China Economy, Construction & Lumber Shipments
Partial economic indicators continue to highlight softening trends in China, evident since the latter part of 2013. These trends remain in line with general expectations, and as such, forecasts for Chinese economic growth are unchanged at 7.3% in 2014 (before slowing to 7% in 2015).
Recent commentary by both China’s President and the Governor of the People’s Bank of China appears to indicate an acceptance of slower growth trends – with Governor Zhou Xiaochuan commenting that the Government would ‘fine tune’ its policy to counter economic cycles but not use any large-scale stimulus to boost the economy (China Daily). Industrial Production and Investment Industrial production was marginally softer in April – increasing by 8.7% yoy (compared with 8.8% in March). Although production levels are slightly above the recent lows of February, output remains comparatively soft, around the weakest levels since China recovered from the GFC.
The various manufacturing PMI surveys highlight mixed conditions in the industrial sector – between large state-owned producers and small-to-medium private firms. The official NBS PMI (covering larger firms) was slightly improved in April at 50.4 points (compared with 50.3 points last month), while the HSBC Markit PMI continued to weaken – down to 48.1 points (from 48.3 points previously).
The trends in major industrial sectors remained mixed. Growth accelerated in rolled steel output (5.4% yoy from 5.0% in March) and motor vehicles (7.9% yoy compared with 7.3% previously). In contrast, growth rates slowed for electricity
output – down to 4.4% yoy versus 6.2% in March – and cement, which increased by 3.9% yoy (down from 5.9% last month).
Fixed asset investment continued to slow in April, with the growth rate easing to 16.8% yoy (on a seasonally adjusted basis) – compared with 17.4% in March.
Investment trends have continued to weaken across a range of key segments – with seasonally adjusted investment in real estate slowing to 16% yoy (compared with 18% in March), while manufacturing increased by 15.2% yoy (edging down from 15.3% last month) – the weakest growth rate since disaggregated data was first released in 2004.
Growth trends in the residential property sector appear to be slowing (although data is quite inadequate). Weak conditions in the residential property market could have a major impact on construction and demand for land, and therefore impact local government revenues and increase concerns around local government debt (due to the importance of land sales in servicing government debt).
In year-on-year terms, trade data for April was marginally stronger, a surprising result given the distortions in export data recorded in the first half of last year. There were slight increases in both exports and imports, with the trade surplus widening to US$18.5 billion (compared with US$7.7 billion in March) – ahead of market expectations.
Merchandise exports rose by 0.8% yoy (in US dollar terms) in April. In year-to-date terms, exports are down around 2.3% – reflecting the crackdown that commenced in the second half of last year on false invoicing used by some firms to avoid capital controls. We continue to anticipate weak export trends in the first half, given these trends. There was a marked divergence in export trends by region. Exports to both Europe and the United States increased strongly – up 15% yoy and 12% yoy respectively. In contrast, exports to East Asia remained weak – down by around -16% yoy (albeit compared with -25% yoy in March). Hong Kong was the main destination for the false invoice schemes and exports to the region were down -31% yoy, while East Asia excluding Hong Kong saw exports rise by 3.0%.
By product category, export trends remained negative for both High Tech products and Mechanical & Electrical goods – which may be connected to the invoicing issues – with exports falling by -11% and -3.2% yoy (in seasonally adjusted terms). In contrast, exports of Agricultural products increased by 6.2% yoy (seasonally adjusted). Imports recovered in April, increasing by 0.7% yoy – after a sharp (and surprising) fall in March of -11%. Growth in imports has been driven more by increasing volume than the price of goods – with commodity prices softening since peaks in late 2011.
By commodity, import volumes remained mixed – with coal imports down by around -5.5% yoy (particularly for metallurgical coal, although this may reflect destocking trends by steel mills), while there were large increases in copper (52% yoy), iron ore (24% yoy)and crude oil (21% yoy).
Retail Sales and Inflation
Retail sales growth was largely unchanged in April – with nominal growth of 11.9% yoy (compared with 12.2% in March) – slightly below market expectations. Similarly, there was little change in real sales growth – with an increase of 11.0% yoy (compa
red with 10.9% previously). There was a noticeable increase in consumer confidence in March – pushing up to its highest level since February 2013. Sales growth for food and drink was in line with total retail sales – increasing by 11.9% yoy (compared with 9.9% in March). In contrast, there were marked slowdowns in both Household goods – with growth at 2.9% yoy (compared with 13% previously) – and Jewellery (which contracted by -30% yoy, from -6.1% last month). Motor vehicle sales remained robust at 12% yoy (from 14% in March).
Price growth was soft in April, with the headline consumer price index recording an increase of 1.8% yoy (compared with 2.1% in March). Softening in the growth rate for food prices was the main contributor to this trend – with food prices increasing by 2.3% yoy (compared with 4.1% in March), while non-food prices were relatively stable at 1.6% yoy (from 1.5% previously). The lower growth in food prices was driven by falling prices for fresh vegetables (-7.9% yoy). Trends for producer prices remained negative – with prices down by -2.0% yoy in April (compared with -2.3% in March). Producer prices have now fallen for twenty-six straight months
(the longest decline since late 1999). The falls remain most evident in heavy industry (-2.6% yoy), reflecting the ongoing declines in US dollar denominated commodity prices.
