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IMF Warns of China’s Economic Growth Optimism Amidst Property Sector Concerns

The International Monetary Fund (IMF) has issued a warning about potential risks in China’s financial and property sectors, even as it has revised its economic growth projections for the country upward. The IMF now forecasts that China’s economy will expand by 5.4 per cent in the current year, with a further growth of 4.6 per cent expected in 2024. These estimates represent a 0.4 percentage point increase from the IMF’s previous predictions, owing to China’s stronger-than-expected economic performance in the third quarter and efforts by Beijing to stimulate economic growth.

Gita Gopinath, the first deputy managing director of the IMF, announced these changes at a news conference in Beijing, attributing them to Beijing’s initiatives, including the issuance of nearly $140 billion in bonds for flood damage repair and climate resilience programs. However, Ms. Gopinath expressed concerns about China’s property sector, which is grappling with declining prices, reduced sales, and loan defaults by major developers. She stressed the importance of addressing the property sector’s challenges, which she characterized as “quite weak.”

The IMF’s annual assessment of China’s economy and financial system recommends that China permit struggling developers that are unlikely to recover to exit the industry. Currently, China allows effectively insolvent developers to continue operating, potentially impeding the sector’s recovery. Ms. Gopinath noted that earlier hopes for a housing market recovery had been thwarted by a second dip in the sector, indicating the sector’s persistent volatility.

The Other Spin

Zhang Qingsong, deputy governor of China’s central bank, acknowledged the challenges in the real estate sector during a financial conference in Hong Kong. He emphasised the need for careful management to avoid sharp downturns and unintended consequences and revealed that China had introduced numerous measures to stabilise the property market.
Furthermore, he advocated for a shift away from the old model of relying on investment and the real estate sector for economic growth, acknowledging that this approach is no longer sustainable. Instead, he urged China to adopt a new approach to maintain economic growth, particularly by expanding lending for factory construction and industrial investments within the state-controlled banking system.

The IMF report also raised concerns about the adequacy of China’s banking system’s financial reserves as the housing sector continues to deflate. The report cited elevated and rising financial stability risks due to lower capital buffers and increasing asset quality risks within financial institutions. In conjunction with the IMF’s visit to Beijing, a separate report by the AidData institute at William and Mary highlighted China’s extensive lending to developing countries, particularly for infrastructure projects. This lending has included rescue loans to countries that borrowed from China before the pandemic. Wang Wenbin, a spokesman for China’s Ministry of Foreign Affairs, defended the country’s overseas lending, emphasizing the role of government debt in economic development.

In economic news, China reported a 6.6 per cent decline in exports last month compared to October 2022, partly attributed to a weakening renminbi against the dollar. Economists also noted reduced interest in manufactured goods by households worldwide due to prior stockpiling during the pandemic. Conversely, China’s imports increased by 3 per cent last month, indicating a broader economic perspective. As China faces challenges in its property sector, the government and financial authorities must carefully manage these issues while seeking alternative avenues for economic growth to ensure continued stability and development.