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China Economy, Housing & Lumber Shipments

Wayne Iversen

By Wayne Iversen


August 1, 2013

Speaking in Washington, Lou Jiwei thought growth for 2013 as a whole would be 7%, but said that even this may not be the “bottom line”. That figure is below Beijing’s official 7.5% target, and below most economists’ forecasts for the country.

Mr. Lou’s comments highlight how rapidly the country is slowing down, as Beijing seeks to rein in a construction boom. He also caused some confusion by implying that 7% was now the government’s target, even though the target was set at 7.5% in March.

Mr. Lou said he expected growth for the first half of this year to come in at just under 7.7%, implying that he believes growth will slow to just above 6% in the second half. Until last year, China had grown at an average rate of 10% a year for over three decades.

Mr. Lou’s comments come after yet more economic data pointed to a sharpening slowdown. Trade data for June fell far short of expectations, with both exports and imports down from a year earlier.

Electricity consumption – which is closely watched by analysts as a reliable economic indicator – rose just 4.9% in the first five months of the year from a year earlier. The growth rate was 5.5% in 2012, and 11.7% in 2011.

The newly installed government of President Xi Jinping and Premier Li Keqiang is intent on rebalancing the economy away from reliance on investment, construction, heavy industries and exports, and towards consumer spending by China’s growing middle class. But the transition is expected to be difficult.

Consumer spending is starting from a small share of the economy – just a third of total spending, compared with 50%-70% in Western countries.

There are also fears of potential over-investment and bad debts in the construction and industrial sectors, which could come to light as cheap loans to these sectors are cut back.

Investment was the biggest growth driver in the first half, contributing 4.1 percentage points to the 7.6 per cent rate, while consumption contributed 3.4 percentage points and net exports made up 0.1 percentage point, the bureau said.

Other figures released showed industrial output in June rose less than expected from a year earlier while annual growth in fixed-asset investment growth in the first half lost some steam, with consumption bucking the trend.

The PBOC Partially Liberalizes Lending Rates 

  • On July 19, The People’s Bank of China announced rules, which further liberalized interest rates. These are the latest in a series of gradual steps that the authorities have taken over a number of years to allow greater freedom in setting interest rates.
  • Benchmark interest rates change infrequently. Banks have used the scope they have been given to adjust lending rates in order to respond to changes in credit conditions. Removing the lending rate floor will help in the transmission of monetary policy.
  • The authorities are proceeding more carefully on freeing deposit rates. Nevertheless, deposit interest liberalization is being carried out by stealth, as financial institutions are allowed to offer wealth management products at unregulated interest rates.

Meanwhile on July 25th, China’s government announced a host of minor stimulus measures as its leaders confront a slowing economy and worries over future growth prospects.

The measures include a tax break for small businesses, reduced export fees and a pledge to accelerate railway construction and investment.

The strategy is something of a departure for China, which responded to a slowing economy in 2008 by unleashing a tidal wave of fiscal stimulus — mostly in the form of government spending on infrastructure projects.

The stimulus measures announced are much more focused, hitting only a few key sectors of the economy. “I think [growth is slow] enough for them to start rolling out some so-called fine tuning measures,” Standard Chartered economist Kelvin Lau told CNN. “I wouldn’t even call it stimulus. It’s very targeted.”

Starting in August, some small businesses will be exempt from paying value-added tax — which should leave more cash in the pockets of business owners and encourage hiring. Six million businesses will benefit from the tax break, according to government estimates.

Railway construction will be focused in poorer, mostly rural areas in China. Beijing also announced an initiative to attract more private investment by establishing a railway investment fund.

Source: various Chinese journals


The Property/Construction Market 

New threats to China’s property bubble

In late 2011 many were expecting China’s property bubble to burst. It looked as though housing prices had peaked and signs of stress were beginning to appear. But the correction turned out to be quite shallow and in spite of China’s government’s multiple attempts to arrest housing price appreciation (and partially succeeding, house prices went on rising.

fredWith real rates on deposits remaining in negative territory for years, there were few places to turn for wealthy savers. Property became one of the primary vehicles to put away excess cash to escape inflationary pressures. Moreover, municipal governments made large sums of money selling land to developers, while banks (“encouraged” by municipalities) have been happily lending. And in many cases lenders and developers have set up arrangements that are a bit closer than “arms length”. Except for ordinary families who got shut out of the housing markets, everyone benefited from this rally.

Housing investment as percentage of GDP has been growing unabated, and in recent years started approaching levels that other nations experienced at the height of their property bubbles.

And while Western economists debate if China’s property market is truly a bubble, major Chinese developers are openly admitting it.

China Vanke [one of the largest developers in China] chairman Wang Shi said the mainland’s property market faces the risk of a “bubble”, reiterating concerns the developer raised three months ago.

The bubble is not “light”, Wang said at a conference in Shanghai yesterday. “If the bubble lasts, it will be dangerous.”

Home prices have been increasing even as the government in March stepped up a three-year campaign to cool the market.

The measures have included raising down payment and mortgage requirements, imposing a property tax for the first time in Shanghai and Chongqing, and enacting purchase restrictions in about 40 cities. New home prices jumped 6.9 per cent in May, the most since they reversed declines in December, SouFun Holdings, the mainland’s biggest real estate website owner, said.

But bubbles can last for a long time. Are there indications that this market may have peaked? Two key economic developments point to rising risks to this multi-year housing rally.

Real rates on deposits have turned positive in China recently, which will reduce incentives to use property markets as a savings tool. If rich savers make more on interest than they lose to inflation, they are less inclined to look for alternatives to bank deposits.

Source: various Chinese journals and analysts

B.C. Softwood Lumber Exports to China, as of Mayl’13

BC softwood lumber export volume to China as of the end of May 2013 was 3.15 million cubic meters as compared to 3.00 million cubic meters over the same period in 2012.  However, while the volume was slightly down from 2012, BC softwood lumber export value for this period was $542.1 million, a 30% increase over this period in 2012.