China’s economy is collapsing as things have quickly taken another turn for the worse. Evergrande, which was at one time China’s largest property developer, has officially filed for bankruptcy and defaulted on its massive $340 billion dollar pile of debt. The sheer size of Evergrande’s debts and failure has left many experts worried that China’s economy might be having a Lehman moment right now that could introduce broad contagion into the global economy.

The Chinese real estate bubble is far from the only economic challenge that the country is facing. China is simultaneously facing a shadow banking crisis, massive youth unemployment, and fleeing foreign investment and companies. China's increasing desperation has led to widespread online censorship, increased aggression towards Taiwan, and debt trap diplomancy.

It’s undeniable at this point that the carnage in the Chinese real estate market is widespread. Data has shown that new home sales for China’s top property developers have dropped 33% compared to just one year ago. And property prices are taking a major plunge as well. While China’s official statistics are reporting that housing prices have only seen a modest decline, the reality is much darker. Property agents and private data providers show that China’s government is significantly underestimating just how bad things are in the property market. Existing home prices are estimated to have fallen by at least 15% in major cities like Shanghai and Shenzhen and at least 25% in Hangzhou.

This widespread downturn in the property market has impacted tons of property developers and brought them to the brink of failure. While Evergrande has been the big name poster child that most people have heard about, they are far from the only property developer falling apart – major Chinese property developer Country Garden also just missed bond payments this month on it’s $194 billion pile of debt and warned investors that it expects to lose $7.6 billion dollars for the first half of the year alone.

Why is all of this such a big deal you might be wondering? Well it’s because for years China’s property market has been arguably the primary engine driving the Chinese economic growth story. The property market alone accounts for roughly 30% of China’s annual total GDP and approximately two thirds of the household wealth of Chinese citizens is tied to real estate ownership.

And the reason the property market became this dominant force in China’s economy is because of China’s rapid urbanization. As China’s economy and citizens transitioned away from rural farming to doing manufacturing work in cities, hundreds of millions of citizens were moving from the country into cities for work and they needed housing in the form of homes and apartments. Evergrande and other property developers jumped on this demand boom for housing in the market and began developing properties at a large scale. And in order to scale up and develop more properties, they borrowed money. Evergrande and other property developers took on massive amounts of debt and leverage to finance their operations and for a while the Chinese government was ok with it because it was also benefiting them.

Since China’s Communist government is the one that actually owns the land in China, Local governments are the ones who sell leasing rights to property developers so they can then build housing. The sales of these rights to property developers is one of the local government’s primary sources of income. So letting these companies take on extreme debt in order to develop properties benefitted the Chinese government for a while since a significant portion of this borrowed money ended up directly in the government’s pockets for the leasing rights. In addition, it helped boost the overall growth of China’s economy and GDP on paper, so no one in power really wanted to stop the property developers out of control borrowing since it was so lucrative.

But you might be seeing a major problem here. This obviously was not a sustainable business model for many reasons and was creating a massive bubble in the property market. The biggest reason is the fact that any downturn in the housing market would put Chinese property development companies under massive financial stress as lowered sales would put them at risk of not being able to make payments on their massive mountains of debt.

And the final nail in the coffin for the sustainability of Evergrande and the rest of China’s property development sector is that they’ve already built far more housing than what’s actually needed. In fact, China has many massive city construction projects that have been completed yet almost no one lives in them. This widespread Chinese phenomenon of massive empty developments has been referred to as “ghost cities”.

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