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China Economy, Housing & Lumber Shipments

Wayne Iversen

By Wayne Iversen


February 28, 2013

The State of the Economy

  • Growth in 2012 was the slowest since the late 1990s (7.8% GDP growth over 2011). The economy was hit by weak demand from its trading partners as well as the effect of policies designed to improve housing affordability. Next year, growth will pick up modestly. It is expected that GDP growth will rebound to 8% in 2013.
  • A more favourable external environment should support exports in 2013 but relatively strong domestic demand means that net exports will still be a drag on growth. Strong apartment sales bode well for a rebound in property investment.
  • The economy was boosted by favourable terms of trade, looser credit conditions and supportive fiscal policy. While policy is likely to be neutral in 2013, China’s terms of trade could improve further, helping to underpin income growth.

Ever more competitive exports will rebound slightly in 2013

China’s export growth will fall to 8 percent in 2012, down from 20 percent in 2011. Yet even this rate of growth is pretty good considering prevailing market conditions. The major markets for China’s exports – the US, the EU and Japan – have essentially been flat since last spring. Moreover, China’s share of sales in these markets has dropped from over 19 percent in early 2011 to 18 percent. Chinese firms have been diversifying their exports to faster growing emerging markets including Russia, the ASEAN countries and Latin America, where they have been able to sell high value-added goods like transportation equipment.

The slowdown in China’s exports, to 8 percent from more than 20 percent before the financial crisis, has been significant. Export growth has slowed in all of China’s major markets. However, the slowdown has been most pronounced in the EU, China’s biggest market. China’s exports to the EU have fallen by 7 percent year-to-date, compared to 27 percent growth before the crisis.


Inventory destocking will support growth in 2013

In 2012, the economy was held back by rising inventories. As long as inventories are rising, firms have little incentive to increase employment and production. The PMI’s measure of finished good inventories dropped in September and remained low in subsequent months. It is, therefore, expected that 2013 could get off to a fairly strong start.

Less food inflation brings down the headline CPI rate 

Consumer price inflation fell gradually though the year: from 4.5 percent in January to 2 percent in November. Much of the decline in inflation came from pork, which contributed 0.8 percentage points to the headline rate in January and -0.3 percentage points in November. The prices of other food items also stabilized. Other food items contributed 2.4 percentage points to the headline rate in January and 1.2 percentage points in November. Non-food items contributed 1.4 percentage points in January and 1.1 percentage points in November. For the year as a whole, CPI inflation will average 2.6 percent, down from 5.4 percent in 2011.

RMB to appreciate gradually against a dollar/euro/yen basket

In 2012, the RMB has appreciated by about 1 percent against the US dollar, by 0.5 percent against the euro and by 9 percent against the yen. For most of the year, it appeared that the authorities have managed the RMB so as to stabilize it against a basket comprised of 70 percent dollars, 20 percent euros and 10 percent yen. The level of this effective index was essentially unchanged between January and September. Indeed, the depreciation of the RMB against the dollar during the summer can be seen as a way of managing this basket in the face of the RMB’s sharp rise against the euro. Source: Canadian Embassy, Beijing.

The Housing/Construction Market  

  • The Chinese property market has seen a big revival in recent months. Led by the strong rebound in housing sales, prices have risen, housing activity has recovered, property investment has picked up, and land market has warmed up as well.
  • It is expected the housing market recovery to keep its momentum in the first half of 2013. Continued strong property sales will also put more upward pressure on housing prices.
  • However, the rebound will be limited by the relatively abundant housing supply, the maintenance of home purchase restrictions, and the potential expansion of property taxation.

After nearly two years of progressively tighter policies, the Chinese property market began to correct in 2011Q4, with apartment sales declining, prices falling and land sales tumbling. However, this correction did not last long. The housing market began to recover after the People’s Bank of China cut benchmark interest rates twice in June and July 2012 to combat the economic slowdown. Since 2012Q3, recovery of the property market has been increasingly apparent. The November 2012 economic data showed that China’s recovery has been mainly supported by the property sector, as consumer spending has been stable and exports remained weak.

The sales of residential property have been picking up on a year-on-year basis since 2012Q2. In 2012Q3, the volume of residential property sold rebounded to 7.3 percent year over year from an 8.3 percent decline in the second quarter. The sales further saw a strong year-over-year gain of 25 percent in October. The rebound of sales even accelerated to 32 percent year over year in November, the fastest growth since the unveiling of property tightening measures in April 2010.

Average new home prices in the 100 major cities monitored by the China Index Academy have increased for sixth consecutive months since June 2012. In November, they rose by 0.26 percent month over month, following a rise of 0.17 percent in October. Nevertheless, prices remain 1 percent below their August 2011 peak.

Property market outlook

Rebounding sales and rising prices have brought home buyers, who had been taking a wait-and-see attitude, back to the market. We expect the housing market recovery will maintain its momentum in the first half of 2013. Continued strong property sales will put more upward pressure on housing prices. However, we do not expect a rapid rebound of the market:

From the market perspective:

  • First, the current recovery is mainly supported by fundamental demand. A large proportion of current demand appears to be the pent up purchases that have been accumulating since the second half of 2011, when prices were correcting and buyers tended to wait and see.
  • Second, the potential for rapid price increased is still limited by abundant supply. Although inventory declined slightly in first tier cities, it is still at a historically high level. In the second and third tier cities, inventories continue to increase.

From the policy perspective:

  • First, ensuring housing affordability is a major policy goal and it is quite certain that the existing restrictive property purchase measures will remain in place. At a press conference held on the margin of the 18th National Party Congress, Chinese housing minister Jiang Weixin said that the recent rise in home sales does not “pose a serious problem” but the government may take further measures to crack down on the sector “if both transaction volume and home prices increase substantially”. In addition, the December 15-16 Central Economic Work Conference, which set the tone for China’s 2013 economic development, reaffirmed that the property controls would continue in 2013.
  • Second, the property tax trials are likely to be expanded to more cities. It is reported that the Ministry of Finance, State Administration of Taxation and the Ministry of Housing and Urban-Rural Development (MOHURD) evaluated the effects of property taxation in the pilot cities of Chongqing and Shanghai earlier this year. Jia Kang, director of the Research Institute for Fiscal Science of the Ministry of Finance, revealed that the direction of property tax expansion has been decided by the policymakers, suggesting that a wider use of property taxes is likely.
  • Source: Canadian Embassy Beijing

B.C. Softwood Lumber Exports to China, as of November’12

BC softwood lumber export volume to China in for the first 11 months of 2012 reached 6.86 million cubic meters, a 0.3% increase over January-November’11.  BC softwood lumber export value for this period reached $974.5 million, a 6% decline over this period in 2011.