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SPEAKER_01: This is Planet Money from NPR.
SPEAKER_02: There is a real estate crisis in China right now. And it's a big deal because China's real estate market is really big. It's the largest asset class in the world. All in all property in China is worth, according to some estimates, something like 60 trillion dollars. But over the past couple of years, that number has been shrinking. And it's the property developers in China that are having the most obvious troubles right now. They've started to miss payments on loans. They've even been defaulting. Of course, these things didn't just happen. There's a long story behind how China's real estate got into this mess. A story I asked NPR international correspondent Emily Fang to help me tell. Here we go. Ah, there you are. Yep. Cool. No one does it better than Emily. No one can combine the on the ground China reporting with the deep historical knowledge that Emily has. Stop it. If I could blush, I'd blush. I mean it. And Emily, why don't we start here? Okay. Why should people pay attention to the story even if they don't live in China? Well, they should pay attention because China is this massive economy and it's
SPEAKER_04: part of the global economy. So whether China does well has an impact on regular people and investors, even in the U.S., for example, with regards to their pensions and their savings. And property is kind of the kryptonite that China is facing. It's helped them enormously in the past, but it could also tank the Chinese economy going forward.
SPEAKER_02: Hello and welcome to Planet Money. I'm Nick Fountain. And I'm Emily Fang.
SPEAKER_04: China's growth for the past few decades has been nothing short of extraordinary. And much of that growth came from real estate. It worked so well. It was almost like a miracle growth engine. But what happens when that engine stops working? That's the question China is facing right now. What would their economy look like without it?
SPEAKER_02: Today on the show, we're going to try to answer these two big questions. What's happening in China's real estate market? And how did we get here?
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SPEAKER_02: OK, we're going to explain the story of how China's property crisis came to be, and the story basically has three chapters. Chapter one, the birth of the property market. Chapter two, how it grew so big, so fast. And chapter three, what's happening now? Our guide to all this history is NPR international correspondent Emily Fang. Start us off the birth of the property market. Sure.
SPEAKER_04: So up until the 1980s, property technically didn't exist in China. It was a communist republic. Everyone owned everything together as administered, of course, by the Communist Party, which still rules China. But people didn't have private houses. They didn't own their land.
SPEAKER_02: And in the 1980s, China was experimenting with a number of economic reforms that in many ways were wildly successful. The reforms basically let people run their own businesses and keep more of the profits of their labor. But that led to a problem. China's government wasn't getting as much of those revenues.
SPEAKER_04: Right. So the economy was growing, but the government really wasn't getting much revenue from that growth. And so in 1994, this guy named Zhu Rongzhi, who was then the vice premier of China, he decides to reform the entire tax system.
SPEAKER_02: And Emily, you've told me that this is the moment that things took a turn in China, that if we want to trace the property crisis going on to one moment, it's this, the tax reform. Right.
SPEAKER_04: And it was really complicated. There's a lot of technical details about how he reclassified certain categories of taxes. But the net effect was that the central government started taking in way more money at the expense of local governments, at the expense of local
SPEAKER_02: governments like states or provinces, as they're called in China, or big cities like Beijing or Shanghai. And it's at this desperate moment for local governments that they realize, and this is key, there is another way to make money other than taxes.
SPEAKER_04: Right. They realize they have a lot of land on their hands. And conveniently, only local governments at the provincial and city level have the power to zone land. Like it's this magical bureaucratic tool where they can just say by fiat, this land that used to be agricultural or just wasteland can now be developed for residential or commercial property use.
SPEAKER_02: So the local government starts selling off 70 year leases for this land for residential developments and developers start building apartments on that land. Lots of them, which at first is great because people want apartments. People are moving from the countryside to the cities by the millions. But local officials start to get very dependent on land sales to fund schools and services and whatnot and to hit their growth targets. Absolutely. They are given quite clear quotas that they need to meet.
SPEAKER_04: You need to make sure that your economy grows by X number of GDP points every year and your performance will be evaluated according to economic performance. And that'll determine where you get assigned next.
SPEAKER_02: The incentives for everyone are to build, build, build. And that they did. Which brings us to chapter two, how real estate in China grew so big,
SPEAKER_04: so fast, though a better title might be the go-go years. And you told me if we're going to talk to anybody about those go-go years, it should be
SPEAKER_02: this one property developer who wrote a tell all book about his time in China.
