“In China, weakening economic momentum, a deepening property-sector downturn, and growing strains on local-government financing weigh heavily on market sentiment,” the report said. It also warned of a “sharp repricing of assets” without action.

“Continued turmoil in the property sector could spread to the financial sector and to local governments with significant dependence on property-related revenues, weighing on the already-weakening recovery,” the IMF added.

As China’s debt risks mount, the spectre of looming local crises rears its head

A pre-pandemic expansion in property has cratered over the past few years, exposing developers’ debts and lowering home prices.

China’s real estate investment declined by 8.8 per cent from a year earlier in the January-August period, according to data from the National Bureau of Statistics.

In the local government lending space, the report said, investors have become “increasingly concerned about the sustainability” of LGFVs used to pay for infrastructure among other investments. It said those set-ups have little capacity to earn money on their own.

LGFVs are public-corporate hybrid entities that can get around the rules on borrowing. Their combined debt quadrupled between 2012 and 2022 to 55 trillion yuan (US$7.5 trillion), global asset management firm PIMCO estimates.

China needs a “comprehensive strategy” to solve its local government-debt issue, the report added.

The IMF called also out Chinese banks as another hotspot.

Consensus forecasts point to lower bank profitability because of “compression of net interest margins” following a drop in the prime lending rate and lower non-interest income, the IMF said.

It added that the number of those banks is expected to grow this quarter and span US$4.6 trillion in total assets.

A stress test has identified “significant capital losses” to “important institutions” in China and the West in the event of severe stagflation, it said.

These 3 Chinese regions have the most daunting debt piles slamming GDP

To ease property woes, China should facilitate the completion of housing projects, which could stem the slump in homebuyer sentiment, and move toward restructuring development firms in a timely way, the fund suggested.

Although the People’s Bank of China has cut policy and mortgage rates and adopted other stimulus measures, the IMF said those measures have not raised confidence among businesses, consumers and homebuyers.

China’s property and lending issues are unlikely to affect the global economy, said Victor Gao, vice-president of the Centre for China and Globalisation in Beijing.

Local debt is “simple”, and the property crisis is “well sealed off” from the international market, he said.

In the October update of its “World Economic Outlook”, also released on Tuesday, the IMF warned that the property crisis could “deepen further” in China and pose a risk to the world economy.

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Anger mounts as China's property debt crisis leaves flats unfinished

Anger mounts as China's property debt crisis leaves flats unfinished

Commodity exporters face particular risk, it said. Some of those exporters ship raw materials for the housing industry.

The fund lowered China’s 2023 growth forecast by 0.2 percentage points to 5.0 per cent.

China’s biggest property developer, Country Garden, is facing severe liquidity stress, it warned.

The outlook calls the pressure on Country Garden “a sign that real estate distress is spreading to stronger developers, despite policy easing measures”, and the IMF considers property woes a top deterrent to economic growth.

“Restoring confidence requires promptly restructuring struggling property developers, preserving financial stability, and addressing the strains in local public finance,” the outlook said.