There have been lots of discussions lately about some major adjustments in China’s macro-economy and the need to solve deep-rooted problems in the country's real estate sector. Speaking of the root causes of China's economic problems, in general, there are five groups with different views. The first group believes that due to the ongoing Sino-U.S. tensions, a deterioration in the external environment has led to China’s macro-economic difficulties. The second group deems weak consumption as the reason, as changes in overall income, confidence and other factors have led to a contraction in consumption. The third group thinks that domestic supply is piling up, and corporate profits are compromised, which has further led to a decline in income and insufficient consumption. The fourth group blames deep adjustments in the real estate market for the decline in demand, high debt and oversupply. There is also a group holding the view that China is undergoing a balance sheet recession, believing that there is a significant change in the asset-liability structure that has led to comprehensive liability management nationwide and contraction in the number of market players.
In light of this, figuring out whether these reasons are the root causes or not for the current macro-economic downturn is significant. External demand, which has always been an important cornerstone of China’s macro-economic stability, performed beyond expectations last year despite headwinds from an unstable external environment. Therefore, a variation in the external environment can be preliminarily ruled out. Second, there is also the issue of insufficient consumption, which is reflected in a decline in the growth rate of total retail sales of consumer goods. However, analyzing the changes in domestic demand and supply and demand structure shows that the most dramatic changes did not occur in consumer goods, but in investment goods, because the decline in consumer goods prices has been significantly lower than those of investment goods. Therefore, the decline in consumption is only a superficial reason for the economic problems. As for oversupply in some sectors due to overcapacity, it is only cyclical, a natural market phenomenon that normally appears every seven to eight years. In summary, we can see that changes in supply, demand and the balance sheet are all related to changes in China’s development paradigm, which point to drastic adjustments in its real estate sector, a major issue that the nation should pay heed to at present. As to the balance sheet, changes in the assets and liabilities of any market entity are inevitably the result of changes in a variety of basic parameters, and will also form an important influencing factor in the next-step economic cycle and the decision-making of market entities. That is, changes in the balance sheet, which for China is a so-called recession in this case, are both a result and a derived cause, negating its role as the ultimate cause.
Changes in the real estate sector have affected some key parameters, such as real estate consumption, investment spending, credit, the collateral of enterprises and individuals, and government revenue. Therefore, there is a need for precise policy-making and implementation in the real estate sector.
First, the proactive fiscal policy, which attracts most of the market’s attention, is an important pillar of in-depth governance in the real estate sector. A more proactive fiscal policy should not focus too much on the deficit ratio, but rather on the growth rate of broad fiscal spending, which is central to a more pro-active fiscal policy in 2025 and 2026, and it should match the target GDP growth rate of 5%.
The implementation of a proactive fiscal policy must be complemented by a more active monetary policy, and the easing of the monetary policy is of equal importance to prevent economic “hypothermia” and avoid deflation. It is necessary for proactive macro-economic policies to be made with a cross-year perspective, preferably with a two-year time span, to systematically arrange indicators, as these can help dispel market concerns over policy stability. Stabilizing the real estate market is the key to stabilizing China’s confidence, expectations and avoiding vicious circles. China should seize the opportunity of the sharp decline in real estate prices, carry out large-scale real estate acquisitions, and make every effort to promote new urbanization. This will not only help resolve the dilemma of deep adjustment in the real estate market, but also effectively solve the housing problem of migrant workers and comprehensively promote the development of new urbanization, Liu Yuanchun, President of the Shanghai University of Finance and Economics, writes in the China Daily.
