Press Briefing on 2023 China Article IV Staff Report

IMF News, February 2, 2024

Source details

Real GDP growth: projected to slow to 4.6 percent in 2024.
2023 growth: Staff Report initially forecast 5.4 percent (prepared in late December); subsequent GDP outturn for 2023 was 5.2 percent (reflected in the World Economic Outlook Update).
Real estate: real estate investment expected to continue to contract in 2024 amid excess housing inventories, unresolved developer stress, and weak homebuyer sentiment.
Inflation: "we project average inflation to be 1.1 percent, rising from 0.3 percent this year, over last year."
Urbanization: China's urbanization rate is around 65 percent; comparator average cited is closer to 80 percent.

Property-sector downside risk:
- A deeper and more prolonged property-sector correction could weigh on domestic demand and confidence.
- Potential for adverse macro-financial feedback loops, especially if local government finances come under further stress.
External risks:
- Weaker than expected external demand and geoeconomic fragmentation pose additional downside risks to the baseline.
- Recent negative developments in exports and FDI reflect a combination of cyclical factors and structural elements, including fragmentation pressures.
Financial sector implications:
- Developer and project distress from unfinished housing projects pose credit risks.
- Many banks start from a strong capital position; tight macroprudential measures and substantial household equity in housing are cited as factors containing immediate financial sector risks.
- A Financial Sector Assessment Program mission is ongoing to assess banking-sector implications in more detail.

Nature of adjustment: described as a multi-year transition toward a smaller and more sustainable property sector; adjustment has started but is ongoing.
Expectations in baseline: continued contraction of real estate investment in 2024.
Cost estimate for completing unfinished presold housing: put at about 5 percent of GDP.
Policy measures already taken by authorities:
- Demand-side: loosening of mortgage restrictions.
- Supply/completion: some financing provided for completion of unfinished housing.
- Plans to ramp up spending on social housing and urban redevelopment.

1) Property developer and housing completion actions:
- Expedite restructuring of nonviable property developers.
- Support housing completion (including central government increased financing for completion).
- Allow greater price adjustment to facilitate transition.
2) Local government debt strategy:
- Implement a comprehensive central government–led strategy to reduce the stock of local government debt.
- Restructure unsustainable local government financing vehicles (LGFVs) through insolvency mechanisms, including debt write downs and public asset sales.
- Undertake triage of LGFVs into sustainable and unsustainable groups; for unsustainable LGFVs, pursue corporate insolvency processes and burden sharing across central government, local governments, and investors.
3) Macroeconomic policy support:
- Provide adequate macroeconomic policy support to smooth the impact of the property-sector adjustment.
- Recommend continued monetary policy accommodation via interest rates.
- Recommend a budget-neutral fiscal package that shifts the composition of spending towards households to better support growth amid the adjustment.

Monetary policy:
- Recommend further monetary easing, particularly via the policy rate instrument.
- Note recent easing steps, including a reduction in the reserve requirement ratio.
- Recommend monetary policy reforms: phase out deposit rate guidelines, credit targets, and structural credit policies.
Fiscal policy:
- Recommend a budget-neutral fiscal package that reorients spending toward households.
- Public investment expected to provide some support in 2024 as part of announced fiscal stimulus.

Demographics and productivity:
- Aging population and slowing productivity growth are highlighted as medium-term headwinds.
- Fundamental demand for housing expected to be lower going forward because of demographic trends.
Structural reforms:
- Report outlines broad-based structural reforms to boost growth potential and support transition to higher-quality growth.

LGFV debt estimates referenced in Q&A: a figure of 65.9 trillion yuan as of this year versus an earlier estimate of 74.4 trillion yuan cited in a question; details and drivers of the change were not finalized during the briefing and follow-up bilateral clarification was offered.
Authorities’ stance:
- Authorities prioritize resolving property-sector issues (cited Central Financial Work Conference).
- Authorities see domestic property adjustment as a key risk while also concerned about external fragmentation and its effects on exports and FDI.

Transcript of IMF press briefing on the 2023 China Article IV Staff Report (February 2, 2024).