IMF Staff Country Report-People's Republic of China: Selected Issues

February 12, 2024--Summary:
SMOOTHING THE PATH TO A NEW NORMAL: CHINA'S PROPERTY SECTOR TRANSITION1
The Chinese authorities have taken resolute actions to address the risks from the property sector since the start of the pandemic. The key challenge now is to smooth the transition of the sector to a smaller, more sustainable size amid unresolved financial distress among developers, weakened home buyer confidence, and a backdrop of large inventories and structurally declining demand.

Key policy priorities should be to expedite the resolution of underlying supply-side imbalances, most importantly by restructuring nonviable developers; support and de-risk surviving developers; and take steps to contain the buildup of risks in the property market.

A. Introduction: China's Real Estate Markets at a Turning Point China's Real Estate Markets: An Overview
1. Real estate activity has been important for China's rapid growth but has come with significant risks. Property-related activities accounted for an estimated 20 percent of GDP through China's decades of rapid growth, with real estate ubiquitous as a form of collateral and household wealth. While the authorities proactively limited risks from household leverage, average sales prices still rose almost 350 percent in the 15 years through 2021 and remain at significantly stretched levels relative to incomes. This price growth partly reflected strong investment-driven demand from households, driven by massive savings, a mortgage lending boom, and limited investment alternatives. At the same time, the country's large developer sector leveraged up heavily to expand construction at a rapid pace, often working closely with local governments who relied on property activity for revenues.