(Bloomberg) -- Chinese authorities have rejected a proposal made by the International Monetary Fund to use central government funds to complete unfinished housing, dealing a blow to hopes for more forceful support to an industry that’s been a major drag on the economy.
The IMF called on China to deploy “one-off” fiscal resources to complete and deliver pre-sold properties or compensate homebuyers, according to an annual review of the world’s second-largest economy published Friday. It put the cost at the equivalent of 5.5% of gross domestic product over four years.
That would amount to almost $1 trillion based on last year’s GDP, according to Bloomberg calculations. It’s a solution that China all but ruled out in an official response included in the report.
“We believe that we should continue to apply market-based and rule-of-law principles in completing and delivering these units,” said Zhang Zhengxin, the IMF’s executive director for China who was elected to the fund by the government in Beijing.
“It would be inappropriate for the central government to directly provide fiscal support, as it could lead to expectation of future government bail-out and therefore moral hazards,” Zhang said.
The IMF’s assessment hints at the scale of the challenge facing China as it endures a prolonged housing downturn but remains reluctant to unleash a large fiscal stimulus or extend a lifeline to the market. The fund said it prepared the staff report in July following discussions with Chinese officials that ended in late May.
Zhang’s comments are “somewhat disappointing,” said Michelle Lam, Greater China economist at Societe Generale SA, arguing that the government will eventually need to deviate from its approach and step up policy support for the housing market if the situation continues to deteriorate.
Drag on Economy
China’s housing travails have emerged as the largest obstacle to growth over the past two years. Beijing’s approach has seemingly offered just enough help to make sure the market adjustment doesn’t get out of control or trigger a financial crisis.
Authorities have been unwilling to extend more support to the housing sector in part because of top leaders’ determination to shift the economy’s growth driver away from property to technology and manufacturing.
The government has urged banks to lend to developers and stalled housing projects, while stopping short of providing direct funding.
In May, officials unveiled the biggest rescue package yet. It contains a 300 billion-yuan ($42 billion) central bank fund that attempts to help local governments buy finished but unsold homes and turn them into subsidized housing.
That’s aimed to reduce the massive housing inventory, but fell far short of the 1 trillion to 5 trillion yuan that some analysts said was needed to deliver a more decisive fix.
“The government is very unlikely to flip its policy overnight,” said Serena Zhou, senior China economist at Mizuho Securities Asia Ltd.
Insolvent Developers
On top of the funds needed to help absorb unfinished housing, the IMF reiterated a call for the government to accelerate the “resolution” or liquidation of insolvent developers, and allowing home prices to be more flexible.
“It will mitigate the risk of a larger and more protracted contraction in real estate investment and will help to rebuild confidence and boost consumption, thereby increasing growth and fiscal revenues in the medium term,” the fund said.
IMF staff conduct regular visits to member states that include meetings with local officials and then provide a report with accompanying analysis to the fund’s executive board for discussion. An Article IV consultation concludes with the presentation of the board’s views to the country’s authorities and its public release.
Across the country, tens of millions of apartments that are already sold to households have been delayed because struggling property developers aren’t able to finish them, according to estimates by economists including Nomura Holdings Inc.’s Lu Ting.
As a result, sentiment among homebuyers has suffered because people remain wary of acquiring properties only to find out they may never live there.
Deflation, Subsidies
Separately, the IMF warned of “significant downside risks” to China’s inflation outlook, saying “a negative domestic demand shock amid high debt levels could trigger a period of sustained deflation.”
It estimates that real GDP in 2029 could be 5.4% lower in a scenario of prolonged deflation — or a period of declining prices — where core inflation stays at minus 0.1% for five years. That could also lead to slower growth among China’s trading partners.
The fund additionally called on China to scale back its extensive use of industrial policies, which it says can create significant trade spillovers.
China’s has adopted around 5,400 subsidies from 2009 to 2022, two-thirds of the measures introduced by all Group-of-20 economies combined, according to the IMF. Chinese exports of subsidized products are 1% higher than those of non-subsidized products, the fund estimates.
Beijing responded to the suggestions by saying the rise of its emerging industries such as electric vehicles are driven by companies’ innovation instead of subsidies, according to Zhang’s statement.
(Updates with economist quotes, additional IMF comments starting in seventh paragraph.)
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