The recent bankruptcy filing in New York by China’s property giant Evergrande, coming close on the heels of a default on bond interest payments by the country’s biggest developer, Country Garden, are significant developments in the brewing crisis in China’s real estate industry. The distress is widespread, with several mid-sized developers also facing mounting losses. In fact, the strain on the real estate sector – which accounts for 25-30 per cent of China’s gross domestic product and has been a major driver of its growth – is arguably the biggest uncertainty facing the economy. Official data show that investment in the sector fell 8.5 per cent during January to July compared with a year ago, and both prices and sales tumbled.

There are no easy policy options to arrest the sector’s decline. So far, the government has relaxed restrictions on property buyers, the People’s Bank of China has eased monetary policy and commercial banks have cut deposit rates to encourage spending rather than saving. But with surveys indicating that consumers expect property prices to decline further, they are holding back on their purchases. Given that the majority of household wealth is held in the form of property, consumers are also increasing their precautionary savings. Moreover, in the face of deflation – which raises borrowing costs in real terms – they are more incentivised to pay down debt than borrow more or spend, which makes cuts in mortgage rates less effective and undermines hopes of the consumption-led recovery that China’s policymakers want to see.