China Economy, Housing & Lumber Shipments
The State of the Economy
The economy only grew by 8.1 percent in 2012Q1. This was the slowest increase since the depths of the crisis. While the National Bureau of Statistics reported quarter-over-quarter growth of 7.4 percent (annualized) in 2012Q1, this was inconsistent with their reported year-over-year rate. Subsequent discussion with the NBS revealed that their year-over-year rate is more reliable than their quarter-over-quarter one. This suggests that the true quarterly rate was only 5.6 percent in 2012Q1, which represents a very sharp slowdown in growth.
The economic data released for April and May indicate that the Chinese economy has stabilized but has not improved much. While this deceleration in growth, is expected the economy seems to be slowing faster than expected and the policy response has been slower and more measured than expected.
Weak external demand hurts China
For a large economy, China is very open to international trade. Imports and exports of goods and services are equal to about half of China’s GDP. Thus, China is relatively sensitive to change in its trading partners’ business cycles. China’s export growth has slowed to 10 percent this year, about one-half the pre-crisis rate, as a result of the softness of global demand. Exports to the EU have been especially weak this year. Europe is China’s most important export destination, accounting for a fifth of its overseas sales.
China’s exports have a large import component, so the growth of imports has fallen along with that of exports. Indeed, notwithstanding the weakness abroad, China’s trade balance for the first five months of the year is about 60 percent higher than the same period in 2011. The relatively strong trade balance is, to a large extent, the result of the decline in world commodity prices, which has boosted China’s terms of trade.
Help is on the way
Policy support to-date has been measured. In 2011, policy makers spent considerable effort to rein in inflation, which peaked at 6.5 percent last July. Given the weakness in demand both globally and in China, it was expected that there would be a rapid decline in inflation this year but instead inflation has come down slowly. More fundamentally, policy makers may be looking at the labour market, which despite the softness in demand, has remained fairly tight. It is expected that inflation will continue to fall in coming months.
Falling inflation will allow the government to take more aggressive measures to support growth. To date, monetary policy has only eased marginally.
The government has announced a series of measures designed to support domestic demand. While there won’t be massive stimulus on the scale of 2008-2009, the government will try to combine short-term stimulus with longer-term economic restructuring.
Source: Canadian Embassy, Beijing
The Housing/Construction Market
Property market drags on investment
For some time, the government has been trying to contain the housing bubble in first tier cities and improve housing affordability. Recent reports that close to 30 percent of Beijing apartments are vacant have likely only added to its resolve. Indeed, while the government will be enacting various sorts of economic stimulus, relaxing restrictive measures, which limit the number of investment properties a household can purchase, is currently off the table.
NBS data show the government’s policy is having a depressing effect on housing demand: the volume of residential floor space sold in the first five months of the year is down 14 percent from the same period in 2011. While the fundamental demand for housing in China remains strong, it is estimated that between 20-40 percent of all apartments sold in major cities is for investment purposes. With the investment demand being restrained, many potential owner-occupiers have been taking a wait-and-see attitude, waiting for prices to fall. The weakness in housing demand is translating into softer housing activity. The residential floor space started in the year to May is down 8 percent from the same period in 2011.
Weakness in the private housing market is being somewhat offset by the government’s aggressive social housing programme, which envisages the construction of 36 million apartment units between 2011-15. Housing investment accounts for about 10 percent of GDP, thus the slower growth has probably knocked close to 1.5 percentage points off growth in 2012Q2, compared to 2011.
Source: Canadian Embassy, Beijing
B.C. Softwood Lumber Exports to China, as of April’12
BC softwood lumber export volume to China in for the first 4 months of 2012 reached 2.497 million cubic meters, a 22% increase over January-April’11. BC softwood lumber export value for this period reached $322.57 million, a 3% decline over this period in 2011.