Rising Possibility of Economic Stimulus Measures Amid Continued Real Estate Slump in China

Bank of Korea "Second Half China Economic Outlook and Key Issues"
"Monitoring Local Debt and Developer Liquidity Closely"

The Bank of Korea forecasted that China, where the recovery remains sluggish due to the real estate downturn, is highly likely to introduce economic stimulus measures.

On the 6th, the Bank of Korea's Research Department explained in the report titled "Second Half Outlook for the Chinese Economy and Key Issues" that "real estate stimulus measures are expected to be reviewed soon." This outlook follows the removal of the phrase "Real estate is for living, not for speculation or investment (房住不炒)" at the Central Political Bureau meeting on the 24th of last month, indicating a shift from the previously maintained stance.

However, despite this change, a rapid recovery is unlikely. The Bank of Korea stated, "Considering the side effects of past real estate stimulus measures, the possibility of implementing large-scale nationwide real estate investment stimulus policies is limited," adding, "It is expected that demand-tailored policies will be pursued, such as promoting redevelopment projects in inner-city slums of major metropolitan areas, providing unsold housing to migrant workers wishing to relocate to cities, supporting education and medical services through reforms of the household registration system, and expanding the easing of loan and transaction regulations to restore investment sentiment and improve demand in the real estate market."

The Chinese real estate market has been sluggish since the first half of 2021, mainly in second- and third-tier cities. It had maintained stability through strong real estate regulations and a neutral monetary policy, but real estate prices temporarily surged sharply due to expansive macroeconomic policies implemented in response to the 2020 pandemic. When financial authorities and local governments reinforced real estate regulations again in the first half of 2021, prices plummeted. Liquidity risks expanded as real estate developers such as Evergrande defaulted on debts, further dampening investment sentiment.

The push to introduce a real estate holding tax also contributed to the decline. According to the Bank of Korea, some market experts evaluated that the introduction of China's integrated real estate registration system led to weakened investment sentiment, resulting in reduced real estate transactions.

The Bank of Korea added, "It is expected that policymakers will review specific measures to improve demand weakness in the real estate market," but cautioned, "If the real estate market downturn continues, attention should be paid to related risks."

The Bank of Korea explained, "Due to the real estate market downturn, revenues from land use rights sales, which account for about 40% of local government tax revenues, have decreased, further worsening local governments' fiscal capacity," noting that "concerns about local fiscal soundness have begun to emerge."

Additionally, it mentioned that liquidity risks could expand as real estate developers face increased defaults due to deteriorating profitability and financial soundness.

[Image source=Yonhap News]

This content was produced with the assistance of AI translation services.