Strategic Insights XLI: China’s accelerating property slump.

Friday, 22 August 2014 01:55:24 (GMT+3)   |   San Diego
       

The outlook for Chinese residential construction has become dire.  Although year-to-year residential construction activity is still up sharply as of July 2014 because of the sizable backlog of projects underway at the start of the year, housing prices are down in most provinces (although not yet precipitously).  Land sales and the start-up of new residential construction projects, including apartments and commercial buildings, through July 2014, are down approximately 4.8% and 12.8% respectively on a year-to-year basis.  Residential construction in China, which includes commercial construction, accounts for about 26% of the country’s fixed asset investment that, on an adjusted basis, accounts for about 48% of the country’s GDP.

 


The fixed asset investment trend in China – i.e., construction and capital spending – is critical because it accounts for about 90% of Chinese steel demand.  The country’s massive construction activity explains how and why rebar production in 2014 may be about 215 million tonnes versus 206 million tonnes last year.  The USA, by way of comparison, produces only about 6 million tonnes per year; it’s low in part because USA houses tend to be made of wood and the Chinese of concrete. 

Booming residential construction activity is one of the major reasons for the sharp rise in the Chinese municipalities’ debt in recent years.  However, it’s not the reason for the surge in
shadow banking loans that, due to their high interest rate, are used principally for near-term financing needs such as working capital for inventory. 
The square meters of housing and commercial buildings under construction as of July 31, 2014 were reported at 6.3 billion.  If two-thirds of this figure is for apartments with an average size of 100 square meters, we derive that about 41 million apartments are under construction for completion largely in the 2014-2016 time frame.  Given three residents per apartment, these apartments would house about 9% of the Chinese population.  Some observers in China conjecture that about 20% of the new apartments are not occupied; often, instead, they are purchased for capital appreciation.  The apartments can be held for investment in part because the cost to maintain and upkeep the less expensive ones may be only about 2 RMB ($0.33) per square meter per month. 

For the seven months ended July 31, 2014, residential construction rose 11.3% to 6,327 million square meters, while sales fell 8.2% to 3.6 trillion RMB.  As noted in the table below, unsold apartments as of year-end 2014, including apartments built prior to 2014, may amount to about 56% of the residential and commercial buildings completed in the year.

Chinese rebar production, in the opinion of Liu Jinghai, WSD’s Director of Chinese research and a professor of the Chinese Iron & Steel Association, is likely to decline at least 20% in the next three years.  He estimates that about one-third of the rebar produced in the country is used in residential construction

 

 

 


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