Derisking Real Estate in China’s Hybrid Economy

This chapter examines the challenges and risks within China’s real estate sector, a cornerstone of its hybrid economy that blends state intervention with market dynamics. The analysis highlights how local governments’ heavy reliance on land sales and debt financing has spurred over-investment and elevated leverage, creating systemic risks for both the financial system and broader economic growth. It discusses the roles of various channels – financing, tournament, and central government guarantees – in exacerbating market distortions and encouraging speculative behavior. The chapter also reviews recent market trends during the COVID-19 period, revealing significant mismatches between demand, supply, and pricing across different city tiers. While government interventions have successfully postponed a hard landing, they may not address underlying structural issues. Ultimately, the chapter argues that sustainable risk mitigation in the real estate sector requires structural reforms and the development of new economic growth engines to reduce over-dependence on real estate.