Because the problem is what happens when all the investors’ financial assets are wiped out.

Post-2009 crash, the local government found themselves unable to finance themselves as the global consumption slump caused export revenues to fall. At the same time, the central government injected huge Keynesian-esque fiscal spending to prevent a recession, but with export demands down and domestic consumption not adequate to absorb such huge volume of spending, those money naturally went to real estate and infrastructure building. This mitigated the immediate troubles that came with the global financial crisis, and prevented a recession in China, but it also spawned new problems that they would eventually have to deal with, decades down the road. This was the first time property market emerged in China. Instead of investing into the real economy, much of the money went to the real estate virtual side of the economy.

Local governments in deep debt were unable to get new loans from the financial institutions, so to repay their debt they had to liquidate something. Since the real economy had slumped, the easiest way is to sell land to real estate developers, who build houses and various infrastructures that the investors could spend their money in. This created a complex and emergent relationship between local government, financial institutions and real estate developers whose fates are deeply entangled. Local governments get their GDP up quickly by selling land (instead of making long term investment in the real economy), which allowed banks to make a profit by handing out more loans, and which further promoted the cycle of investments from the private sector into the real estate because that’s the easiest way to make your asset values go up.

I have simplified a lot, but keep in mind also that the proliferation of shadow banks and the vast amount of non-real estate related corporations that have borrowed and invested into real estate, as well as households that have taken mortgage loans and have invested much of their personal wealth into the properties they bought.

Clearly, bailing out the real estate companies is just kicking the can down the road. The property bubble has to burst at some point.

But what happens when those trillions of RMB are getting wiped out? You have many non-real estate companies that will see that assets slashed in half, and that might just tip them into insolvency. What happens when thousands or tens of thousands of companies in China start going bankrupt?

The local government would immediately lose their cash revenue needed to finance their state functions, and there needs to be a completely restructured system in place to ensure that the local governments don’t fall into disarray.

The households who have spent a lot of their personal wealth buying houses will also see their assets plunge, and the anxiety might cause them to start saving and spend less, which in turn could trigger a spiraling recession as consumption goes down.

This is a complex crisis with no easy solution at hand, as far too many sectors not directly related to the real estate have got themselves involved in the investment schemes (some figure says up to 20% of China’s GDP). The central government has to walk a tightrope carefully balancing which and what sectors are going to be negatively affected as the property market fails, enact the appropriate policies to mitigate damages (which is inevitable), and even small missteps could easily snowball into huge crisis.

To be clear, China is not going to collapse, and the crash is likely not going to be as bad as the 2007 subprime mortgage crisis in the US, but it is undergoing a challenging and complex crisis that needs the government to be extremely diligent to ensure that the damages dealt can be minimized.