China Economy, Housing & Lumber Shipments
The State of the Economy
Constrained by sluggish domestic demand and sustained weaknesses of the Euro-zone economy, China’s GDP expanded by 8.1% in Q1 2012, lower than the consensus estimate of 8.3%.
“China’s economic slowdown has stabilized,” said Citigroup economist Ding Shuang, adding he expects GDP growth to bottom out in the second quarter at 7.9%, its lowest level in three years. Ding tips economic growth to rebound in the second half after Beijing cuts the bank reserve requirement ratio, increases money supply to make M2 year-on-year growth rise to 14%, boosts government investment and loosens restrictions on the property market gradually.
Following a surprise trade deficit in February, the country returned to a surplus of $5.3 billion in March. However, export and import growth slowed to 8.9% and 5.3% respectively in March. Business sentiment appeared favorable as the purchasing managers’ index increased to 53.1 while year-on-year growth in industrial production accelerated slightly to 11.9% in March. Consumer sentiment strengthened further as the consumer confidence index rose to 105.0 in February from 103.9 in January. Inflation accelerated slightly to 3.6% in March from 3.2% in February, but remained within the government’s full year target rate of about 4.0%.
The Housing/Construction Market
Decline in land sales revenues should be manageable
The government budget document provides revealing data on local government land sale revenues. Many analysts have focused on local government’s gross revenues from land sales, which have represented 35-40 percent of local government expenditures in recent years. These analysts have underscored the risk that a cooling property market could reduce land sale revenues and necessitate severe reductions in local government expenditures. However, according to the budget document, local governments need to undertake significant expenditures for “land expropriation, housing demolition and resident relocation” in order to realize their revenues. As the Graph shows, net revenues from land sales, after accounting for these expenditures, are much less significant: 10-20 percent of local government expenditures in 2010-11.
The budget document notes that local government gross revenue from land sales increased by 14 percent in 2011. However, the associated expenses rose by 76 percent. Net land sale revenues were just under RMB 1 trillion in 2011. Both gross land sale revenues and the associated expenses are expected to fall this year. Net land sale revenue for 2012 is forecasted at close to RMB 0.75 trillion. At this level, net land sale revenues are about 7 percent of local government expenditures.
B.C. Softwood Lumber Exports to China, as of February’12
BC softwood lumber export volume to China in for the first 2 months of 2012 reached 1.207 million cubic meters, a 33% increase over January/February’11. BC softwood lumber export value for this period reached $147.7 million, a 5% increase over this period in 2011.