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China Economy, Construction & Lumber Shipments

Wayne Iversen

By Wayne Iversen

Blogmaster

March 19, 2015

Economy

Hours after China’s central bank cut interest rates to battle slowing growth and rising deflationary risk, an official survey showed on Sunday that activity in China’s factory sector contracted for a second straight month in February.The official Purchasing Managers’ Index (PMI) inched up to 49.9 in February from January’s 49.8, a whisker below the 50-point level separating growth from contraction on a monthly basis, but nevertheless above more pessimistic analyst forecasts for a 49.7 reading.

The new reading ended a four-month streak of declining numbers, and the National Bureau of Statistics (NBS) said the rise should be viewed more positively as it occurred despite the week-long Lunar New Year holiday, during which PMI usually contracts. This year, the holiday was in February.”In the context of stabilizing macroeconomic policies including recent tax cuts and increased infrastructure spending, market demand rose and business confidence strengthened,” the NBS said, adding that stabilizing crude oil and raw material prices were also important factors.

The services PMI showed growth in that sector picked back up to 53.9, up from 53.7 in January, which the NBS attributed in part to strong holiday spending.Accounting for 48 percent of China’s $10.2 trillion economy last year, the services sector has weathered the growth downturn better than factories have, partly because it depends less on foreign demand.

MIXED NEWS IS BAD NEWS

From the breakdown of factory data, economic performance is uncertain. Employment, in negative territory for the last 12 months, contracted further to 47.8, its weakest reading since February 2013.

Output, while remaining positive, declined from 51.7 to 51.4. New orders rose slightly to 50.4, but export orders and imports both remained below 50, although the rate of contraction decreased.The production and business outlook, however, rebounded sharply to again show growth, at 54, compared to the previous month’s 47.4.

But the overall PMI figure remained below 50 and that, in combination with earlier negative surprises from trade and inflation data, appears to have sparked the central bank to act more quickly than some analysts anticipated.Late last week, the People’s Bank of China (PBOC) cut interest rates, its second easing move in four weeks, as regulators show signs of intensifying concern that the drumbeat of lackluster data since the fourth quarter is hurting investment and consumption.

The PBOC had already cut interest rates in November and reduced the reserve requirement – the ratio of cash that banks must set aside as reserves – earlier in February, the first such reduction in over two years.

DEFLATION DANGER

A newspaper owned by the central bank warned that China was dangerously close to slipping into deflation, highlighting the nervousness among policymakers about a sputtering economy not gaining speed.A housing slump, erratic growth in exports and a state-led slowdown in investment to help restructure China’s economy dragged growth to 7.4 percent last year – a level not seen since 1990.

Reflecting China’s “new normal” of slower but better-quality growth, economists at state think-tanks said the government is likely to lower its 2015 economic growth target to around 7 percent, from last year’s 7.5 percent.Source: Reuters and others

The Property/Housing Market

China new home prices posted their fifth month of annual drops in January 2015, as weak demand weighed on consumer sentiment despite moves by the Chinese government to encourage buying. According to data from China’s National Bureau of Statistics (NBS), new home prices fell in 69 of 70 cities by an average of 5.1 percent from the year-ago period. This China housing price dip beats the 4.3 percent decline in December 2014, which was the largest drop since the current data series began in 2011.

Both Beijing and Shanghai registered price declines of 3.2 percent and 4.2 percent, respectively in January 2015, compared with the 2.7 percent and 3.7 percent respective declines seen in December 2014.

The People’s Bank of China slashed the reserve requirements of major banks – or the minimum amount of cash banks need to hold back from lending – last month. The move follows the central bank’s surprise interest rate cut in November.After robust growth in recent years, China’s property prices have been cooling amid a glut of supply and as economic growth moderated.

The housing sector contributes to about 15 percent of China’s economy. The world’s second-biggest economy slowed to 7.4 percent in 2014, the slowest rate in 24 years. Local real estate consultants are saying they have already seen a steady drop in China housing prices across the board. The problem China has now is large developer inventories. Chinese developers have two to five years of inventory still to sell off. Until that has been absorbed, home prices in China will not be increasing any time soon, and China’s famous ‘Ghost Cities’ will continue to endure.

China’s wobbly property market has kept investors on edge this year, but the country’s first-rate cut in two years is expected to bring some stability into the all-important sector in 2015. “Sales volumes will stabilize amid increased mortgage availability and improved buyer’s sentiment following various supportive policies including the recent interest rate cut,” Moody’s Investors Service wrote in its ‘2015 Outlook –China Property’ report.

Residential property sales are forecast to decline between 0-5 percent next year, a far slower pace than this year’s near-double digit fall. Sales plunged 9.9 percent on year in the first 10 months of 2014. China is preparing measures to counter a housing market slump and will roll them out if the economy needs support, people with knowledge of the matter said. The contingency plans come amid signs of a deepening decline in the real-estate industry in the world’s second-largest economy.

News of the possible stimulus measures helped the Hang Seng Composite Properties & Construction Index rise as much as 0.8 percent in afternoon trading in Hong Kong, the biggest intraday gain in almost two weeks. The gauge was up 0.1 percent as of 3:39 p.m. in Hong Kong. Guangzhou R&F Properties Co. gained 1.3 percent while China Overseas Land & Investment Ltd. rallied 2 percent.

China’s central bank already lowered interest rates in November, and officials previously removed some curbs on the property industry that had been put in place in past years to address the danger of a bubble.The central bank on Sept. 30 allowed people applying for a loan to buy a second home to qualify for lower down payments and mortgage rates previously available only to first-time home buyers, so long as they had paid off their initial mortgage. Source: Bloomberg and others

B.C. Softwood Lumber Exports to China, as of December’14

BC softwood lumber export volume to China in 2014 was 7.60 million cubic meters as compared to 8.0 million cubic meters over the same period in 2013, a decrease of 5.0%. BC softwood lumber export value over this same period was $1.43 billion, a 1.7% increase.

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