banner realestate


Date:​ Thu-09-December-2014

China’s residential building boom is petering out, with the effects seen from slumping steel and cement prices, to electricity use, rail-freight traffic and retail sales.

The drag will be long lasting with home completions set to fall by 1 to 3 percent annually from next year to 2025 after almost tripling in 13 years, according to Beijing-based research company Gavekal Dragonomics. A once-in-a-generation shift in demand for housing and an overhang of supply suggests policy makers can cushion the effect with interest-rate cuts such as the one announced Nov. 21, not reverse it.

“The turning point has come,” said Wang Tao, chief China economist at UBS Group AG in Hong Kong. “Construction has to come down so that means growth has to slow, and therefore steel demand, cement demand, energy consumption, mining production, appliances, automobiles -- everything has to come down.”

The challenge for Premier Li Keqiang: Services and consumption aren’t picking up the slack quickly enough, leaving China set for its weakest full-year expansion since 1990. Increasing evidence the slowdown is structural, not cyclical, is playing out on commodity markets and leaves the U.S. shouldering prospects for a pickup in 2015 global growth. Bloomberg’s monthly gross domestic product tracker shows China’s growth slowed to 6.91 percent in October from a year earlier, the third straight month below 7 percent and the weakest stretch since the start of 2009. Most of the tracker’s seven gauges -- industrial production, electricity production, passenger traffic, railway freight volume, investment (CNFAYOY), retail sales and exports -- are either slowing or falling.

Universal Importance

Housing’s influence on the economy is pervasive, driving sales of everything from cement to steel, electrical appliances, furniture and cars. Its contribution to China’s growth and thereby to global expansion make it “the most important sector in the universe,” Jonathan Anderson, former chief economist for emerging markets at UBS who now runs Beijing-based Emerging Advisors Group, wrote in a 2011 research note.

Real estate and construction accounted directly for 15 percent of 2012 GDP, a quarter of fixed-asset investment, 14 percent of urban employment and about 20 percent of bank loans, the International Monetary Fund said in a July report. About 39 percent of government revenue was related to the property industry last year, Nomura Holdings Inc. says.

Signs of property’s reversal are evident from a 10 percent slump in home sales in the first 10 months of 2014, triggered by waning investor demand and less need for upgrading to larger dwellings, both pillars of the decade-long boom. Prospects for a recovery are damped by a supply overhang after the building binge that accelerated when the government spurred a record borrowing spree in response to the global financial crisis.

Economic Fallout

The fallout is rippling across the economy. Industrial production (CHVAIOY) in October expanded 7.7 percent from a year earlier, the second-weakest pace since 2009, while retail sales gained the least in eight years. Investment in fixed assets grew 15.9 percent in January-October, down from a 20.1 percent pace in the same period in 2013.

Electricity-output growth slowed to an average 4 percent in January through October, less than half the pace of the prior five years. Freight-traffic volume on the nation’s rail network slumped 7.5 percent in October from a year earlier, the 10th straight decline, the longest losing streak since the global slowdown of 2008-2009. Fewer coal shipments account for much of the drop.

‘All Related’

“There has been a slowdown in industry and industries have been a big consumer of coal,” said Wei Jiangping, a market manager at coal producer Inner Mongolia Yuan Xing Energy Co. (000683) “It’s all related: The property industry slows, and that leads to a slowing of demand from the cement and glass industries.”

Real estate and construction’s contribution to GDP will probably slide to 28 or 29 percent by the end of the decade from about 33 percent this year and more than 34 percent in 2011, said Rosealea Yao, an analyst at Gavekal Dragonomics in Beijing.

Per-capita living space has increased to almost 30 square meters (323 square feet) per person from about 20 square meters in 2000, approaching the 35 to 40 square meters in most developed countries, she said.

“The room for further increases is quite limited,” she said. “Fewer people will move into bigger houses.” It will take as many as six years for excess land supply to be digested in third- and fourth-tier cities, four years in second-tier and two years in first-tier cities, Nomura says.