SPEAKER_04: Yeah. And that guy is Desmond Shum. Desmond was an insider's insider during the go-go years. And talking to him is a bit like getting a glimpse through a keyhole into this period of extreme growth and also extreme wealth creation in China.
SPEAKER_02: So first, I don't know the easy question. Who are you and what do you do?
SPEAKER_03: Where am I? Actually, that's never an easy question. That's one of the actually the hardest questions when people ask me. Touché. In simple terms, Desmond was a real estate developer.
SPEAKER_02: He had a business with his then wife, Whitney.
SPEAKER_04: Whitney was friendly with the wife of the second in command of the country, the premier of China. And Desmond and Whitney used those political connections to make deals with local governments. Yeah, Desmond told us the story of one of their most famous deals.
SPEAKER_02: It shows just how wild these growth years were. The story starts in 2003 when Desmond and Whitney saw this piece of land with great potential next to Beijing's airport. They came up with a kind of audacious idea. They wanted to build a huge logistics hub with millions of square feet of warehouses and import and export processing centers. The airport hub would be the first of its kind.
SPEAKER_03: It was a bit crazy. We know it's we think it's going to be profitable because it's, you know, it's a monopoly business how every monopoly business got to be profitable. But at the same time, we know Zippo about a business.
SPEAKER_04: Since this was a time of economic growth in China, Desmond knew that having the only air cargo logistics hub in Beijing could mean massive profits because essentially they could get a little richer every time goods came in and out of Beijing's airport.
SPEAKER_02: The details on how to build that cargo logistics hub, though, were less clear to Desmond.
SPEAKER_03: Like the loading deck, how tall the loading deck should be. So the roads outside the loading deck, how wide they should be. You know, what's the depth of the warehouse? What's the structure of the warehouse? It's like we know absolutely nothing about anything.
SPEAKER_02: Desmond set to work. He learns the right widths and the proper structures for everything. He hires consultants, hires a staff, and he does a lot of wining and dining. To hear Desmond tell it at this point in China's economic development, it was rational to engage in casual bribery on a day to day basis because there was so much money to be made off these deals. Desmond said he would routinely spend thousands of dollars buying officials dinner.
SPEAKER_04: Apparently there was a thousand dollar soup that people couldn't get enough of, made of a part of a fish called an air bladder.
SPEAKER_02: You write that at one point you just like went to Hong Kong and bought like half a dozen watches of 10 to $20,000 value and you just had them as bribes for the future. Well, as trivial respect for the future.
SPEAKER_03: Oh, sorry.
SPEAKER_02: I keep calling them bribes, but, uh, sure. Trivials of respect. Because it really, I mean, for the people we deal with, like, you know, 10,000 is nothing.
SPEAKER_03: It's like nothing for them. It's like, you know, in the community we move in, those are really trivial with respect. If I give them anything less, they're definitely, what do you think of me? I'm just like a beggar of the street. Desmond, I can't tell if you're being a little facetious or what, like, do you now see these as
SPEAKER_02: bribes or do you still, I mean, I, you know, obviously I, you know, in a West, we see, you
SPEAKER_03: know, it's, it's obviously the bribe, but in the community we're moving in the, in the situation of the time, nobody actually seriously, nobody considered that by, was it just because it's not going to tell you, it's not, people not going to do something for you because you give them $10,000, $20 a watch in a community we were moving.
SPEAKER_02: It's so wild to me that you would give someone a 10 or $20,000 gift and they wouldn't be on the hook to do you a favor in the future. That is wild to me.
SPEAKER_04: Well, now we know you're selling Bryce Nick. $10,000 Nick Fountain will do anything for you. For the record, not true.
SPEAKER_02: I do not accept gifts. Also for the record, it's hard to independently verify many of the things that Desmond told us, but according to Desmond, those bribes got way bigger than the watches.
SPEAKER_04: Yeah. One amazing story he tells it's from when they were building that cargo logistics hub and Desmond needs a sign off from the customs chief.
SPEAKER_02: Who tells him over dinner, sure. I'll help you out, but I'm going to need the following amenities for my 300 person workforce, regulation size, basketball, badminton, and tennis courts, an indoor gym, a 200 seat theater, a banquet hall, and a karaoke bar.
SPEAKER_04: And Desmond agreed to it. He needed the custom heads approval. It added $50 million to the project. But once the logistics hub got built, Desmond says they sold it for a profit of close to $200
SPEAKER_02: million. Desmond and his wife got very rich. They also started building a fancy hotel with a fancy condo project, and they became part of this new extremely rich elite.
