MNI INTERVIEW2: China Property Crisis To Drag On -IMF's Adrian

China's property sector problems are likely to be protracted and domestic demand will remain subdued unless a viable alternative to the housing market as the engine of growth is found, IMF financial counselor and director of its monetary and capital markets department Tobias Adrian told MNI.

The IMF expects Chinese growth to slow to 4.6% in 2024 and 4.1% in 2025 from 5.2% last year, according to its latest World Economic Outlook report released Tuesday. That's unchanged from the October outlook even as the global picture has improved.

The slowdown reflects a less optimistic view of the country's longer-term growth potential with implications for stability and financial stability more broadly, Adrian said in an interview.

"The concern is really about future sources of growth," Adrian said. Beijing has made a concerted effort to ramp up technology investment and electric vehicle production, and China is now the world's biggest exporter of automobiles. But export figures last week came in somewhat below expectations and export prices have continued to come down, he noted.

"To what extent that can replace the housing market as the engine of growth remains to be seen." (See MNI EM: China To Continue Housing Relaxation As Developers Suffer)

PROLONGED DOWNTURN

Three years into China's property crisis, private sector funding and bank lending to property developers has dried up entirely, Adrian said. Housing starts have seen a dramatic drop, similar to that of the 2008 U.S. housing crisis, though price declines have been somewhat contained, helping to cushion the impact on households, he said. (See MNI INTERVIEW 2: China 5% GDP Growth Depends On Land Revenue)

Still, despite the government's aggressive steps to finish pre-purchased housing projects, household sentiment has not recovered from fairly low levels since the second round of Covid shutdowns, Adrian said. (See MNI INTERVIEW: China Consumption Key To Growth - Advisor)

"We think that maps to some degree to the challenge closely linked to the housing market, which is about the underlying drivers of growth in China," Adrian said. Housing has contributed 20%-30% to GDP growth over the past 10-15 years. "So if you think housing investment is going to be lower going forward, the question is how do you keep growth rates at elevated levels."

He uses the comparison of the 2008 U.S. crash with the bursting of bubble in Japan in the early 1990s to illustrate what fate might be in store for China. Whereas the U.S. experienced a deep financial crisis, collapse in housing prices, followed by a quick recovery, Japan saw a very prolonged recession without the same degree of price adjustment, he said.

"China looks a bit more like Japan in terms of prices," he said. "Because it’s really a structural shift in the economy and the drivers of growth, the housing turbulence could have a protracted impact on financial stability."