Pictured here is a real estate project under construction in Huai’an city, Jiangsu province, China, April 8, 2024.
Future publishing | Future publishing | Getty Images
BEIJING – China needs to convince people that real estate prices are rising for economic activity to pick up, Richard Koo, chief economist at Nomura Research Institute, told CNBC’s Steve Sedgwick last week.
Business and consumer demand for new loans got off to a subdued start to the year, while home prices fell more in January than in February, according to Goldman Sachs analysis.
In other words, as Koo warned last year, China could enter a “balance sheet recession,” similar to what Japan experienced during its economic downturn.
“For them to come back and borrow money, we need a narrative that says, OK, this is the bottom of prices, from this point onwards prices will go up,” Koo said.
However, it is not clear whether prices have already reached an actual bottom. Koo and other analysts have pointed out that property prices in China’s politically controlled economy have not fallen as much as expected given declines in other areas of the real estate market.
Chinese officials said the real estate market remains in a period of “adjustment.” The country has also placed emphasis on new growth drivers such as manufacturing and new energy vehicles.
Real estate and related sectors account for at least a fifth of China’s economy, according to analyst estimates. The real estate market began its recent slump after Beijing cracked down on developers’ high reliance on debt in 2020.
This coincided with the shock of the Covid-19 pandemic.
Koo pointed out that China’s population has also begun to shrink – a big difference from Japan, whose population only began shrinking in 2009, he said.
“That makes it even harder to justify this narrative that prices have fallen so much that you should take out loans and buy houses.” [the] “The population is shrinking now,” Koo said.
Lessons from history
China’s economy officially grew 5.2% in 2023, the first year since Covid-19 controls ended. Beijing has set a growth target of around 5% for 2024.
However, many analysts believe that such a target is ambitious without further incentives.
Chinese authorities have been reluctant to provide large-scale support to the economy. Koo said one reason is that Beijing sees its previous stimulus program as a mistake.
About 15 years ago, in the wake of the global financial crisis, China launched a 4 trillion yuan ($563.38 billion) stimulus package that was initially met with skepticism – and led to a 70% decline in Chinese stock prices, he said Koo.
“It was almost heading for a balance sheet recession,” he said. “A year later, China recorded 12% growth.”
But Beijing stuck to its stimulus package even after the country achieved rapid growth, leading to overheating of growth and speculation in addition to corruption, Koo said. “That is one of the reasons why this government, Mr. Xi Jinping, is still hesitant to say anything [out] a big package because so many people think the previous one was a failure.
Looking ahead, Koo said China should boost its economy to avoid a balance sheet recession and that it should withdraw that support once growth reaches 12%. “As soon as the loan is closed[ing] comes back, then you can cut, but not before.
Source link
2024-04-10 00:05:58
www.cnbc.com
