China needs a story that house prices will rise

BEIJING — China needs to convince people that home prices are rising for economic activity to pick up, Richard Koo, chief economist at the Nomura Research Institute, told CNBC’s Steve Sedgwick last week.

Business and consumer interest in new loans started the year tepidly, while house prices fell more sharply 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 slump.

“To get them to come back and borrow money, we need a narrative that says, OK, this is the bottom of prices, prices will start to rise from this point,” Koo said.

But it is not clear whether prices have already reached an actual low. Koo and other analysts have pointed out that home prices in China’s policy-driven economy have not fallen as much as expected, given declines in other aspects of the real estate market.

Chinese officials have said real estate is in a period of “adjustment.” The country has also emphasized new growth drivers such as manufacturing and new energy vehicles.

According to analyst estimates, real estate and related sectors account for at least a fifth of China’s economy. The real estate market entered its latest slump after Beijing cracked down on developers’ heavy reliance on debt in 2020.

This coincided with the shock of the Covid-19 pandemic.

It’s also because China’s population is starting to shrink, Koo pointed out — a big difference from Japan, where the population only started falling in 2009, he said.

“That makes this story, that prices have fallen enough that you have to go out and borrow and buy houses, even harder to justify, because [the] The population is shrinking now,” Koo said.

China’s economy officially grew 5.2% in 2023, the first year since the end of Covid-19 controls. Beijing has set a target of achieving growth of around 5% by 2024.

However, many analysts have said such a target is ambitious without further stimulus measures.

The Chinese authorities are reluctant to provide large-scale support to the economy. Koo said an underlying reason is that Beijing views its previous stimulus program as a mistake.

About fifteen 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 caused a 70% drop in Chinese stock prices. Koo said.

“It was almost heading for a balance sheet recession,” he said. “A year later, China experienced 12% growth.”

But Beijing pushed ahead with its stimulus package even after the country achieved rapid growth, leading to overheating growth and speculation, along with corruption, Koo said. “That is one of the reasons why this government, Mr. Xi Jinping, is still reluctant [out] a big package because so many people think the previous one was a failure.”

Looking ahead, Koo said China needs to stimulate its economy to avoid a balance sheet recession, and scale back that support once growth reaches 12%. ‘Borrow once[ing] comes back, then you can cut, but not before.”