Economists urge China to ramp up housing rescue package to propel growth

By Bloomberg News
 

China’s housing rescue package offers the best path for putting the country on track to expand around 5 per cent, in the view of most economists, assuming it’s deployed to maximum effect in the face of a real estate crisis expected to last as long as five more years.
 

Among the policy options considered by 15 analysts in a Bloomberg survey, a more forceful implementation of the government-led plan was the top choice of a majority of respondents. The poll followed the release of data for August that deepened doubts over whether the economy will meet Beijing’s annual growth goal.

“A complete change in mindset is required to break the deflationary spiral,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “A massive easing is needed to avoid a contractionary nominal GDP.”

The years-long real estate slump that’s wiped out an estimated $18 trillion in wealth from households has been the single biggest challenge faced by the Chinese economy. It’s cost millions of jobs, ravaged consumer confidence and brought down demand for products like steel.

Yet four months after China unveiled its most far-reaching attempt to revive the property market, progress has been slow on plans that include a programme to provide 300 billion yuan ($42.5 billion) of central bank funding to help government-backed firms buy unsold homes from developers. 

Designed to reduce the inventory glut, it’s far short of the 1 trillion to 5 trillion yuan that some analysts said was needed to deliver a more decisive fix. And given the unattractive economics of the plan for local authorities, only 29 cities are heeding the call to help absorb an excess of housing, a fraction of more than 200 urged to participate by the central government. 

China has dismissed as risky and overly expensive a proposal — with a price tag of almost $1 trillion — made by the International Monetary Fund to use central government funds to complete unfinished housing on a large scale. 

Authorities have been unwilling to extend more support to the housing sector, in part, because of Beijing’s resolve to shift the economy’s growth driver away from property to technology and manufacturing. The government has urged banks to lend to developers and stalled housing projects, while stopping short of providing direct funding. 

Target undershoot
 

Without a stimulus blitz, the Chinese economy is expected to expand 4.8 per cent this year in real terms, according to the median forecast of economists in the survey, falling roughly at the lower end of the government’s target range. But nominal growth, which factors in the impact of declining prices, will likely come far lower at 4.25 per cent, they estimate.

Measures other than housing support will likely prove less effective in giving the economy a push, the survey showed. Meanwhile, China’s property gloom is projected to last another two to five years by eight economists in the survey.

What Bloomberg Economics Says...
 

“The extended decline in housing activity indicates the rescue package announced in mid-May has failed to get much traction. A sharper drop in housing prices suggest developers and homeowners are offering discounts to try to offload homes in the weak market. More policy support in the form of faster implementation is needed — especially on budged spending and property measures.” 

— Chang Shu, chief Asia economist, and Eric Zhu, economist

Chinese authorities are considering various ways to shore up the real estate market. That includes letting local governments buy unsold homes with funds raised from special bond issuance, reducing rates on outstanding mortgages, and removing some of the remaining home purchase restrictions for consumers.

Local officials have been cautious because property prices are expected to slide further despite previous plunges, while estimated returns from turning inventory into affordable rental housing are below the cost of funding.

In a sign the slow roll-out of the rescue plan has failed to put a floor under the downturn, new-home prices in China fell 0.73 per cent last month from July, the biggest decline since 2014. 

Property investment continued to decrease at a double-digit rate, while consumption weakened more than expected and a deceleration in production notched its longest slowing streak since 2021.

“Policymakers have so far chosen to stay the course and roll out steady drips of policy support.” said Erica Tay, an economist with Maybank Investment Banking Group. “The time has come for a forceful, front-loaded fiscal boost.”