Leveling Off

Even a mere leveling-off of property investment will drag on growth and construction-related commodities including steel, copper and cement, said Patrick Chovanec, chief strategist at Silvercrest Asset Management Group LLC in New York.

“You don’t have to have a big crash to have a big impact on the growth rate,” said Chovanec, a former associate professor at Beijing-based Tsinghua University. “If you just build the same number of condos and villas and apartments that you did last year but no more then it’s not a contributor to GDP growth.”

Industries making up China’s “new” economy, including private-enterprise output, vehicle exports, clean-energy production, communication equipment and computer output, are faring better, though not accelerating quickly enough to prevent the economy’s slowdown.

Bloomberg’s China Real Activity Index for such new drivers expanded 11.9 percent in October from a year earlier, while a gauge of the “old” forces including real estate investment, ferrous-metal ore production and output of state-owned enterprises expanded 5.3 percent, the slowest since May 2009.

Online Boom

While retail-sales data points to a slowdown, electronic commerce is booming, with online sales rising 18 percent in the third quarter, according to Shanghai-based iResearch Consulting Group. Online shopping surged 50 percent from a year earlier, led by Alibaba Group Holding Ltd. (BABA)’s TMall with a 58 percent share, while travel sales jumped 20 percent.

Because service industries, which replaced manufacturing and construction as the biggest part of the economy last year, require about 30 percent more jobs per unit of GDP than industry, the nation’s economic-growth rate can slow while still providing ample employment, says Stephen Roach, former chief economist at Morgan Stanley.

“Most people around the world are very negative on China because they see GDP growth slowing,” said Roach, a senior fellow at Yale University’s Jackson Institute of Global Affairs and author of “Unbalanced,” which explores the links between China and the U.S. “China is shifting its economic growth into more labor-intensive services industries and that’s a big deal. It doesn’t matter if GDP growth is slowing if employment growth is increasing, and it is.”

Staff Crunch

Roach said slower GDP growth accompanied by services-creating structural changes will be good for China. On the outskirts of Beijing, massage and facial parlor owner Yao Yanming says business is booming and it’s difficult to find local staff willing to work for 3,000 yuan ($487) to 5,000 yuan a month after commission income on sales of products.

Young Beijingers have a higher salary expectation,” she said. “Older Beijingers already have enough money and just want to rest at home. It’s hard to find migrant workers with an adequate education level.”

Yao said she remains optimistic about business prospects and recently moved to a new location and upgraded equipment, including adding a new steam massage.

“China is making a tentative transformation to a more consumption-driven economy,” said Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong. “That’s just being masked by the bad news.”

Policy Support

Exports (CNFREXPY) have also helped underpin this year’s expansion even as rising wages erode the competitive advantage of China’s factories. China’s overseas shipments climbed 4.7 percent in November from a year earlier, down from 11.6 percent growth a month earlier.

Policy makers are trying to support 2014 growth close to the target of about 7.5 percent without adding to risks from a surge in credit after the financial crisis. The central bank cut interest rates last month for the first time since 2012 after a Bloomberg monetary conditions index for China showed the tightest level in data going back to 2003.

Regional outcomes are diverging, with the industrialized northeast faring worst. For January through September, all 31 provinces and municipalities are missing expansion targets, according to data compiled by Bloomberg from governments and state media.

2015 Growth

As for next year, Premier Li will endorse 7 percent as the GDP growth target, according to analysts polled by Bloomberg. While that compares with the 10 percent average pace of the past 30 years and would be the slowest expansion since 1990, it’s about triple the rate the IMF expects for advanced economies.

Property’s downturn will slice 1.2 to 1.5 percentage point off growth this year and 1.5 percentage point next year with any significant rebound later unlikely, says UBS’s Wang.

The “new normal” for housing doesn’t mean there won’t be short-term up-cycles, and the central bank’s recent interest-rate cut is among factors supporting a short-term rebound in the price of houses and steel, said Gavekal Dragonomics’s Yao.

“But this is cyclical,” she said. “The underlying trend will be the final say.”

Source From: BONNA REALTY GROUP ( 09-12-2014 )