As Evergrande Fails, China's Housing Market Could Go Flat—What This Means for Beijing

Thursday could mark the first of a series of events that may lead to the collapse of China's second-largest property developer, the Evergrande Group. Facing an $83 million interest payment on a bond, Evergrande could face its first of many loan defaults on its over $300 billion worth of debt.

While some have likened a potential Evergrande collapse to the fall of America's one-time fourth-largest bank, Lehman Brothers, in 2008, analysts say the scope of such a fall would not have the same effects on the international economy.

Still, with its hands in China's consumer products, electric vehicles, health-care services, and video production sectors, an Evergrande collapse would have a wide-reaching effect on China's economy. Beijing has so far pumped $18 billion into the country's banking system in a move to protect the Chinese lenders. But a number of industries and people who profit from the nation's housing market could soon suffer.

Newsweek spoke with the Brooking Institution's David Dollar who specializes in the global economy with a focus on China. He said this moment could prove as an inflection point for President Xi Jinping's government. With the real estate market standing as one of China's most important sectors, its future and the wealth of the country's people may very well hang on the administration's upcoming decisions.

"The Chinese government's done a good job managing their economy over a long period of time, and people's incomes are going up," Dollar told Newsweek. "If they can manage this well then people will be happy, as a lot of household wealth is tied up in housing. So, if the government can prevent a bubble that collapses, then that just leaves people in a good position. On the other hand, if they mismanage it, then it starts undermining this story of their competence."

China stands as the world's fastest-growing consumer market with more and more people purchasing goods. As the country has become wealthier, its urban centers have grown. Subsequently, Dollar said more people are buying goods to fill their new apartments, and as a growing number of people continue to move to the cities, more cement factories, lumber producers, and construction workers are being called upon to fill these demands. It is for these reasons that the real estate market stands with such significance in China's growing economy.

Dollar predicts that if Evergrande falls, then the housing market will enter a "soft period." Prices will neither rise nor fall and will likely stay that way for some time. In conjunction with recent regulations, an Evergrande collapse could see construction continue its recent slowdown. This phenomenon has and likely would result in cooling off of the demand seen amongst Chinese buyers for new apartments.

Right now, Dollar said, many households own additional investment apartments that they don't rent out but rather plan to sell in the future, given that housing prices have continued to rise in recent years. Should the effects of an Evergrande collapse be greater than recent predictions and trigger a mass sell-off and subsequent price drop, many Chinese citizens could see a collapse in their net worths. Beijing will work to prevent any such phenomenon from occurring.

"People see buying an apartment as a sign of their progress," Dollar said. "Since most people have their wealth in their household, you're going to have a lot of unhappy people if there's a significant downturn in prices."