Within days of China’s real estate behemoth Evergrande Group hitting headlines for default on payments, another property major in the country, Fantasia Holdings missed a $206 million bond payment deadline on Monday. This has not only led to an uncanny uncertainty among investors and home buyers but serious questions are now emerging over China’s economic recovery.

The Chinese real estate sector and its allied services account for about 30 per cent of the country’s gross domestic product (GDP). Besides, according to the latest data, about 29 per cent of all bank loans are directed towards housing.

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Following the Evergrande debt crisis, home sales had started to dip. In September, the top Chinese cities reported over 30 per cent dip in home sales compared to the corresponding period in the year ago period.

China was the first country to have clocked a handsome GDP growth after the outbreak of the Covid 19 pandemic. In the January to March quarter of the current year, China’s GDP growth stood at a whopping 18.3 per cent. However, growth slowed to 7.9 per cent in the April-June quarter.

“Economic recovery will undoubtedly be weak in China, as the real estate sector until now has been a pillar in its overall growth framework. Now we see one (company) after the other falling. The uncertainty in the real estate sector would have a direct impact on other commodities such as cement and steel and this is happening when there are already major supply side constraints in the country,” DK Srivastava, chief policy adviser, EY India told India Narrative.

The problem in the artificially over-grown housing sector has been brewing for the last few years. While China relied on the real estate sector boom for its economic growth, on an average over 20 per cent of the country’s homes in the urban markets have remained unoccupied.

Gan Li, of Chengdu’s Southwestern University of Finance and Economics told Bloomberg in 2018 that there was no other single country with such a high vacancy rate. “Should any crack emerge in the property market, the homes to be offloaded will hit China like a flood,” the news agency quoted Gan as saying.

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Though President Xi Jinping has been stressing that homes must be used for living and not for investments, the real estate sector has been constantly on the rise with a sharp increase in property prices. Two independent analysts said that Beijing has already sounded off its banks and local governments to prepare for Evergrande aftershock but the problem is deep rooted and would require a structural rebalancing.

“The challenge of rebalancing the economy away from real estate production and services is a problem China will have to face in the coming years, perhaps sooner rather than later,” former chief economist of the International Monetary Fund Kenneth Roghoff, who is currently serving as Professor of Economics and Public Policy at Harvard University wrote in an article published by Vox.

One of the analysts, India Narrative spoke to said that the rebalancing exercise would require a very well thought strategy to ensure that economic activities are not hindered.

Xi’s haphazard crackdown on the country’s private sector and a clarion call for Common Prosperity, though aimed at narrowing the wealth gap and cooling down the overheating in the economy, may only add to the problem especially with China’s big companies tumbling.