China needs a narrative that house prices are going to rise, Nomura’s Koo says

China’s economy is facing a challenge: declining home prices and weak consumer spending.

To stimulate growth, economists believe that China needs to persuade its population that home prices are set to rise.

Richard Koo, a renowned economist, argues that China’s current situation resembles Japan’s “balance sheet recession” of the past.

In Japan, falling home prices led to a downward spiral in economic activity as businesses and consumers became hesitant to spend due to their decreasing wealth.

Koo suggests that China is experiencing a similar phenomenon.

Declining home prices have eroded consumer confidence, leading to a drop in borrowing and spending.

To reverse this trend, China needs to establish a narrative that convinces people that home prices are poised to rebound.

This would encourage them to borrow and invest in property, driving economic growth.

However, the reality is that home prices in China have yet to hit a definitive bottom.

Analysts note that government policies have prevented prices from falling as much as expected.

Moreover, China’s shrinking population poses another obstacle.

In Japan, population growth helped support rising home prices for years; however, China’s declining population undermines this possibility.

Furthermore, Chinese authorities remain reluctant to implement large-scale economic stimulus.

They view their previous stimulus program as a failure that led to overheating, speculation, and corruption.

As a result, they are hesitant to repeat the same mistake.

Koo recommends a targeted approach to economic stimulation.

He suggests that China should focus on stimulating sectors that are less likely to lead to asset bubbles, such as manufacturing and new energy vehicles.

Once growth reaches a certain level, stimulus measures can be phased out to prevent excessive inflation and speculation.

In summary, China needs to find a way to convince its citizens that home prices will rise to boost consumer spending.

However, the government’s reluctance to stimulate the economy and the underlying demographics make this a complex and challenging task.