IMF Calls for China to Boost Spending Amid Ongoing Property Market Slump

The IMF has recommended that China significantly increase its fiscal spending to address the ongoing property market slump. The proposed $1 trillion program aims to complete unfinished projects and boost economic growth.

IMF Urges China to Increase Spending to Combat Property Slump, Proposes $1 Trillion Program

The International Monetary Fund is renowned for its advocacy of fiscal discipline. The typical course of action for a nation experiencing an economic downturn is to tighten its budgetary belt to reestablish confidence, lower interest rates, and stimulate development. Argentina's extensive interaction with the International Monetary Fund (IMF) serves as an illustration.

Therefore, the IMF's recommendation for substantial fiscal expenditure is particularly noteworthy in light of this established pattern. In an annual assessment of China's economy this week, the fund's staff called for a more extensive solution to the nation's property slump. According to Bloomberg calculations, they proposed a program equivalent to 5.5% of GDP over four years, or nearly $1 trillion.

However, China ultimately resolved to stymie this seemingly radical concept. According to the International Monetary Fund (IMF), Beijing stated, “existing policies are sufficient to generate a positive momentum in the property market.”

However, economists do not widely hold this perspective. In a note dated July 30, Goldman Sachs emphasized that Chinese real estate prices and activity are declining. The firm concluded that "further demand-side easing measures—particularly on the fiscal and housing fronts—are required" to achieve the 2024 growth target of approximately 5%.

The ultimate cost is exacerbated by the classic policy error of underestimating risk and delaying decisive action. Witness the US Federal Reserve's decision to postpone addressing the inflationary surge in 2021-22. Additionally, the United States fiscal authorities needed to adequately stimulate the economy following the 2007-09 financial crisis. And—perhaps most aptly—the Japanese policymakers who could not resolve their property slump.

China is adhering to a well-established trajectory.

The primary concern of the Chinese property market is the abundance of undeveloped properties pre-sold to homebuyers. After a policy-induced financial crunch commenced in late 2020, developers could not complete the units due to a lack of funds.

This subsequently alarmed prospective purchasers, who were apprehensive about losing their deposits, which are generally significantly higher in China than in the United States as a percentage of the purchase price.

Years after the recession commenced, home sales and prices are still declining. According to data released this week, the value of new-home sales from the 100 most prominent real estate companies decreased by nearly 20% from the previous year.

Please remember that these figures are based on significantly lower levels than before the recession one year ago.

IMF Proposes Bailout and Social Housing to Mitigate China's Property Market Downturn

IMF staff recommended that China’s central government essentially bail the market out with a program to “complete and deliver the pre-sold unfinished projects or offer compensation to homebuyers, whichever is less costly.” National authorities could also “consider converting some unviable projects into social housing.”

Stopping the property downturn would have a more extensive positive impact by reducing the drag on local government expenditures and consumption.

The real-estate downturn has created a significant gap, as local authorities have historically depended on selling property usage rights as a critical source of fiscal resources. This, in turn, has restricted their capacity to promote economic expansion. In certain respects, they are currently exacerbating the already diminished confidence levels. Some local governments urgently need revenue and have requested that numerous corporations pay tax bills from the 1990s.

In recent exchange filings, several publicly traded companies have disclosed that they have received government demands to pay tens of millions in back taxes. They have also cautioned investors that this could impact their earnings.

The real estate slump has continued to impact China's consumer spending, which has affected the purchases associated with purchasing new residences and caused a significant decline in sentiment. The monthly pace of retail sales in June was the lowest since December 2022, when President Xi Jinping was eventually compelled to relax his stringent COVID-19 regulations.