SPEAKER_04: But he was small fry compared to the really big property developers who are amassing wealth in China at the time. People like this one man he met named Xu Zhaoyun.
SPEAKER_02: Yes, the founder and head of this property development company that you probably have heard of. It's called Evergrande.
SPEAKER_04: And while Desmond was giving out $10,000 watches, he says Xu Zhaoyun's bribes were next level. Like according to Desmond, Xu Zhaoyun offered to buy Desmond's wife, Whitney, a ring worth more than a million dollars, presumably for her political connections. Desmond says she declined.
SPEAKER_02: Was he a fun person to hang out with? No, really. I mean, no.
SPEAKER_04: Desmond tells this one story of a trip that he took with Xu Zhaoyun that shows just how enormously wealthy these property developers were becoming. The story goes that he and Xu Zhaoyun were thinking about investing in a new members only wine club in Beijing with a few other rich families.
SPEAKER_02: And they decide to go to France to try some wines. They initially planned on each taking their own private jet. But right before they take off, they decide, actually, we want to play cards. So they end up flying all three private jets to France. They play cards on one and the other two fly empty. What game do you play?
SPEAKER_03: Oh, they better be. Dou Di Zhu. It's a common Chinese card game.
SPEAKER_04: Desmond, for people who don't speak Chinese, what does Dou Di Zhu mean?
SPEAKER_03: Dou Di Zhu, struggle the landlord.
SPEAKER_04: Struggle against the landlord.
SPEAKER_02: You were playing a card game called struggle against the landlord on a private jet with two of the biggest real estate developers in China?
SPEAKER_03: Yeah, that was the game. If there was a top to China's real estate boom, it might have been this moment.
SPEAKER_02: Two private jets flying empty en route to France next to one full of real estate moguls playing struggle against the landlord.
SPEAKER_04: Yeah, these folks were getting enormously wealthy because over just a couple of decades, China went from basically not letting people own private property to 90% of people owning their own homes. And there was so much demand, prices kept rising and real estate started to seem like a great investment. So people were sometimes buying second or third homes.
SPEAKER_02: Which meant that for the real estate developers, it made sense to borrow money to build homes that people might never even live in.
SPEAKER_04: Yes, the developers were borrowing massive amounts of money. Or as Desmond likes to put it, they were leveraged to the max.
SPEAKER_03: Because when you have nonstop 30 years year on year growth, everybody leveraged to the tilt. Because the moment you're not leveraging to expand to the maximum speed, you feel like you're falling behind. I was in that game. So if you're not taking a maximum risk and taking the most maximum leverage to expand your business empire, next year you look at your peers and say like, damn, I only built 10,000 apartments. They already selling 15.
SPEAKER_02: Yeah. I'm behind. In 2015, Desmond decides to, by and large, get out of the Chinese real estate business. He eventually leaves China and moves to the UK.
SPEAKER_04: Meanwhile, Evergrande and other property developers, they're doubling down, taking on more and more loans and building more and more apartments.
SPEAKER_02: Until something happens that will reverse the fortunes of China's new real estate titans and the whole country. That's after the break.
SPEAKER_02: All right, so we've heard about the birth of real estate in China. We've heard about the go-go years and all the different groups that got sucked into China's real estate get rich quick strategy. The local governments, the developers and the just regular people who had put much of their savings into first homes, sometimes even second and third homes. Now for the third chapter, the crisis. And Emily, you actually witnessed the exact start of this chapter. You were a reporter in Beijing at the time. Who were you working for?
SPEAKER_04: 2017, I was still working for the Financial Times. It's this lovely little salmon-colored British newspaper. And it was my first ever party congress that I was covering. So that was really exciting. Yeah, the party congress.
SPEAKER_02: This happens every five years and it's where the Communist Party gets together to decide the future of China.
SPEAKER_04: Yeah, and it's at this party congress in 2017 that the head of the party, Xi Jinping, says something very important that will change China's entire real estate market.
SPEAKER_02: All right, and what did it look like?
SPEAKER_04: You're seated in the main chamber of the Great Hall, which is, it's really tall. He's standing on this big stage in the center framed by these red velvet curtains and gold and the hammer and sickle of the Communist Party. In front of him sit all of the Communist Party delegates. And then in these tiered seats going up like a stadium are journalists and other lower level Communist Party dignitaries. And as foreign journalists, you know, we sit at the very, very top, really, really far away. Like literally people bring binoculars. The photojournalists come with their zoom in lenses.
