China’s real estate market has plummeted over the past two years after Beijing cracked down on developers’ high reliance on debt for growth.
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BEIJING – China needs to do more to solve its housing problems, the International Monetary Fund said on Friday.
The real estate market contributes about a quarter of China’s GDP and is holding back growth, especially since Beijing cracked down on developers’ heavy reliance on debt in 2020.
The Chinese authorities have started easing funding restrictions on the sector in recent months.
“Recent policy action by the authorities is welcome, but we believe additional action is needed to end the housing crisis,” Thomas Helbling, deputy director in the IMF’s Asia-Pacific Department, said in a briefing.
“If you look at the measures, a lot of them are addressing funding issues for the developers who are still in relatively good financial shape, so that will help,” he added in an interview with CNBC. “But the problems of real estate developers, who are facing serious financial difficulties, are not yet addressed. The problem of the large stock of unfinished housing more broadly is not addressed.”
Apartments in China are usually sold to homebuyers before completion. Covid and financial difficulties slowed construction so much that some homebuyers stopped making mortgage payments in protest last summer.
Chinese authorities then stressed the need to help developers complete the construction of these pre-sold apartments. Still, residential space sold in China fell nearly 27% last year, while real estate investment fell 10%, according to official figures.
“I think it would be helpful to show a way out and … how the recovery could be done and who bears losses if losses occur,” Helbling said. He also called for additional measures to address the large stock of unfinished housing.
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“Otherwise, the sector will continue to collapse and remain at risk, also constraining households that are overexposed to the property sector and have cash and their savings tied up, which will be a handicap to the overall economic recovery,” he said.
Helbling declined to give a specific timeframe within which the authorities would have to act before the situation worsened significantly.
“The sooner you address downside risks, the better.”
China says it’s not a crisis
The IMF analysis was part of the organization’s latest report on China, which followed annual talks with Chinese officials that ended in November.
According to a Jan. 12 IMF report by Zhengxin Zhang, Executive Director of the People’s Republic of China, and Xuefei Bai, senior adviser to the Executive Director, officials pushed back on the IMF’s property valuation.
China’s real estate market has generally functioned smoothly and “is not in a ‘crisis’ situation,” said the statement, which described the sector’s situation as “a natural progression of ‘debt and destocking’ in recent years.”
“The risks involved are local, affecting only individual companies, and their impact on the rest of the world has been relatively small,” central bank officials said. Looking ahead, the Chinese side said it will work towards ensuring the delivery of completed housing and bringing together developers.
Chinese property developers such as country garden, long after And R&F properties have seen their shares nearly double or more in the last 60 trading days — about three months, according to Wind Information. However, trading in shares of the one-time giants Evergrande, Shimao and Sunac has been suspended since March 2022.
The IMF report pointed out that a significant proportion of investors in Chinese developer bonds were affected.
“As of November 2022, developers who have already defaulted or are likely to default — with average bond prices below 40 percent of face value — accounted for 38 percent of the market share of companies with available bond prices in 2020,” the report said.
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“The shrinking of the sector is also creating tensions in local government. Declining revenues from land sales have reduced their tax capacity, while at the same time local government financing vehicles (LGFVs) have also significantly increased land purchases.”
The IMF on Monday raised its global growth expectations for the year on better-than-expected growth in key countries late last year, easing inflationary pressures and the end of China’s Covid controls.
The new forecast of 2.9% for the world is 0.2 percentage points better than expected in October. But it’s still a slowdown from 3.4% growth in 2022.
For China, the IMF forecasts growth of 5.2% this year, faster than the 3% in 2022.
— CNBC’s Silvia Amaro contributed to this report.