The concerted efforts to slow shadow banking appear to have had an effect, with a substantial pullback in the growth rate for the People’s Bank of China’s (PBoC) Total Social Financing measure since the second half of 2013 – down from 22% yoy
in May 2013 to 16.2% yoy in April 2014. The slowing trend is particularly evident outside the traditional banking sector. Outstanding non-bank lending (which includes
some, but not all, components of Shadow Banking) grew by 23% yoy – compared with 41% in May 2013 – with a particularly noticeable slowdown in entrusted and trust loans. In addition, reports have suggested that tighter regulation has forced banks to bring a range of off-balance sheet items (such as Wealth Management Products) back on-book. That said, credit growth continued to outpace nominal GDP
growth in the first quarter – with growth for the twelve months to March 2014 slowing to 9.1% yoy (from 9.5% in the December quarter) – a trend that
continues to concern policy makers.
The PBoC was less active in Chinese money markets in April – with the scale of open market operations far below the levels
observed in February and March. That said, the 7-day Shanghai Interbank Offered Rate remained relatively volatile, and remained at comparatively
low rates across April. In early May, the SHIBOR was around 3.2%, 100 basis points below the level in early April, and well below the rates during the latter part of 2013. Longer term rates converged across April – reflecting a marginal increase in 3 year rates and a softening in 5 year, bringing the interest spread back to more typical levels seen across most of 2012 and 2013.
Source: National Australia Bank
The Property/Construction Market
China’s real estate market: collapse or managed slowdown?
Is China’s real-estate market headed for a collapse or will it be a managed slowdown?
In the middle of the previous decade, when large numbers of newly built properties remained vacant as housing prices tripled, predictions that the market was on the verge of collapse abounded. The bubble did not burst, however, as government policies aimed at stopping overseas speculators and limiting purchases of second homes seemed to control the threat.
But many observers now see new danger signs in the real-estate sector, making the possibility of a crash seem more certain to them.
“We are convinced that the property sector has passed a turning point and that there is a rising risk of a sharp correction,” Nomura Securities analysts Zhang Zhiwei wrote investors this month. Behind the comment were Chinese government statistics showing that the amount of unsold commercial and residential property in the country hit an all-time record in March. China’s national growth rate is now seen as possibly dropping below the 6 percent mark in 2014 amid a glut of housing supply and tight project-development funds.
Driving Nomura’s prediction were negative first-quarter property investment figures in four of China’s 26 provinces, including two – Heilongjiang and Jilin – where the investment dropped by more than one quarter in the period. When the property industry turns downward in China, national growth suffers because of the industry’s major influence on economic performance.
Other analysts dismiss the idea of a short-term popping of China’s property bubble and see a gradual deflating of the bubble.
One of them is Barclays PLC’s Barclay Capital, who predicts that will occur in the next 18 months as government monetary policies and developers manage their activities more carefully.
“We believe the government will likely tolerate some further correction, although not too steep, and also allow local governments more discretion to use ‘differentiated housing policies’ that fit local situations,” Barclays China economist Chang Jian said.
UBS AG said China’s leaders will try to slow the downturn through policy moves. “The government still has the means and willingness to mitigate a property downturn, including by increasing infrastructure investment and relaxing property policies,” UBS economist Wang Tao said.
“As such, our base case forecast is for the property downturn to remain manageable,” Wang said.
Sophii Weng, an economist with Standard Chartered Bank in New York, told China Daily the bank expects China’s government to step in to blunt the impact of a housing-market slowdown as property investment growth declines through this year.
“Given the importance of the property sector to China’s economy, we think the government will introduce more loosening measures to mitigate the impact of a housing-market slowdown,” Weng said in an interview.
Moves by China’s central bank, the People’s Bank of China, requesting that banks speed up mortgage lending, set mortgage rates at reasonable levels, and do more to meet first-home buyers’ mortgage requirements “signal that the central government would like to stabilize the housing market”, the economist said.
National growth is “clearly decelerating – and without more aggressive short-term stimulus measures, we think it is set to slow further,” Weng said. To meet or come close to Chinese Premier Li Keqiang’s 2014 goal of 7.5 percent GDP growth, Beijing will need to gradually loosen policy in the second and third quarters, Weng said.
“We expect this loosening to take the form of increased investment” as well as export-tax rebates, reserve requirement ratio cuts in the second and third quarters and a basically flat Chinese yuan against the US dollar.
Such moves would help “stabilize growth and confidence”, the economist said.
Observers like Ma Guangyuan, a member of the 12th Beijing Municipal Committee of the Chinese People’s Political Consultative Conference and director of the Private Economy Research Center under Renmin University of China, find it hard not to conclude that the decade-long Chinese real estate boom may be over.
Ma wrote in China Daily that the average price of newly built homes in China’s 70 major cities rose 8.7 percent year-on-year in February, slightly lower than the 9 percent growth in January, according to data from the National Bureau of Statistics.
The number of cities that saw prices rise fell to 57 in February from 62 in January while prices rose just 0.7 percent on average in the latest month, compared with a modest 1.2 percent rise a month earlier, Ma pointed out. Moreover, in Beijing, Shanghai, Guangzhou and Shenzhen – major cities that saw huge increases just a year ago – the price increase fell below 20 percent, the research center director noted.
“Along with the slowing price increases is the drastic drop in home sales. In Beijing, only 2,221 new homes were sold in February, a record low since 2007,” Ma wrote. “The February volume for sales of secondhand houses was 5,441, decreasing by 38 percent from January and 46.3 percent from a year earlier, a new low in 24 months.”
Source: Various Economic Journals
B.C. Softwood Lumber Exports to China, as of March’14