standing up to Beijing’s suppression of liberal principles in Hong Kong, the Cato Institute awarded him this year’s Milton Friedman Prize for Advancing Liberty. Sebastian Lai accepted the award on his father’s behalf.

Jimmy Lai, like other prisoners of the state, understands the key role a free market in ideas plays for both economic and personal freedom. In a recent documentary produced by the Acton Institute, he stated: “Information is choice and choice freedom.” When the free flow of information is crushed by the state, there can be no criticism of current institutions and leaders: wrong ideas persist and good ideas are suppressed. Consequently, both economic development and personal freedom suffer (see Zhang 2015).

Peter Bauer (1957: 113), the first recipient of the Friedman Prize in 2002, held that “the principal objective and criterion of economic development” is to widen “the range of effective alternatives open to people.” Restricting the flow of information and free speech limits the range of choices open to people, impedes the market discovery process, and weakens the moral fabric of society.

China’s Attack on the Free Flow of Information

When Deng Xiaoping began to open China to the outside world in 1978, there was both an economic liberalization and an opening of the market for ideas. However, preserving the CCP’s monopoly on power has always come first. Although freedom of speech is now embedded in the PRC’s Constitution (Art. 35), the state has the upper hand, as expressed in Art. 51: “Citizens of the People’s Republic of China, in exercising their freedoms and rights, may not infringe upon the interests of the State.” Those interests are wide‐​ranging and offer no guarantee of free speech or other fundamental human rights.

The Tiananmen crackdown in 1989 stalled liberalization until Deng’s Southern Tour in 1992. One of the many casualties of that crackdown was Zhao Ziyang, then Party General Secretary and a firm proponent of liberalization. When he spoke out in favor of a peaceful settlement with the protesters, he was purged from his position and put under house arrest for the remainder of his life.

Although Zhao’s voice was silenced, his posthumous book, Prisoner of the State: The Secret Journal of Premier Zhao Ziyang (2009) became a New York Times bestseller. In that book, he argued that, if China wants to fully develop, it must move toward a parliamentary democracy with a genuine rule of law and a free press (pp. 270–71).

Another enemy of the Chinese state was Liu Xiaobo, one of the drafters of Charter 08. He was charged with “speech crimes” for “inciting subversion of state power” and imprisoned. In 2010, he was awarded the Nobel Peace Prize for his strong support of democracy and human rights—especially free speech. The empty chair at the Nobel ceremony symbolized the struggle for truth against power.

In a statement released on December 23, 2009, Liu wrote: “Freedom of expression is the foundation of human rights, the source of humanity, and the mother of truth. To strangle freedom of speech is to trample on human rights, stifle humanity, and suppress truth.” Jimmy Lai would undoubtedly agree

Since Xi Jinping took over in 2012 as General Secretary of the CCP, there has been a carefully managed campaign to squash dissent within the Party and establish Xi as the paramount leader. Now the most powerful leader since Mao Zedong, Xi has silenced all critics, including those in Hong Kong.

In January 2017, the cyber police in Beijing shut down the website of China’s leading private, market‐​liberal, think tank—the Unirule Institute of Economics—as well as the personal websites of its scholars. The director of Unirule, Sheng Hong, in a memorandum dated January 24, 2017, pointed to the hypocrisy of Xi Jinping, who paid lip service to free trade in his remarks at The World Economic Forum, while cracking down on free speech at home. According to Hong, “As ideas are more valuable than commodities, anyone who truly defend[s] the freedom of trade will defend freedom of expression” (quoted from a personal copy of the memorandum). The Unirule Institute was permanently banned in August 2019, and the voice of its co‐​founder, Mao Yushi, who received the Friedman Prize in 2012, has been silenced.

Today, access to economic and financial data is being restricted in the name of national security, making it difficult for foreign firms and scholars to gather information necessary to conduct business in China and to understand policy changes (see Wei, Kubota, and Strumpf 2023). Without a free market for ideas and access to relevant databases, it will be difficult to make informed decisions and develop China’s financial markets.

China’s Future Development

In 2015, Zhang Weiying, a pioneer in China’s transition from plan to market, predicted: “The future of China’s reform will depend on the kind of ideas and leadership the new leaders, particularly General Secretary Xi Jinping, have. To succeed in a peaceful transition to a liberal society, China must get rid of the wrong ideas” (Zhang 2015: 13). The most serious wrong idea is that economic and social harmony come from top‐​down planning—not from the spontaneous order of free markets and free people bounded by a rule of law that protects persons and property.

Continuous improvement in people’s lives comes from taking advantage of new opportunities to exchange goods and ideas. In that endeavor, there must be competition in all markets, including the market for ideas. China’s one‐​party system and the lack of free speech are impediments to future development. That is why Ronald Coase and Ning Wang have emphasized that, “when the market for goods and the market for ideas are together in full swing, each supporting, augmenting, and strengthening the other, human creativity and happiness stand the best chance to prevail” (Coase and Wang 2012: 207).

Globalization and trade liberalization help bolster the free market for ideas and widen the range of choices open to people, thus increasing the wealth of nations. Crude nationalism and protectionism do the opposite. Politicizing trade and blocking the free flow of information risks losing the gains from globalization and marketization that have benefited both China and its trading partners.


Hong Kong’s turn from the principles that made it a great society—namely, the rule of law, nonintervention, and a free market for ideas—has made successful entrepreneurs and advocates of freedom like Jimmy Lai enemies of the state. By silencing critics—under the guise of national security—both Hong Kong and China have sacrificed liberty in the name of “stability.” Reversing that trend is the biggest challenge they face in achieving social and economic harmony.