Welcome to Canaries in the Coalmine, a series of posts focused on the future of China and its relationship to the rest of the world. In recent years, the country’s economic surge has become an economic sputtering. Lower growth, an ageing population, increasing debt and high youth unemployment all create headaches for policymakers in China and abroad. 

First up, we focus on China’s real estate sector which has struggled in recent years. So, what are the canaries in the coalmine signalling the spreading contagion of a potential housing collapse? 

Canary in the Coalmine 1: “Nevergrande” 

For years, commentators warned of a housing bubble. Huge demand from rapid urbanisation and an increasingly prosperous population organically drove the market. But Chinese capital flows are largely barred from investing abroad and had little alternative but to invest in local real estate (FT.com). This meant over-investment and hyper charged oversupply. This resulted in half-finished ghost towns and the current property crisis. 


Real estate prices have been falling for the past two years. Image source: St Louis Fed 

Government measures to constrain lending to real-estate developers in 2021 marked the beginning of the end of the bubble. The downfall of Evergrande, China’s largest construction company, was emblematic of a sector in crisis. Except in top-tier cities, real-estate markets are seeing their fastest falls in a decade (Business World). Until recently, government measures to hold back the tide seemed insufficient (Reuters).

However, over the past few weeks, the policy response has been ramping to counter this.  

Source: Google Finance 

The Shanghai Stock Exchange Index has rallied some 30% off the back of news that central government was introducing additional fiscal policy support. This was until recently the missing piece of the policy response which had focussed on supporting lending to local governments to purchase housing stock. Whether this rally will continue or hold remains unclear and the state of the construction market is still problematic. We’ll continue exploring ramifications in the next blog post.

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