China is rightly considered an economic wonder. Since the late 1970s, when it was one of the most backward nations in the world, it has become an economic powerhouse and a formidable rival to the United States and the West generally. Given this record, observers and journalists can be excused for anticipating that China will soon surpass America’s economic might and assume the premier position among the world’s economies with everything that status implies. But the future seldom emerges as a straight line from the past. Chinese prospects today must take account of the country’s changing economic trajectory, especially the array of serious economic problems it faces, all of which in one way or another reflect Beijing’s policy missteps and mismanagement.

Exhibit one among these considerations is China’s ongoing property crisis, which began in 2021 when the giant residential developer Evergrande admitted that it could no longer meet its business and financial obligations. Evergrande was only the first of many such failures. Property development once constituted some thirty percent of China’s GDP, so these failures almost immediately became a huge impediment to the country’s growth prospects. Housing starts stalled and then began a long decline. And while some developers this year have at last begun to reschedule their finances, the situation has yet to turn around, and according to analysts at S&P Global, declines will likely continue into 2027 or longer. 

The ills imposed by this situation go far beyond the immediate effects on this once-powerful growth engine. The spread of failures has restricted China’s financial resources generally, limiting investment and expansion throughout the economy for private firms as well as state-owned enterprises. The failures have also prevented the completion of millions of apartments for which Chinese households had prepaid. Many of these frustrated homeowners have refused to pay on the mortgages associated with these non-existent units, putting yet more strain on Chinese finance. And because this collapse of home-building and home-buying has depressed real estate prices almost twenty percent since the start of the crisis, just about all Chinese homeowners have suffered declines in their net worth, crimping consumer spending and impairing the economy’s growth prospects in yet another quarter.

Unsurprisingly, Beijing has blamed property developers and lenders for the crisis. Certainly, the managements of these firms deserve some blame for lending and borrowing aggressively and spending recklessly. But behind such reprehensible behaviour, much of the blame belongs with Beijing’s economic planners. Three huge policy mistakes stand out.

First, Beijing’s central planners actively promoted residential development for far too long with easy credit and active cooperation from local governments. At first, this plan was a justifiable attempt to address China’s severe housing shortage, but Beijing kept the encouragement up long after that problem had disappeared. Property development accordingly reached an outlandish relative size in the economy. The above-mentioned thirty percent of GDP compares with maximums of five percent elsewhere in the developed world. 

Beijing made its second mistake in 2020, when it abruptly decided it was time to rein in this development. The authorities suddenly promulgated what they called the “three red lines” policy, which was intended to bring housing development into better balance with the rest of China’s economy and to encourage greater prudence among lenders and developers alike. Unfortunately, Beijing implemented this huge change with little or no warning, which left those involved with no time to adjust. Developers—who were already overextended by past encouragement—suddenly lost all that support. Unsurprisingly, they failed.

Then, in the face of the unfolding crisis, the authorities made their third mistake. They waited almost a year before doing anything to protect Chinese finance from the ill effects of the failures. Unlike the measures Western governments and central banks took to mitigate financial strains during the crisis of 2008–09, neither the government in Beijing nor the Peoples Bank of China (PBOC) provided emergency liquidity to financial arrangements, lower interest rates, or indemnification of debts. By the time the Chinese authorities acted, financial strains had metastasised throughout China’s financial system.