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In its annual review of the world’s second-largest economy published Friday, the IMF urged China to use “one-off” fiscal resources to finish and deliver pre-sold properties or compensate homebuyers. The IMF estimated the cost to be around 5.5% of gross domestic product over a span of four years. Based on calculations by Bloomberg, this would come close to nearly $1 trillion considering last year’s GDP. However, China largely dismissed this approach in an official response included in the report.
Zhang Zhengxin, the IMF’s executive director for China who was elected to the fund by the government in Beijing, said “We believe that we should continue to apply market-based and rule-of-law principles in completing and delivering these units.”
“It would be inappropriate for the central government to directly provide fiscal support, as it could lead to expectation of future government bail-out and therefore moral hazards,” Zhang added.
China is facing a significant challenge as it goes through an extended housing downturn but is hesitant to implement a substantial fiscal stimulus or provide support to the market, as hinted by the IMF’s assessment. According to the fund, the staff report was prepared in July after talks with Chinese officials concluded in late May.
Michelle Lam, a Greater China economist at Societe Generale SA, expressed that Zhang’s remarks are “somewhat disappointing,” stating that if the situation continues to worsen, the government will ultimately have to change its approach and increase policy support for the housing market.
Drag on Economy
The main barrier to China’s growth in the past couple of years has been the housing challenges. Beijing’s strategy seems to have provided just enough assistance to ensure that the housing market adjustment stays manageable and doesn’t lead to a financial crisis.
Changing Focus
Authorities have been hesitant to offer more support to the housing sector partly due to the leaders’ strong commitment to shifting the economy’s growth focus from real estate to technology and manufacturing.
The government has encouraged banks to provide loans to developers and paused housing projects, but has refrained from directly providing funding.
Chinese Government Eases Home Buying Requirements
In May, the largest rescue plan to date was revealed by officials. It includes a 300 billion-yuan ($42 billion) central bank fund aimed at helping local governments purchase completed but unsold homes and convert them into subsidized housing.
The goal is to decrease the large amount of housing stock, but it did not meet the 1 trillion to 5 trillion yuan that some analysts believed was necessary to provide a more effective solution.
“The government is very unlikely to flip its policy overnight,” said Serena Zhou, senior China economist at Mizuho Securities Asia Ltd.
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