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The International Monetary Fund (IMF) has released a staff report projecting a significant drop of around 50% in new housing demand in China over the next decade. This decline is expected to present challenges for Beijing in its efforts to swiftly boost overall economic growth. The IMF attributes the anticipated decrease to factors such as a decline in new urban households and a considerable inventory of unfinished or vacant properties.
Key Points from the IMF Report:
1. Expected Decline in Housing Demand:
– The IMF predicts a fundamental decline in new housing demand ranging from 35% to 55%, impacting the absorption of excess inventory.
– This decrease is primarily attributed to a drop in new urban households and the large inventory of unfinished or vacant properties.
2. Impact on Growth:
– Slowing demand for new housing is expected to prolong the adjustment process into the medium term, weighing on China’s overall economic growth.
– China’s real estate sector and related industries, historically accounting for about a quarter of the country’s GDP, face challenges amid the property market slump.
3. Contrasting Views:
– Zhengxin Zhang, China’s representative to the IMF, expressed skepticism about the predicted 50% drop, stating that the forecast overestimates a possible market downturn.
– Zhang emphasized the likelihood of policy support gradually kicking in and highlighted the ongoing large demand for housing in China.
4. Historical Context:
– The report highlighted that China’s real estate sector experienced rapid growth in the last few decades, prompting authorities to caution against speculation and emphasize housing for living rather than speculation.
– The correction in the property market in 2020-21, following government efforts to contain leverage, was deemed warranted by the IMF.
5. Debt and Defaults:
– The last three years have seen highly indebted developers, including Evergrande and Country Garden, default on U.S. dollar-denominated debt, contributing to concerns about the strength of the real estate sector.
6. Government Initiatives:
– Chinese authorities have taken steps to ease financing restrictions for developers and new homebuyers since late 2022.
– Efforts to support real estate, however, have not yet significantly halted the broader decline in the sector.
7. Fiscal Policy and Monetary Measures:
– The fiscal stance in 2023 is viewed as “proactive” by Chinese authorities, and a policy package is being developed to prevent and resolve local government debt risks.
– The People’s Bank of China announced a cut in the reserve requirement ratio, with the IMF suggesting additional monetary policy easing is needed.
8. GDP Growth Outlook:
– China’s economy grew by 5.2% in 2023, slightly below the IMF’s December prediction of 5.4%, primarily due to weaker-than-expected consumption in the fourth quarter.
– The IMF forecasts China’s growth to slow to 4.6% in the current year.
9. Supply Chain Impact:
– The analysis found that moving supply chain production could lower GDP growth by about 6% in China and 1.8% globally.
10. Inflation and Housing Impact:
– Inflation is expected to tick higher to 1.3% this year, with falling energy and food prices cited as reasons for the drag on prices in 2023.
– The real estate slump in China has weighed on prices, contrary to the inflation-boosting effect seen in other countries.