China’s real estate crisis isn’t over yet, IMF says

BEIJING — China needs to do more in order to fix its real estate problems, the International Monetary Fund said Friday.

The property market contributes to about a quarter of China’s GDP and has been a drag on growth, especially since Beijing cracked down on developers’ high reliance on debt in 2020.

Chinese authorities started to ease restrictions on financing for the sector over the last several months.

“Authorities’ recent policy measures are welcome, but in our view additional action will be needed in order to end the real estate crisis,” Thomas Helbling, deputy director in the IMF’s Asia Pacific Department, said in a briefing.

“If you look at the measures, a lot of them address financing issues for the developers that are still in relatively good financial health, so that will help,” he added in an interview with CNBC. “But the problems of the property developers’ facing severe financial difficulties are not yet addressed. The issue of the large stock of unfinished housing more broadly is not yet addressed.”

Apartments in China are typically sold to homebuyers before completion. Covid and financial difficulties slowed construction so much that some homebuyers halted their mortgage payments last summer in protest.

Chinese authorities subsequently emphasized the need to help developers finish building those pre-sold apartments. Still, residential floor space sold in China dropped by nearly 27% last year, while real estate investment fell by 10%, according to official numbers.

“I think it would be helpful to point to a way out and … how the restructuring could be done and who will absorb losses if there are any losses,” Helbling said. He also called for additional measures to address the large stock of unfinished apartments.

“Otherwise the sector will continue to slump and remain a risk and also constrain households that are overexposed to the property sector, and will have cash tied up and their savings tied up which will be a handicap for the broader economic recovery,” he said.

Helbling declined to name a specific timeframe within which authorities needed to act before the situation got much worse.

“The sooner you address downside risks the better.”

The IMF analysis was part of the organization’s latest report on China, following annual discussions with Chinese officials that ended in November.

The officials pushed back on the IMF’s real estate assessment, according to a statement in the IMF report by Zhengxin Zhang, executive director for People’s Republic of China, and Xuefei Bai, senior advisor to the executive director, dated Jan. 12.

China’s property market has generally operated smoothly and “is not in a ‘crisis’ situation,” the statement said, casting the sector’s situation as “a natural evolution of ‘deleveraging and destocking’ in the past few years.”

“The related risks are local and only concern individual firms, and their impact on the rest of the world has been relatively small,” the central bank representatives said. Looking ahead, the Chinese side said they would work toward ensuring the delivery of completed apartments, and merging developers.

Chinese property developers such as Country Garden, Longfor and R&F Properties have seen their shares nearly double or more over the last 60 trading days — about three months, according to Wind Information. But trading in shares of one-time giants Evergrande, Shimao and Sunac have been halted since March 2022.

The IMF report pointed out that a significant portion of investors in Chinese developers’ bonds have been affected.

“As of November 2022, developers that have already defaulted or are likely to default — with average bond prices below 40 percent of face value — represented 38 percent of the 2020 market share of firms with available bond pricing,” the report said.

“The sector’s contraction is also leading to strains in local governments. Falling land sale revenues have reduced their fiscal capacity at the same time as local government financing vehicles (LGFVs) have also significantly increased land purchases.”

The IMF on Monday raised its global growth expectations for the year due to better-than-expected growth in major countries late last year, softening inflationary pressures and the end of China’s Covid controls.

The new 2.9% forecast for the world is 0.2 percentage points better than anticipated in October. But it’s still a slowdown from 3.4% growth in 2022.

For China, the IMF projects growth of 5.2% this year, faster than the 3% pace in 2022.

— CNBC’s Silvia Amaro contributed to this report.