Richard Koo, chief economist at Nomura Research Institute, stated that in order for economic activity to pick up in China, the country needs to convince people that home prices are on the rise. This is because both business and consumer appetite for new loans have been subdued and home prices have dropped significantly. Koo warned that China may be heading into a “balance sheet recession,” similar to what Japan experienced in its economic slump. Chinese officials have acknowledged that the real estate market is in a period of adjustment, and are focused on developing new growth drivers such as manufacturing and new energy vehicles.
The property market in China makes up a significant portion of the economy, with real estate and related sectors accounting for at least one-fifth of the country’s GDP. The recent slump in the property market began after Beijing cracked down on developers’ high debt reliance in 2020, coinciding with the impact of the Covid-19 pandemic. Additionally, a shrinking population in China adds complexity to the situation, as it makes it difficult to justify a narrative that home prices have fallen enough and people should go out and borrow to buy houses. Koo pointed out that Japan did not start experiencing a population decline until 2009, which is a key difference.
In 2023, China’s economy officially grew by 5.2%, marking the first year since the end of Covid-19 restrictions. Beijing has set a growth target of around 5% for 2024, but many analysts believe that achieving this goal will require more stimulus. Chinese authorities have been cautious about providing large-scale support for the economy, largely due to the negative impact of a previous stimulus package launched about 15 years ago in the aftermath of the global financial crisis. Despite initial skepticism, the stimulus led to rapid growth but was continued beyond its effectiveness, resulting in overheating, speculation, and corruption.
Looking ahead, Koo suggested that China should consider stimulating its economy to avoid a balance sheet recession, but should be prepared to cut back on support once growth reaches 12%. He emphasized the importance of timing and gradual adjustments to prevent overheating and speculative behavior. Additionally, Koo highlighted the challenge faced by Beijing in trying to convince people that home prices have reached a bottom and that it is a good time to invest in property. The narrative surrounding home prices is crucial in determining whether individuals and businesses will be willing to borrow and invest in the market.
In conclusion, the challenges facing China’s property market and economy are complex and multifaceted, requiring careful navigation and strategic decision-making by policymakers. The lessons learned from past stimulus programs and economic cycles are informing current approaches to managing growth and preventing potential downturns. Moving forward, it will be important for China to strike a balance between stimulating the economy to drive growth and avoiding excessive speculation, while also addressing demographic changes and shifting market dynamics.
