China’s stimulus measures could target the ‘dire’ real estate sector. Here’s What Economists Expect – CNBC

Unfinished buildings, abandoned midway through construction, in Wuxi, China, on Tuesday, May 16, 2023. China’s economic recovery is losing momentum after an initial burst of consumer and business activity early in the year, prompting calls for more policy incentives to support growth. Photographer: Qilai Shen/Bloomberg via Getty Images
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Weak economic data out of China, despite an expected recovery, has fueled rumors that Beijing will need to boost fiscal stimulus – and some economists say the real estate sector could be in its sights.

Prices in China’s housing market have risen, but sales have slowed, research firm China Beige Book said in a May report.

Citi economists said a real estate-focused stimulus package is imminent, pointing to a local media report showing deteriorating sentiment in resale homes and a fall in transaction volumes. //

“The stimulus package could target the real estate sector, with expansionary monetary and fiscal policies to maintain growth momentum,” Citi economists led by Xiangrong Yu wrote in a note Tuesday.

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“We think the overall policy tone for this sector could shift from stabilizing to cautiously stimulating. More efforts are needed to halt a downward spiral,” they wrote.

Critical two months ahead

Citi economists say the stimulus could come as early as June and more significant measures could be introduced at China’s Politburo meeting in July.

“The next two months will be a critical period to take action,” they said.

The economists outlined some options for a real estate-focused stimulus package from China: more mortgage rate cuts; financing support for project developers; and lowering down payment ratios for second home purchases.

These steps would follow a potential reduction in medium-term borrowing rates or the required reserve ratio, the report said. The measures would boost demand for housing in families, especially those with two or more children outside China’s core regions.

“Policymakers will likely have to reconcile any new stimulus with the overarching guideline that ‘housing is for living, not speculating,’ even though the mantra could be dropped in upcoming policy meetings,” Citi economists wrote.

Don’t expect a ‘bazooka’

Nomura’s Chinese chief economist Ting Lu said: “The situation of China’s real estate sector seems dire.”

The Japanese investment bank does not expect a ‘bazooka’ stimulus package, but predicts it will be introduced cautiously.

“We believe that measures will be introduced piecemeal and step-by-step and implemented mainly in tier 2 cities,” the Nomura economists wrote.

They pointed to the latest wording from top policymakers and their emphasis on “security” – how this is an indicator of the size of a stimulus package to come.

“Now that decision-making is highly centralized, and with an emphasis on ‘safety’, we are aiming for it
approving a support package for the real estate sector can only be gradual and can even be easily blocked for various non-economic reasons,” they wrote.

Nomura expects the so-called “rescue package” to be rolled out slowly.

“Amid deteriorating growth prospects, we expect Beijing to eventually announce a rescue package, although these supportive measures will most likely be gradual,” they wrote.

“The best we can expect is policies that finally break the downward spiral and stabilize new home sales at slightly above current levels.”

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