China – Repairs to the “Bus” Badly Needed
Building on WSD’s long-running metaphor of the Chinese economy and its steel industry “Driving the Bus” of global trends, it’s quite apparent that the recently crashed “Bus” is now badly in need of repair. The question is: how long will it take to fix it, and will it ever run as fast as it did in the past? As WSD sees it, the list of repairs is long and substantial-enough where it could take some time, possibly a full year, before China’s property sector – the “engine” of China’s steel industry and a key component of the overall economy – is revived into a working condition. The most-recent list of factors influencing the situation is as follows:
- Sales of new homes continued to deteriorate rapidly in September of 2022, down 26% versus one year prior, albeit slightly better than the August figure of -27% on the same basis:
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- This comes despite a recent easing of mortgage rates – unprecedented in its scale – as well as a number of policy tools deployed in the past few weeks aimed at loosing credit to the beleaguered sector
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- In addition to improve homebuying credit conditions, China’s central government policymakers have ceded decision-making control over property policies to local governments, including down-payment ratios and other items
- The real crisis, especially from the viewpoint of steel consumption, continues when it comes to new housing projects, which continued to plummet ~38% on a year to year basis in September (versus 37% in August). Year to date, the decline stands at ~29%
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- According to some reports, LGFVs (Local Government Financing Vehicles) – entities generally responsible for funding local government infrastructure projects, have been ordered to purchase land from local municipalities as a means of back-stopping a brewing fiscal crisis at the local government level. This is an effort to offset the massive decline in local government revenues, 20-40% of which have been tied to land sales to real estate developers in recent years. As these developers suffer from a debt crisis, LGFVs are “plugging the hole” in local government budgets for the time being. This, of course, portends poorly for the future possibility of actually construction ever unfolding on the land sold under these circumstances, as LGFVs are not well equipped to turn their recently acquired land into housing projects.
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