You don't have to spend much time in China to notice the mystifying glut of half-built apartment complexes, neighborhoods, and even ghost cities.  There are certainly legitimate residences getting built, but the buildings I have in mind are concrete frameworks with no doors or window frames.  They feature sky cranes and scaffolding but no construction workers.  Buildings sit in this condition month after month.  China is estimated to have enough unsold "housing" of this type for 90 million people.

These empty buildings are a manifestation of China's enormous property bubble.  The real estate sector has grown to at least 25 percent of the county's GDP.  This makes China's bubble significantly larger than historic bubbles in, for example, Spain and Japan.

Turmoil at Evergrande, the country's second-largest developer, has drawn attention in the international press.  Evergrande's bond prices are now only a fourth of what they were in March.

Although Chinese culture emphasizes thrift and savings, there is no tradition of ordinary people investing in anything other than real estate.  They can't invest abroad.  Local stocks and bonds have a poor reputation.

The empty buildings are essentially a form of land speculation.  Developers must build something on the land, or it reverts to the government after a certain amount of time.

The government runs Chinese banks.  They often finance shell projects and unneeded infrastructure as a way of padding GDP statistics.  At the beginning of the pandemic, the government responded by encouraging loans of this type.  But it later reversed course.

The banks began cracking down on property-related loans a year ago, triggering the crisis at Evergrande.  Under the "three red lines" policy, developers must now bring their debt load below specified levels.

Evergrande is not expected to survive an upcoming series of payment deadlines.  The Wall Street Journal is confident that the government can prevent the contagion from spreading, while the Epoch Times expects a larger collapse.

If the bubble is successfully popped, that would mean more affordable housing for the younger generation.  At the same time, many older Chinese would lose some of their savings, and economic growth will be slowed.  Perhaps China's collective savings can be redirected to something more productive than empty buildings and stalled cranes.  "Homes are for living in, not for speculation," according to a mantra that officials have been repeating lately.

The reason why Evergrande can't lead to an economic collapse is that China lacks a financial free market.  There is no issue of bankers panicking in response to an unexpected turn in the market.  Risk and concerns about profitability won't stop the banks from lending, either.  The People's Bank of China, the country's central bank, directs the lending policy of the commercial bank in accordance with the dictates of the Communist Party.

The factors that are likely to determine China's economic prospects in the near term are the overall debt level and corporate transparency.  China's debt increased to 270 percent of GDP in 2020 at the start of the pandemic.  But it has since come under control.

On the other hand, Xi Jinping's policy of shielding China and its businesses from scrutiny could lead to a backlash from foreign investors.  Although China has significant savings of its own, such investment still plays a crucial role in the economy, as the dysfunctional property market illustrates.

Fresh from his victory over the pro-democracy movement in Hong Kong, Xi is imposing a dystopian vision on one sector of Chinese society after another.  Alibaba boss Jack Ma and the other tech moguls, China's swaggering elite until just last October, have been brought to heel.

Ma was planning the largest initial public offering ever when the party demanded that he pull the plug.  The tech giants have turned over months of profits to the government to show their loyalty.  Popular actors have been erased from the internet with no explanation given.

Paid private tutoring on core subjects, such as English, has been banned.  Chinese high school students focus their studies on passing the college entrance exam, which once emphasized English.  Courses on "Xi Jinping Thought" are replacing those that taught English.

For many years, China focused on economic growth and catching up with the West.  Not for the first time, the country has turned inward.  This follows a recurring pattern in Chinese history that scholars call "anti-foreignism."  Previous examples include the Boxer Rebellion of 1900 and the Cultural Revolution of the 1960s.  The "Great Firewall" keeps foreign influence off the Chinese internet.  The communications technologies once thought to be a bulwark of freedom have been repurposed as tools of authoritarianism.

Peter Kauffner lives in Sequim, Washington.

Image: A Chinese ghost city.  YouTube screen grab. 

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