China’s Property Crisis and Its Legal Fallout

The Situation

China’s real estate market has contracted sharply. New project starts fell by 45% in July compared with July 2021. The value of new home sales dropped by 29% and property investment declined by 12%. These figures reflect a sector under immense financial strain.

The Causes

For more than a decade, real estate has contributed around 25% of China’s GDP. Approximately 70% of Chinese household wealth is tied to property. Much of this market relies on pre‑sale arrangements. Buyers typically pay a 30% deposit before construction begins and then make monthly mortgage payments while the developer builds the property.

This model depends on developers maintaining strong cash flow. Many became heavily leveraged, including Evergrande Group, whose liabilities exceeded £228 billion in September 2021. The risks of this model became clear when the Chinese government introduced the Three Red Lines policy in August 2020. Developers were assessed against three criteria:

• A liability‑to‑asset ratio below 70%.
• A net gearing ratio below 100%.
• A cash‑to‑short‑term debt ratio above 1.

Developers that breached any of these thresholds faced strict limits on further borrowing. Many could no longer finance the completion of pre‑sold homes. As projects stalled, buyers across more than 300 developments began mortgage boycotts, intensifying financial pressure on developers.

The Consequences

In 2022, Chinese real estate groups missed payments on $31.4 billion of dollar‑denominated bonds. Two‑thirds of these bonds now trade below 70 cents on the dollar, signalling investor expectations of losses approaching $130 billion. Several developers face imminent maturity deadlines, including Shimao Group, which must repay a $300 million principal in September 2023.

Ordinarily, companies would roll over debt by issuing new bonds. However, missed payments have damaged credit ratings across the sector. Developers now pose higher credit risks, making borrowing more expensive and more limited. Rising global interest rates and a strong US dollar further increase the cost of servicing dollar‑denominated debt.

Many developers may soon be unable to refinance at all. This will drive demand for restructuring and insolvency lawyers, as well as construction specialists advising on frozen projects.

The crisis also threatens local governments. Developers have reduced land purchases, which previously accounted for roughly 40% of local government revenue. These governments collectively hold an estimated $7.8 trillion in debt. Reduced land sales will make servicing these debts far more difficult and will likely reduce investment in infrastructure.

The Bigger Picture

The slowdown will affect industries linked to construction. Manufacturers of raw materials will face reduced demand, creating three major legal implications.

1. Financing and Consolidation

Companies may need new financing to meet debt obligations as revenues fall. Capital markets and finance lawyers will be required to advise on equity and debt options. Consolidation among suppliers may increase as firms seek economies of scale. Corporate lawyers will be needed to structure mergers and acquisitions.

2. Contractual Disputes

Stalled developments mean suppliers may not receive payments under supply contracts. To maintain cash flow, suppliers will likely pursue dispute resolution and litigation. Developers may also face claims from buyers whose homes have been abandoned.

3. Employment Claims

Construction stoppages will lead to layoffs across management and trade roles. Large‑scale dismissals increase the risk of employment claims, requiring specialist advice.

Key Takeaway

China’s property crisis adds to existing economic pressures, including strict zero‑Covid policies and rising local government debt. Growth is now expected to fall to around 5%, compared with an average of 7.7% over the past decade. Law firms will be watching closely to see whether Chinese offices remain viable and whether firms shift operations to other Asia‑Pacific jurisdictions.