Thread by @taylorwloeb

Some thoughts on the Chinese property market: how we got here and where we're going.

TL;DR: This time next year, China's real estate market is going to be an unsexy, predominantly state-controlled sector - and that's exactly what #Beijing wants.

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Players in the Chinese property markets came to expect that the wild sectoral growth trajectory was somehow a given (we’ve heard that story before).

Investors, local governments, and developers got used to double-digit growth and baked that into their economic decisions.

Then two things happened, simultaneously:
– Beijing restricted developers’ leverage capacity
– Prices inevitably stopped growing so rapidly

Regulators long knew private developers were overleveraged and that speculation was rampant and driving prices higher – and have wanted to solve both issues for years.

It may be happening a little bit faster than China would like, but policymakers appear confident they can avoid an overly painful landing – as evidenced by the weak policy response to the slowdown.

That’s still the goal, which means that policy support will focus on locking in the policy “gains” of deleveraging and price corrections while avoiding major sectoral catastrophe.

We’ll see – and are already seeing – bailouts, debt guarantees (for more well-capitalized developers), local policy tweaks to stimulate purchases at the margins, and major state takeovers of developers and projects.

Many (perhaps most) private developers will have their debt restructured and creditors will take a hit. Many (perhaps most) of them will also cease to exist as the sector becomes state-dominated.

Ultimately, property will never return to the growth the market had come to expect during the past 20 years and will level off into a normalized real estate market. For now, the focus is on avoiding the worst, and there’s no real push to get the property market moving again.

More broadly, policymakers realize that property sector growth can’t be the economic driver that it was previously - and real estate, which has come to contribute 1/4 to GDP, growth simply ain't gonna do that anymore.