If China's Real Estate Market Slumps Prolonged, Social Discontent May Increase↑

Possibility of Delay in Essential Reforms Including Introduction of Property Tax

There is an analysis that the prolonged slump in China's real estate market could lead to the spread of social discontent.

According to the International Finance Center on the 20th, Kim Ki-bong, senior researcher, and Lee Chi-hoon, head of the Emerging Economies Department, recently revealed this in their report titled "Outlook and Risk Assessment of China's Real Estate Market."

Currently, China's real estate market has entered a double dip recession phase, and concerns over defaults by real estate development companies such as Country Garden are increasing, raising caution.

The International Finance Center stated in the report, "Although the contraction of the real estate market is unlikely to worsen into a systemic crisis, there are concerns that it could cause anxiety by spreading to credit risk expansion and government fiscal deterioration." About 45% of corporate bonds maturing within one year are related to the real estate sector, and the cash ratio compared to short-term debt of major developers has significantly decreased, increasing credit risk. Land sale revenues, which account for about 20% of government income, have declined for two consecutive years, and real estate stimulus expenditures have increased, raising concerns over the rapidly worsening fiscal situation of local governments since the pandemic.

The International Finance Center forecasts that China's real estate market will stabilize to some extent by the end of this year due to government market activation measures, but it will be difficult to show meaningful recovery as it has already entered a structural transition period.

Vacancy rates have been rising for several years, causing oversupply, and demand has slowed due to population aging, increasing caution over further price declines. The price-to-income ratio of housing in major cities remains among the highest in China.

The Chinese government has launched full-scale policy support since early this year to address real estate market issues. Financial support measures such as slight adjustments to down payment ratios and loan limits have been implemented, and in the Politburo meeting last July, the phrase stating that housing is not for speculation was removed for the first time in seven years. Starting this month, measures to prevent housing price declines, including interest rate cuts and development expansion, have been introduced beginning with Zhengzhou City in Henan Province.

However, since policy support is used for real estate stimulus, there is a high possibility that efforts to resolve social inequality and foster advanced industries will be neglected. The International Finance Center predicted, "The Chinese government faces a dilemma between economic growth and real estate market reform, which will increase policy difficulties and may delay essential reforms such as the nationwide introduction of property taxes."

Unlike major advanced countries, China has no inheritance or gift taxes, and property taxes are only piloted at about 1% in a few regions such as Chongqing, deepening the rich-poor divide. The International Finance Center explained, "If the real estate market slump prolongs in the future, not only will downward pressure on the economy increase, but structural reforms such as the introduction of real estate taxes will be delayed, potentially leading to the spread of social discontent."

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