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China's residential real estate sector plays an important role in the economy and has been a key driver of growth. Since 2014 the sector has softened visibly, reflecting overbuilding across many cities. An orderly adjustment of the sector is welcome. The key questions are how severe the adjustment will be and how long it will last. This paper uses various datasets, an analytical framework to estimate demand and supply conditions, and develops a number of scenarios to determine the oversupply both at the national level and by city tiers. It highlights that the adjustment will be a multiyear process with adverse implications for investment and growth. Smaller cities, as well as those in the Northeast region, face more challenging demand-supply dynamics. The key will be to allow the adjustment to take place, while avoiding a too sharp of an economic slowdown.

Nonviable "zombie" firms have become a key concern in China. Using novel firm-level industrial survey data, this paper illustrates the central role of zombies and their strong linkages with stateowned enterprises (SOEs) in contributing to debt vulnerabilities and low productivity. As a group, zombie firms and SOEs account for an outsized share of corporate debt, contribute to much of the rise in debt, and face weak fundamentals. Empirical results also show that resolving these weak firms can generate significant gains of 0.7-1.2 percentage points in long-term growth per year. These results also shed light on the ongoing government strategy to tackle these issues by evaluating the effects of different restructuring options. In particular, deleveraging, reducing government subsidies, as well as operational restructuring through divestment and reducing redundancy have significant benefits in restoring corporate performance for zombie firms.

This Occasional Paper is the product of a team effort led by Markus Rodlauer and Alfred Schipke, both staff members of the IMF's Western Hemisphere Department. The team includes authors from a number of other departments in the IMF, as well as an outside co-author from the region.The authors would like to express their deep appreciation for the valuable guidance provided by Olav Gronlie, who-as the head of the Central American Division-was instrumental in moving the project forward as part of the IMF's increased emphasis on regional issues and those related to regional integration. They would like to thank and acknowledge the comments received from Agustín Carstens. Also, the authors are grateful to Tamim Bayoumi, Michael Keen, Anoop Singh, Teresa Ter-Minassian, and Philip Young for their comments and advice.Particular thanks go to Susan McCuskey and Hildi Wicker Deady, who worked extremely hard to ensure the timely publication of this paper, and to Mauricio Bourdin for valuable research assistance. The authors would like to thank the authorities of the respective countries in Central America and the Dominican Republic, the Central American Monetary Council, and the participants of an internal IMF Workshop on Central America for helpful comments and suggestions. Marina Primorac of the External Relations Department coordinated the production of the publication.The opinions expressed in this paper are solely those of its authors and do not necessarily reflect the views of the International Monetary Fund, its Executive Directors, or the authorities in the respective Central American countries and the Dominican Republic.

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