The International Monetary Fund (IMF) has issued a warning about the potential decline of China’s property market while reducing its growth forecast for the world’s second-largest economy.
In a report published Tuesday, The IMF has reduced its growth forecast for China this year to 4.8%, which is 0.2 percentage points below its July projection. For 2025, the IMF reportedly anticipates growth to be at 4.5%.
The IMF has pointed out that the unexpected contraction of China’s property sector is among several factors posing risks to the global economic outlook.
‘The real estate market could face worsening conditions, potentially leading to further price declines amid a drop in sales and investment’, the report indicated.
The report referenced past property crises in countries such as Japan in the 1990s and the U.S. in 2008, suggesting that if China’s situation is not managed, property prices may fall even more.
According to the IMF‘s World Economic Outlook, this could undermine consumer confidence, leading to lower household spending and domestic demand.
Shares of many Chinese property stocks listed in Hong Kong soared to their highest levels in more than a year, propelled by the ongoing stimulus rally in China
The real estate sector emerged as the top performer in the Hang Seng Index on Wednesday 2nd October 2024.
Chinese stocks experienced a rally, climbing over 7% to complete their sixth consecutive day of gains.
In a significant development that has raised concerns among investors and policymakers worldwide, China’s debt outlook has been downgraded as the country grapples with a slowing economy. This move reflects growing apprehensions about the sustainability of China’s economic growth and its ability to manage its burgeoning debt.
Moody’s issued the warning as it cut its outlook on the government’s debt to negative, from stable. China said it was disappointed by the move, calling the economy resilient. China also reported to have said it is unnecessary for Moody’s to worry about China’s economic growth prospects and fiscal sustainability.
Rapid Expansion
For years, China’s rapid economic expansion has been the engine of global growth, but recent trends indicate a deceleration. The once double-digit growth rates have now tapered, with projections suggesting a further slowdown in the coming years.
China exports
This deceleration is attributed to various factors, including trade tensions, demographic shifts, and a maturing economy.
Downgrade
The downgrade, announced by a prominent credit rating agency recently, underscores the risks associated with China’s increasing debt levels. The country’s total debt, which includes government, household, and corporate debt, has climbed to around 85%* of its GDP. This debt accumulation is partly due to the government’s efforts to stimulate the economy through infrastructure spending and lending to state-owned enterprises.
Property Sector
The property sector, a significant pillar of China’s economy, has also shown signs of strain. High-profile defaults and a cooling housing market have added to the concerns, prompting fears of a ripple effect across the economy. The government’s crackdown on excessive borrowing and speculative investments has further tightened liquidity, impacting developers and homeowners alike.
The burden of debt sits heavy in China’s property sector.
Response
In response to the downgrade, China’s finance ministry has expressed confidence in the country’s economic resilience. Officials argue that the fundamentals of the Chinese economy remain strong, with continued efforts towards high-quality development and structural reforms. They assert that the concerns raised by the credit agencies are overstated and that China’s fiscal position remains robust.
Warning signal
Nevertheless, the downgrade should serve as a warning signal. It highlights the need for careful fiscal management and policy adjustments to navigate the challenges ahead. As the global economy faces uncertainty, the world will be closely watching how China addresses its debt dilemma and maintains its trajectory of growth.
This situation presents a complex puzzle for China’s leadership, balancing the goals of economic stability and sustainable development. The outcome will have far-reaching implications, not just for China but for the entire global economy.
The world awaits to see how China will write the next chapter in its remarkable economic story. If this goes wrong – it will go wrong in a big way.
Update Friday 8th December 2023
China’s top decision-making body of the ruling Communist Party on Friday said that the country’s fiscal policy ‘must be moderately strengthened’ to stimulate economic recovery, according to state-run news outlet.
85%* debt to GDP ratio
China’s debt-to-GDP ratio was recorded at around 77% of the country’s Gross Domestic Product in 2022. This ratio is an important indicator of a country’s economic health, reflecting its ability to pay back its debts. This ratio has been on the rise in recent years, indicating an increase in national debt relative to the GDP. For instance, the ratio was around 23% in 2000 and grew to 34% in 2012, with a significant jump to the current level.
China’s projected debt to GDP ration
Forecasts suggest that China’s debt-to-GDP ratio could reach 104% by 2028
It’s important to note that such figures can vary and should be interpreted within the context of each country’s economic structure and policies.
