The picture shows a real estate project under construction in Huai’an City, Jiangsu Province, China on April 8, 2024.
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BEIJING — China needs to convince people that housing prices are rising, Richard Koo, chief economist at Nomura Research Institute, told CNBC’s Steve Sedgwick last week. rise to allow economic activity to pick up.
Goldman Sachs analysis shows business and consumer interest in new loans has started the year with tepid interest, while home prices fell faster in January than in February.
In other words, as Gu warned last year, China may be entering a “balance sheet recession,” similar to what Japan experienced during its recession.
“In order to get them to come back and borrow money, we need a narrative of, okay, this is the bottom of prices and prices are going to go up from this point on,” Gu said.
But it’s unclear whether prices have bottomed. Analysts such as Koo Yongsheng pointed out that in China’s policy-driven economy, the decline in housing prices did not meet expectations, taking into account the decline in other aspects of the real estate market.
Chinese officials say real estate is still in an “adjustment period.” China has also been emphasizing new growth drivers such as manufacturing and new energy vehicles.
Real estate and related industries account for at least a fifth of China’s economy, according to analyst estimates. The real estate market began its latest downturn in 2020 after Beijing cracked down on developers’ heavy reliance on debt.
It coincides with the impact of the Covid-19 pandemic.
China’s population has also begun to decline, Xi pointed out, which is very different from Japan, whose population did not start declining until 2009.
“That makes the argument that house prices have fallen far enough that you should go out and borrow money to buy a house even more difficult to prove because the population is shrinking now,” Gu said.
lessons from history
China’s economy officially grew by 5.2% in 2023, the first year since Covid-19 control ended. Beijing has set a target of economic growth of around 5% in 2024.
However, many analysts say such a target is ambitious but not more Stimulate.
Chinese authorities have been reluctant to adopt large-scale support for the economy. The fundamental reason, Gu said, is that Beijing believes its previous stimulus plan was a mistake.
Gu said that about 15 years ago, after the global financial crisis broke out, China launched a 4 trillion yuan ($563.38 billion) economic stimulus plan, which was initially met with skepticism and the Chinese stock market fell by 70%.
“It’s almost heading towards a balance sheet recession,” he said. “One year later, China’s economy grew by 12%.”
But Gu said Beijing continued to implement stimulus packages even after the country grew rapidly, which led to overheated growth and speculation, as well as corruption. “That’s one of the reasons why Mr. Xi Jinping’s government is still reluctant to launch a big plan because many people think the previous plan was a failure.”
Looking ahead, Xi said China should stimulate the economy to avoid a balance sheet recession and then cut support once growth reaches 12%. “Once the borrowed money comes back, you can cut back, but not before.”
