A real estate project under construction in Huai ‘an city, Jiangsu province, China, is shown in a picture on April 8, 2024.
China needs to assure people that home prices will rise to stimulate economic activity, according to Richard Koo, chief economist at Nomura Research Institute, as reported by CNBC. Business and consumer loan demand has been sluggish at the start of the year, and home prices have dropped faster in January than February, as per Goldman Sachs’ analysis.
Koo warned of a potential “balance sheet recession” in China similar to Japan’s economic downturn. To encourage borrowing and economic activity, there needs to be a narrative that home prices have bottomed out and will start rising.
However, it’s uncertain if prices have hit a true bottom yet, as analysts note that house prices in China haven’t fallen as much as expected given declines in other property market aspects.
Chinese officials describe the real estate sector as being in a period of “adjustment,” highlighting new growth drivers like manufacturing and new energy vehicles. Real estate and related sectors contribute at least one-fifth to China’s economy, and the property market slumped after Beijing’s crackdown on developer debt reliance in 2020, coinciding with the Covid-19 shock.
Additionally, China’s shrinking population poses a challenge, making it harder to justify borrowing and buying houses as the population decline affects demand, stated Koo.
Lessons from history show that China’s economy grew by 5.2% in 2023, with a 5% growth target set for 2024. Analysts believe achieving this goal may require more stimulus, but Chinese authorities are cautious due to past mistakes with large-scale stimulus programs.
Koo mentioned China’s previous stimulus package after the global financial crisis, which led to rapid growth but also overheating and speculation. To avoid a balance sheet recession, Koo suggests stimulating the economy until growth reaches 12%, then gradually reducing support.
According to Richard Koo, chief economist at Nomura Research Institute, China needs to convince people that home prices are on the rise in order to boost economic activity. Chinese officials have acknowledged that the real estate market is going through an adjustment period, with prices falling and new growth drivers like manufacturing and new energy vehicles being emphasized. The property market’s decline began in 2020 due to crackdowns on debt-heavy developers and the impact of the Covid-19 pandemic. Analysts have warned that China may be entering a “balance sheet recession,” similar to Japan’s economic slump in the past. It is uncertain if home prices have reached their bottom yet, and with China’s shrinking population, the narrative of rising prices may be harder to justify.
China’s economy officially grew by 5.2% in 2023, the first year post-Covid-19 controls, with a growth target of around 5% set for 2024. Many analysts feel this goal is ambitious without further stimulus, but Chinese authorities are wary of implementing large-scale support due to previous experiences. Nearly 15 years ago, China launched a 4 trillion yuan stimulus package in response to the global financial crisis, resulting in rapid growth but also overheating, speculation, and corruption. This has made the current government hesitant to roll out extensive stimulus measures. Koo proposed that China should stimulate its economy to avoid a balance sheet recession, cutting support only once growth reaches 12%.
In conclusion, China is facing challenges in its real estate market and economic growth, with the need to instill confidence that home prices will rise in order to stimulate borrowing and spending. The country is wary of repeating past mistakes with excessive stimulus measures, but may need to consider targeted support to prevent a balance sheet recession. The future of China’s economy will likely depend on finding the right balance between stimulating growth and avoiding overheating, while considering the changing demographics and global economic environment.
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