China Economy, Housing, & Lumber Shipments
The State of the Economy
- Growth moderated further in 2011Q2. While the data do not indicate that China is heading for a hard landing, they do show weakness in all sectors of the economy, which we believe will keep growth below 8 percent this year.
- Production is being restrained by high finished goods inventories. The property market continues to correct. Social housing is providing a welcome offset to the weakness in private demand.
- The fall in inflation gives policy-makers more space to support demand. However, the government should be comfortable with the 7.5 percent growth as long as the labour market remains healthy.
- On July 13, 2012, the National Bureau of Statistics (NBS) released its national accounts data for the second quarter of 2012. As expected, year-over-year growth fell to 7.6 percent, the lowest rate since the first quarter of 2009. The quarter-over-quarter rate rose from 6.6 percent in Q1 to 7.4 percent in Q2. While the data do not indicate that China is heading for a hard landing, they do show weakness in all sectors of the economy, which we believe will keep growth below 8 percent this year.
Inventory correction has not yet begun
The effect of the business cycle is most clearly seen in the high levels of finished goods inventories. These inventories are leading to a significant slowing in production. The May and June readings were close to record highs. This largely explains the slowdown in industrial value added growth to very low levels.
It is worrisome that inventories have not yet begun to decline. This is because current industrial value added growth is correlated with inventories six months earlier.
Much of the quarter-over-quarter improvement in GDP appears to have come from a pick-up in investment, which grew by 21.7 percent in real terms, compared to 20.8 percent in 2012Q1. Indeed, real investment demand this year appears to be somewhat stronger than what seen in 2010-2011. There has been an important shift in investment, with real estate falling sharply since mid-2011 and “other” investment – essentially public works – rebounding slightly.
Foreign trade – less than meets the eye
Both exports and imports have slowed significantly, compared to their pre-crisis growth rates. In 2012Q2, exports grew at 11 percent while imports only grew by 6.5 percent. This resulted in the trade surplus for the quarter rising to US$ 69 billion, the highest since 2008Q4. Indeed, for the first half of the year, the trade surplus is about 50 percent larger than last year.
However, much of the improvement in the trade balance this year comes from the decline in China’s import prices and the improvement in its terms of trade. China’s export growth has fallen by close to 12 percentage points in the last year. The weakness in Europe has received a lot of attention as China’s exports to the EU are actually falling. However, the slowing of exports to “other” countries has actually made a much bigger contribution to overall export deceleration. The US and, to some extent, the ASEAN countries are holing up as export markets.
CPI inflation falls to a 29-month low
As expected, CPI inflation continued to fall in June. The 2.2 (y/y) percent headline rate was the lowest since January 2010. Food inflation, which accounts for about 30 percent of the consumer basket, was only 3.8 percent in June, down from 11 percentage points from its recent July 2011 peak and about half the March 2012 rate.
Source: Canadian Embassy, Beijing
China Construction Update
The property market continues to correct
The sales of residential property have been falling on a year-over-year basis since late 2011. This has led to a slowing of housing activity as measured by the amount of floor space under construction. Most recently, there are signs that sales are picking up. In 2012Q2, the volume of residential property sold was down 9 percent year-over-year, an improvement from the 16 percent decline in the first quarter. The government continues to insist that that the measures to limit purchases of investment properties will remain in-place. Moreover, it has rolled back various moves by local government to promote housing purchases. Nevertheless, the fundamental demand for housing remains strong and there is a sense that prices have troughed.
The big question is at what point an improvement in sales will translate into additional housing activity. By examining the ratios of floor space completed and floor space under construction to floor space sold over the period January-June for the last number of years, it suggests that there is still an overhang of construction that needs to be sold and that sales still have some way to go before there will be a rebound in housing activity.
The floor space data covers commercial but not social housing. The good news is that, according to the Ministry of Housing and Urban Rural Development (MOHURD), the government’s aggressive social housing program is progressing as planned. In the first six months of the year, construction began on 4.7 million units of social housing, suggesting that the target of 7 million for the year should be achieved. In addition, 2.6 million units were completed, pretty well half of the 5 million completions planned for 2012.
Source: Canadian Embassy, Beijing
B.C. Softwood Lumber Exports to China, as of May’12
BC softwood lumber export volume to China in for the first 5 months of 2012 reached 3.152 million cubic meters, a 13% increase over January-May’11. BC softwood lumber export value for this period reached $413.72 million, a 9% decline over this period in 2011.