China needs information that housing prices will rise

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

Business and consumer appetite for new credit got off to a sluggish start, with home prices falling at a sharper pace in January than in February, according to a 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.

“In order for them to come back and borrow money, we need a story that says, okay, this is the floor of prices, prices will start to rise from here on out,” Koo said.

But it is not yet clear whether prices have reached an actual bottom. Koo and other analysts say that in China’s policy-driven economy, home prices have not fallen as much as expected, given the decline in other aspects of the property market.

Chinese officials said the property was undergoing a period of “redevelopment.” The country is also focusing on new growth drivers such as manufacturing and new energy vehicles.

Analysts estimate that real estate and related industries account for at least one-fifth of China’s economy. The property market began its latest downturn after Beijing cracked down on developers’ high reliance on debt in 2020.

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

This also comes as China’s population has begun to decline, Ku noted. That’s a big difference from Japan, whose population only began declining in 2009, he said.

“This makes this story that prices have fallen so much that you should take out loans and buy houses even more difficult to justify because [the] the population is declining now,” Koo said.

China’s economy officially grew by 5.2% in 2023, the first year after Covid-19 came under control. Beijing has set an economic growth target of around 5% by 2024.

However, many analysts believe that such a goal is ambitious and requires additional incentives.

Chinese authorities are reluctant to begin large-scale economic support. Koo said the main reason is that Beijing believes its previous stimulus program was a mistake.

About 15 years ago, after 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 percent drop in Chinese stock prices, Ku said .

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

But Beijing continued its stimulus package even after the country achieved rapid growth, leading to an overheated economy and speculation as well as corruption, Koo said. “This is one of the reasons why the current government, Mr. Xi Jinping, is still unwilling [out] a big package because a lot of people think the previous one was a failure.”

Looking ahead, Koo said China should stimulate its economy to avoid a balance sheet recession, and that it should reduce that support once growth reaches 12%. “As soon as the loan[ing] will come back, then you can cut, but not before.”