The developer bankruptcies have been triggered by China implementing its so-called ‘three red lines’ policies last year, which put real estate developers in a very difficult spot by drastically raising their equity requirements while at the same time cutting access to external funding. This made it difficult for them to launch new projects, and forced some to halt work on ongoing projects. Many home buyers who invested in these unfinished properties have discontinued their monthly payments until construction work resumes.

Banks who lent money to the failing developers — sometimes enormous amounts, and often without performing solid due diligence — are also among the policy’s casualties. The risk exposure to banks is especially serious in regions where demand for apartments is far less than it is in China’s wealthy east-coast cities.

Yet while developers, banks, homeowners and other affected entities are suffering financial losses and other forms of hardship, it appears that the government is by and large achieving just what it set out to do: Reigning in real estate developers while at the same time avoiding a sharp increase in home prices due to the subsequent slowdown in new supply that would inevitably follow.

Beijing’s goal in cooling down the industry is to ultimately reduce upward pressure on home prices, and redirect some of the disproportionate amount of investment going into real estate towards other industries and so create a more balanced economy, among other reasons.

The developer bankruptcies, liquidity problems at banks and other adverse situations that have arisen may be seen as a kind of collateral damage of the ‘three red lines’, which can be seen as a calculated shift from a free-market approach to a more regulated and planned approach towards governing the real estate sector. The government has already acted to mitigate some of this collateral damage by establishing a ‘rescue’ fund to ensure completion of residential projects that developers have halted.