The Chinese Communist Party rejected the International Monetary Fund’s (IMF) proposal to use $1 trillion in fiscal resources to complete unfinished housing projects, citing the need to prevent the formation of a “government backstop expectation” among the public. This decision shattered hopes for stronger government assistance to the real estate industry, leaving private citizens disappointed.
On Friday, August 2nd, the IMF released its annual assessment report on China, urging the Chinese government to utilize central government fiscal resources to protect homebuyers of unfinished pre-sold homes. The report called for Beijing to provide one-off government support at sufficiently low costs for acquiring relevant assets and to offer support specifically for homes pre-sold before a certain deadline that cannot be completed through market financing.
According to the report, the cost of this one-off plan is equivalent to 5.5% of China’s GDP over four years. “Although there are data gaps making it difficult to estimate potential costs accurately and significant uncertainties in these costs, staff calculations suggest that implementing this program could result in fiscal costs of around 5.5% of GDP over four years,” the report stated.
Based on China’s official GDP calculation for 2023, this cost figure would amount to nearly $1 trillion. However, the Chinese Communist Party’s official response almost entirely rejected this proposal.
In a written reply, Zhang Zhengxin, the IMF’s Executive Director for China, stated that concerning the “protecting unfinished homes” aspect, the IMF recommended providing one-off central government financial support to the real estate industry. However, the official response from the Chinese Communist Party expressed reluctance to directly provide fiscal support from the central government to avoid creating a government backstop expectation and triggering moral hazards.
Unfinished homes across China have turned into unfinished buildings as financially troubled real estate developers face challenges in completing and delivering properties on time. Homebuyers’ sentiments have been affected as people worry about purchasing properties they might not be able to inhabit.
The IMF suggested that Beijing should use fiscal resources to reduce homebuyers’ losses, assist bankrupt developers, and utilize central government resources to complete and deliver unfinished pre-sold projects or compensate homebuyers based on lower costs.
Additionally, the IMF recommended that the Chinese central government consider converting some unsustainable projects into affordable housing and integrating them into economic affordable housing projects.
“If risk aversion is widespread, leading to inadequate financing that hinders the completion of projects with commercial viability, central government resources could be used to provide risk-sharing capital or guarantees while adopting strict protection measures to ensure eventual repayment,” the report emphasized.
Bloomberg noted that the IMF’s report underscored the magnitude of the challenges facing China’s real estate crisis. China is currently enduring a prolonged downtrend in the real estate market, yet authorities are reluctant to roll out massive fiscal stimulus measures or implement market rescue measures.
For the past two years, the real estate market’s downturn has become the primary obstacle to China’s economic growth. Beijing’s reluctance to provide further support to the real estate industry is partly rooted in top leadership’s ideological stance and the desire to shift economic growth momentum from real estate to technology and manufacturing sectors.
In May, the Chinese Communist Party unveiled its largest rescue plan to date, including a supportive housing refinancing scheme amounting to 300 billion yuan (approximately $42 billion) provided by the central bank, significantly lower than analysts’ estimates of a rescue fund ranging from at least 1 trillion to 5 trillion yuan.
Michael Pettis, a finance professor at Peking University’s Guanghua School of Management, noted that China’s core issue lies in a massive real estate bubble causing industry expansion far beyond economic rationality. He believes that China cannot avoid significant adjustments in the real estate industry and substantial drops in property prices.
He stated that if the real estate industry is contracting inexplicably, leading to adverse lagging effects on the economy, then the assistance proposal presented by the IMF may hold significance.
Chinese netizens expressed dissatisfaction with Beijing’s rejection of the IMF’s market rescue plan, with one netizen on Weibo writing, “The purpose of saving the property market is clear. The people are the sacrificial lambs, enduring hard work contributing. It’s normal and realistic.”