The Chinese government is under increasing pressure to intervene more forcefully to restore confidence in the slumping property market.

Chinese authorities are investigating debt-laden property developer China Evergrande Group 3333.HK, according to people familiar with the decision. Whether Xu Jiayin, the billionaire founder of China Evergrande, tried to move assets overseas as the company struggled to secure the sale of buildings. It is the latest sign of stress in the housing market.

China Evergrande disclosed last week that its founder was under investigation, but offered little explanation. The company did not respond to questions over the weekend.

China Evergrande's multi-billion dollar debt restructuring plan has collapsed. The company is one of many property developers still struggling to regain their footing three years after China's property bubble burst. As bad news for the sector continues to pour in, economists and investors have stepped up calls for more coordinated measures to restore confidence and help developers clear their debts.

Country Garden, once seen as one of China's most solid property developers, is also in financial trouble. One of the company's biggest unfinished projects is Forest City in Malaysia, which is home to just 9,000 people and is deserted like a ghost town. This video analyses how overbuilding and a succession of bad luck have pushed Chinese property developers into the red.

Many say it may eventually require heavy government intervention, as the US was forced to do in the housing-led financial crisis of 2008.

George Magnus, former chief economist at UBS and deputy director of Oxford University's China Centre, said: "The government should take more decisive steps to restructure the property sector and share losses among developers, banks and other stakeholders."

The growing gloom in the property market, which has accounted for up to a quarter of China's economy in recent years, threatens to offset the lift from recent improvements in manufacturing and other sectors, jeopardizing a much-anticipated economic recovery.

In the longer term, many economists warn, a prolonged property slump could drag China's economy into prolonged stagnation. That could lead to weaker demand for commodities and lower Chinese consumption of goods such as US and European fashion, hurting the global economy.


Real estate investment fell 8.8 percent in the first eight months of the year. Home sales at China's top 100 companies fell 29 per cent in September from a year earlier. Other troubled developers include Country Garden Holdings Co. (2007.HK), once considered one of China's healthiest.

"Real estate is a mess," said Leland Miller, chief executive of China Beige Book, an American economic research firm. "That's why we're seeing the dullest cyclical recovery in China ever."

The State Council Information Office, which handles media inquiries on behalf of the Chinese government, didn't immediately respond to questions. Chinese officials have said in the past that some Western politicians and media are exaggerating the economic challenges facing China and that the country is trying to help the property sector stabilize.

So far, Chinese officials have largely muddled through the slide.

Temporary measures taken to allow developers to clear their debts and complete unfinished projects have had limited success. Other measures, such as price floors in many cities to keep prices stable, also mask the severity of the industry's woes.

China's property problems have escalated to their current extent in part because of decisions the government made in earlier years, when the leadership repeatedly relied on real estate to spur economic growth.

Seize the window
A few decades ago, most Chinese people's housing was assigned by their work units. In the 1990s, Chinese authorities began liberalizing the market, unleashing one of the biggest investment booms in history.


But whenever economic growth is threatened, his administration will take steps to keep the housing market humming. Real estate had become a countercyclical economic management tool in the Chinese government's decision-making circles.

In 2015, with an oversupply of housing weighing on prices, Beijing introduced new policies to stimulate speculative home purchases and launched a shantytown renovation program, boosting private housing demand.
When the new coronavirus outbreak broke out in 2020, the real estate market heated up again, further inflating the bubble, and the Chinese government initially did not intervene.



With China's economy rebounding from the initial coronavirus lockdown, the country's leadership judged that the time had come to rein in the property market.
"The plan was to take advantage of a window of less growth pressure to push through change," recalls one policy adviser in Beijing.
a stagnant market

While some analysts applaud the idea of deflating bubbles, many worry that the measures go too far and increase financial and economic risks by making defaults more likely.
The property market stalled and developers began to go out of business. That has led to a sharp slowdown in construction activity, prompting protests from owners angry that homes they have started paying off have been halted. Sales of new homes have fallen sharply.
In that case, the usual approach would require the government to recapitalise the stronger property companies, while the worst assets would be spun off to be handled or disposed of by asset managers.
China made a similar move in the 1990s, when Zhu Rongji, then premier, restructured the near-bankrupt banking sector, with asset management companies taking over bad loans and state banks recapitalised through government bonds.
However, the Chinese government's response has been modest. Instead of organizing a large-scale restructuring plan, the government has focused on "protecting" the building to appease public anger.
Last year, China's biggest banks said they would provide at least $178 billion in yuan financial support to select housing companies. Regulators have also allowed some developers to defer payments on some loans.
For China Evergrande, the central government instructed local governments at the time to help manage the completion of stalled projects and to consult with other developers about potential support.


Protesters demand repayment of loans at China Evergrande's Shenzhen headquarters in 2021.

At the time, the option of bailing out developers like China Evergrande was off the government's table for fear that it would create a moral hazard that would lead to further overbuilding.
But some initiatives lacked follow-through or were not met with enthusiasm because of low market confidence. Some policies conflict with each other, slowing the response.
One reason for Evergrande's failure to restructure its debt is that China's securities regulator refused to allow the company to issue new financial instruments. China Evergrande has said it is not eligible to issue new debt under Chinese securities rules because its main mainland subsidiary is under investigation.
China Evergrande had the equivalent of more than $327 billion in debt at the end of June. Hundreds of thousands of homes that Evergrande has started or promised to build remain unfinished.
Band-Aid solution
Some analysts questioned whether the latest move by authorities to investigate the company's founder was at least partly an attempt to divert attention from the Chinese government's failure to overhaul the company.
Without debt restructuring, developers such as China Evergrande will either need to be kept alive by the government or face liquidation, analysts say.
The government has also been slow to stimulate demand, fearing a repeat of the speculative buying that has occurred more than once before.
Some cities ban developers from cutting prices "maliciously"; Developers sometimes need to sell properties to pay off debt. The moves have helped prevent a sharp fall in house prices that could undermine social stability. But they have also made it difficult for the market to get back to a level where more people are willing to buy.
In the past few months, against the backdrop of a barrage of bad economic data, the Chinese government has relaxed rules restricting home purchases. Recent moves by China's central bank and local governments include cutting mortgage rates and lowering minimum down payments.
"These are all stopgap measures aimed at stabilising the market rather than fixing it," said Magnus of Oxford University's China Centre.
Need further support
Many home purchase restrictions remain in place, such as limits on the number of homes households can buy in first-tier cities.
Goldman Sachs economists wrote in a research note in late August that while most economists believe China's banking system can withstand further shocks from the housing market, resolving so much debt would likely require a recapitalization of some parts of the sector.
Further policy adjustments are needed, they added. To speed up the market recovery, bolder steps are needed, such as the creation of national asset management companies. Other potential options include buying distressed inventory outright, demolishing homes or converting them into rentals.
'Policy makers aren't signaling a shift to more radical solutions,' they wrote, 'so they continue to believe that the restructuring of China's property sector is likely to be a gradual, multi-year process.'