SPEAKER_02: Did you bring binocs?
SPEAKER_04: I did not. I think a colleague did.
SPEAKER_02: Xi Jinping starts his big speech.
SPEAKER_03: And it's a long one. But deep in the speech, he drops the bombshell.
SPEAKER_02: Yeah, he says one line about how houses are made for living in, not for speculating.
SPEAKER_04: And that is a very clear, directed criticism of people who are just buying apartments for
SPEAKER_04: investment, but not actually living in them. This is a very big deal because essentially Xi Jinping is a very big person.
SPEAKER_02: And that is a very big deal because essentially she is saying all that building that real estate developers have been doing, much of it was unproductive. Not good for the party, not good for China. Cut it out.
SPEAKER_04: And so that's when you see this sea change of tighter regulation on all parties, on local governments, on banks, on private developers, on regular investors to limit them on how many apartments they can buy. Because basically he's saying there's too much of this stuff.
SPEAKER_02: But the problem was Xi Jinping could only do so much at once. And all these different parts of the economy were relying on more apartments, more growth. Starting with regular people, many people were still waiting on their apartments to be built
SPEAKER_04: and delivered because the way it works in China is you often prepay for your apartment before it's even constructed. Also, the property developers with all their debt, they had to keep selling new apartments to
SPEAKER_02: pay off those debts. And of course, local governments needed the building to keep happening, too, because a good
SPEAKER_04: portion of their revenues came from property and land sales.
SPEAKER_02: So for a few years after Xi Jinping's big speech, China's real estate market just keeps ramping up until 2020, when the government decides we got to slow this market down. And so the central government draws a line in the sand. Well, three of them, actually.
SPEAKER_04: Yeah, the policy is called the three red lines, and the three red lines are pretty hard caps on how much debt a developer can have, specifically on three different measures of debt. And if a developer is above those debt levels, no more loans for them.
SPEAKER_02: This was the turning point. After decades of rapid growth, property prices, especially in smaller cities, started to drop. Evergrande, the company whose founder, Xu Zhaoying, liked to give out million dollar rings. Well, by 2021, Evergrande had hundreds of billions of dollars in debt. Yes, hundreds of billions of dollars. And they started to miss payments.
SPEAKER_04: And over the last two years, housing prices have fallen in most cities in China, which has led to more property developers defaulting on their debt. Evergrande founder Xu Zhaoying is now under criminal investigation, according to his company, and they say he's been detained for suspicion of illegal crimes.
SPEAKER_02: So, Emily, you've been our guide to how we got here. You've been watching this for years. I guess my last question for you is, where does all this that we've been talking about today, where does this leave China?
SPEAKER_04: So China is trying desperately to deflate the property market with as little collateral damage as possible. Some people are going to lose a lot of money. But the question now is how widespread is the damage going to be? The economy is kind of on the brink because if China cannot contain the losses in stabilized things, their economy is gone. And so any person who watches China these days has been on tenterhooks about whether they can fix the property crisis.
SPEAKER_02: On the next Planet Money, we are stepping out of reality and into fiction.
SPEAKER_01: Whenever I meet writers and they go, oh, I don't understand business or economics, I look at them and go, well, do you know people?
SPEAKER_02: That's author Min Jin Lee, who wrote the bestselling novel Pachinko. She says money can reveal so much. Tell me what you like by telling me how you spend your money.
SPEAKER_01: If I understand your income inflow and outflow of cash or credit, I know exactly what's in your heart. I know what you idolize. I know what you don't care about at all.
SPEAKER_02: Money, economics and fiction. We'll talk to the authors of some of the most celebrated novels of the past few years. That's on the next episode of Planet Money. Our show today was produced by Emma Peasley. It was edited by Jess Jang, fact checked by Sierra Juarez and engineered by Josephine Nioni. Alex Goldmark is our executive producer.
SPEAKER_04: And special thanks to Vincent Nee, NPR's Asia editor. I'm Nick Fountain. And I'm Emily Fang. This is NPR. Thanks for listening.
SPEAKER_00: This message comes from NPR sponsor American Express Business. Take your business further with the Amex Business Gold Card, now smarter and more flexible. It's packed with enhanced benefits to help unlock more business value. Learn more at American Express dot com slash business gold card.
