China rejects $1 trillion plan to end housing crisis

China has rejected a recommendation from the International Monetary Fund (IMF) to end the country’s years-long housing crisis, a move that is estimated to cost about $1 trillion.

In a report on the Chinese economy, the IMF called on the central government to speed up “the completion of unfinished, pre-sold homes, which would help restore homebuyer confidence.”

The IMF recommended a comprehensive policy package, partly financed by the central government, to address the problem of unfinished pre-sale projects. This approach should be combined with the “timely resolution” or liquidation of insolvent developers to ensure market stability, the document said.

China’s real estate market, which once accounted for a fifth of the country’s economic activity, plunged into full-blown crisis in 2020 as the government introduced policies targeting speculation and over-indebtedness. Over-leveraged real estate giants including Evergrande and Country Garden have plunged into insolvency. Evergrande was ordered to liquidate earlier this year, while Country Garden faces a similar fate if it fails to finalize a debt-restructuring plan by January.

“I think the way China is handling this crisis in individual cities reflects the government’s approach,” said Peter Sattler, a senior lecturer in economics at China’s Duke Kunshan University. Newsweek.

But he noted that Shanghai, a first-tier city with higher real estate prices and supported by exports, is far from normal. “Inland, I think it’s much slower,” he said.

Among the IMF’s recent recommendations, the organization stressed the need for Beijing to adopt a policy of providing “one-time” support for indebted developers. This assistance would allow developers to complete housing and protect homebuyers, and would total nearly $1 trillion, or 5.5 percent of China’s gross domestic product, over four years. The plan included a daunting range of projects across the country.

The IMF also said the effort would likely require raising the primary deficit for 2024 and beyond. The primary deficit is the difference between a year’s fiscal deficit and interest payments on government debt from the previous year.

“We believe we should continue to apply market principles and the rule of law in completing and delivering these units,” said Zhang Zhengxin, the IMF’s Beijing-appointed executive director in China, according to Bloomberg.

Speaking about China’s rejection of the IMF’s recommendation, Zhang said it would be “inappropriate” for the central government to inject funds directly. It would set a bad example and “lead to expectations of future government bailouts and therefore moral hazards,” he said.

Newsweek The Chinese Ministry of Foreign Affairs was contacted by email for comment.

The housing crisis has left millions of buyers stuck with unfinished homes, as about 70 percent of China’s household wealth is tied up in real estate. In response, the central government has introduced $55.2 billion in loans in 2023 to help developers finish some of these projects. Just 34 percent of those homes were completed in July, Yicai Global reported.

Despite efforts to support the market, new home prices fell 0.67 percent from June to May, the biggest drop since October 2014, according to data from China’s national bureau of statistics.

The decline came even after the central government introduced a package of rescue measures in May. These included lower down payments for potential homeowners and a reduction in the national minimum mortgage rate. In addition, $42 billion was earmarked to help struggling developers sell unsold properties to state-backed companies to convert into affordable housing.

Some city governments have had relatively more success.

In April alone, Shanghai real estate developers sold $3.3 billion worth of luxury homes, an impressive 156 percent increase from a year earlier, according to data from China Real Estate Information Corp., Bloomberg reported.