China needs a narrative that house prices are going to rise, Nomura's Koo says
BEIJING — China needs to convince people that home prices are on their way up in order for economic activity to pick up, Richard Koo, chief economist at Nomura Research Institute, told CNBC's Steve Sedgwick last week.
Business and consumer appetite for new loans have had a tepid start to the year, while home prices dropped at a steeper pace in January than in February, according to Goldman Sachs' analysis.
In other words, as Koo warned last year, China may be entering a «balance sheet recession,» similar to what Japan experienced during its economic slump.
«For them to come back and borrow money, we need a narrative that says, okay, this is the bottom of the prices, the prices will start going up from this point onwards,» Koo said.
But it's not clear whether prices have reached an actual bottom yet. Koo and other analysts have pointed out that in China's policy-driven economy, house prices have not fallen as much as expected given declines in other aspects of the property market.
Chinese officials have said that real estate remains in a period of «adjustment.» The country has also been emphasizing new growth drivers such as manufacturing and new energy vehicles.
Real estate and related sectors have accounted for at least one-fifth of China's economy, depending on analyst estimates. The property market began its latest slump after Beijing cracked down on developers' high reliance on debt in 2020.
That coincided with the shock from the Covid-19 pandemic.
It also comes as China's population has started to shrink, Koo pointed out — a big difference with Japan, whose population didn't start to fall until 2009, he said.
«That makes this narrative, that the prices have fallen enough, you should go out and borrow and buy houses,
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