IMF 'welcomes' steps in property market

China's near-zero inflation means it has space to ease monetary policy, and it has taken "welcome" measures to address property market difficulties that were a factor in the International Monetary Fund cutting the country's GDP growth forecast to 5 percent for 2023, IMF chief economist Pierre-Olivier Gourinchas said.

Looming large over China's growth prospects is the challenging real estate situation, in which a number of pre-sold units have not been completed and developers face financial difficulties, resulting in downward pressure on and a lack of confidence in the real estate market, Gourinchas said.

"Clearly, what this calls for is forceful action by the authorities to help — for instance ... restructure struggling property developers — to make sure that there isn't any increase in financial instability," Gourinchas said on Tuesday during the annual meetings of the IMF and World Bank in Marrakech, Morocco.

"We've seen some measures that have been taken in recent months, in recent weeks," he said. "These measures are welcome, but they need to be at scale."

In a statement issued on Sept 26 at the conclusion of its discussion of the World Economic Outlook report, the IMF Executive Board said, "Most directors noted the risk of a further deterioration in China's property sector and, in this regard, welcomed the recent policy actions taken by the authorities."

The property sector has been a pillar of China's economy, but it has been a drag on the nation's economic recovery.

President Xi Jinping, who is also general secretary of the Communist Party of China Central Committee, has underscored the significant impact of the real estate sector on other facets of the country's economic and social development. In an article published in February in the journal Qiushi, the flagship magazine of the CPC Central Committee, he called for efforts to effectively forestall and defuse systemic risks arising in the property sector.

Following a key meeting of the Political Bureau of the CPC Central Committee in late July that decided property policies should be adjusted and optimized in a timely manner, authorities issued a series of measures on Aug 31, including adjustments to ease restrictions on the classification of first-home buyers, lower existing first-home loan rates and extend tax incentives.

The mortgage interest rate for first-time homebuyers should be no less than the level of 20 basis points below the loan prime rate, according to a statement issued by the People's Bank of China, the country's central bank, and the National Administration of Financial Regulation.

As a result, trading in the real estate market has become brisker. In September, the total sales of the country's top 100 real estate developers surged 24.8 percent month-on-month, Xinhua News Agency reported last week.

At the IMF news conference, Gourinchas also said that China's monetary policy can "certainly" help its economy.

"There is a sense in which monetary policy can be eased. China is in a very different place than the rest of the world, in terms of the inflation pressures. If anything, their inflation numbers are below target, so they have room to ease monetary policy," he said.

Worldwide, even as central banks have taken decisive action, inflation remains above target in almost all economies with an inflation target, the IMF said.

It noted that among major central banks with inflation above target, the Bank of Canada, the Bank of England, the European Central Bank and the United States Federal Reserve all raised rates in July.

"The largest exception to this pattern is China, where headline inflation is subdued and below the authorities' target, and the PBOC reduced interest rates in June and August," it added.

The central bank cut the one-year loan prime rate in June and August by 25 basis points in total. The one-year LPR was 3.45 percent last month, while the five-year LPR, on which lenders base their mortgage rates, was unchanged at 4.2 percent.

Global core inflation, excluding food and energy prices, was down from a peak of 8.5 percent in the first quarter of 2022, at a quarterly annualized rate, to 4.9 percent in the second quarter of 2023, nearly two-thirds of the way back to the pre-pandemic annual average of 2.8 percent.

China's core inflation in the second quarter of 2023 was 0.3 percent, compared with 4.6 percent in the eurozone and 4.7 percent in the US, according to the latest IMF statistics.

That means China will have room to support the household sector on the fiscal side, by redeploying some of the fiscal measures and helping households and consumers.

"So these are sort of the measures we would encourage the authorities to undertake. And I think they are moving in that direction, and this is to be welcomed," Gourinchas said.

He also said that "typically, if there is one percentage point lower growth in China, this translates into something like 0.3 percentage point lower growth in the rest of the world".

To avert the likelihood of China's economy further slowing down, a downside risk to global growth, the IMF said there should be effective policy response in preserving financial stability.

That could be achieved by expediting the restructuring of struggling property developers, facilitating the completion of housing projects, and addressing the growing strain in local government finances, all of which would help restore business and consumer confidence.

"Policy space has shrunk but is not fully exhausted. Given the lack of inflationary pressure, the People's Bank of China has some room to ease," the IMF said.

Stronger policy support in China than currently envisioned — through means-tested transfers to households in particular — could bolster the recovery and generate positive global spillovers, it said.

Globally, growth is projected to fall from 3.5 percent in 2022 to 3 percent in 2023 and 2.9 percent in 2024. The figure for next year is 0.1 percentage point lower than the IMF's July projection.

"The weaker growth prospects also reflect the rising incidence of climate risks, with increased frequency of large natural disasters and rising geo-economic fragmentation" such as US-China trade tensions, Gourinchas said.

"While some countries may benefit in the short term, in the medium term, all lose," he said, adding that "multilateral cooperation can help reverse some of these headwinds for the world economy".