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Thursday, January 20, 2011

China Goes Thunk

China hit the wall, and it hit it in cartoonish fashion. It's like watching a Road Runner cartoon. Beep-Beep!

It's fascinating to watch the US coverage of the Hu visit, none of which seems to take into account the situation in which poor Hu finds himself. The Grinch has come and taken Christmas, and what is poor China Hu To Do?

I'm terribly busy, so I don't have time to write much about this. If you are interested:
Main site Chinese stats.
2009 December CPI. 1.9% YoY Dec 2009/2008, accumulated over 2009 negative. But note the negative YoY in Beijing, epicenter of the boom. Also look at Shanghai. We don't have CPI for 2010 December yet, so contrast that with November 2010 at 5.1% YoY.

The huge amounts of money dumped into the Chinese economy have done the inevitable, and of course in November 2010 China started pulling back on money. There is such a demand for money that effective interbank and bond pricing is very expensive right now.

Property is doing the inevitable. You have to look at the month by month stats to see it, but they've already gone into negative real returns over recent months sparked by rapidly falling sales. Sales are going to be hard to sustain at current levels because the incentive to buy is not there right now.

Look at commercial floor spaces:
2009 12. 42.1% in floor spaces, 75% sales volume in yuan.
2010 12. 10.1% in floor spaces, 18.3% sales volume in yuan.
Beijing 2009: +76.9% floor space, +96.6% sales volume
Beijing 2010: -30.6% floor space, -10.6% sales volume
Shanghai 2009: +44.2% floor space, +125.9% sales volume
Shanghai 2010: -39.0% floor space, -31.6% sales volume.

Some will describe this as purely the result of monetary policy, but you can run through the regions and see that it is more related to pricing. The regions are hitting their natural boundaries, and companies are switching investment to other areas.

If you go to residential, the curve is slightly different but we have the same controlling factors.
2009 12 (70 large/medium cities, 90 sq meters and below)
2010 12.
In 2009 the YoY was around 13% and the monthly was over 2.5%. By December 2010 we are not that far off on the YoY (11% & 9%), but the monthly has slowed below 0.5%.
Intermediate steps:
April 2010. August 2010.

If you go back to 2009, you can see the dip, which was counterbalanced by a flood of money.

There is a pronounced cap effect, which can be seen in December 2010's report on RE in China. Note the difference between the YoY and the Jan/Nov figures. It's a decent summary so read it if you are interested in this post.

To put this in context, use November's (the latest available) investment in Fixed Assets by Industry. You see that while manufacturing investment accounts for 31.3% of the total, up slightly from the YoY 31% of total, real estate accounts for 24.2% of the total, up from 22.2% of the total YoY.

But it is evident that RE can't keep turning in these types of increases, so that means that China's economy, which is acutely dependent on investment in fixed assets to sustain a high growth rate, has a growth curve that should be adjusted down.

Taken in conjunction with the sharp rise in short rates, this would imply a sharp downturn by 2012. Certainly the Chinese government is going to try to avert this, but it is not clear exactly how they can do it. They will not continue on with their current tight monetary policies - they'll reverse as soon as the inflation curve drops a bit and as soon as they get frantic over jobs and GDP. But they are at the danger point with inflation, and inflation itself is reaching the point at which it would naturally undercut investment.

One interesting thing about the sharp rise in short-term rates is that many of these buildings were essentially collateral, and if there is a near term shortage of money, one would expect that a secondary market would develop. Previously there has been very little of an existing-building market in China. Private property is just too new, and owners of properties would rather hold them and borrow on them (because of appreciation) than sell.

Looking at the other type of report on 70 large/medium cities, which splits new construction sales from "second-hand" sales, it appears that this secondary market might be developing right now.
2009 12
2010 12

Notably, the chain index (month over month) is now better for existing-building sales, although the YoY is much lower, and is lower than inflation (PPI). This suggests that it is cheaper for companies that need money to sell a building than borrowing with it as collateral, and cheaper for companies that want a building to buy one that's already built.

That would suggest a further weakening of sales for new buildings in many areas, though. Since investment in commercial buildings is 70% of the total, one would think the volume of new investment would have to drop over the next few years. Looking at the starts, completions and land purchases gives me a case of the economic creeps.

Using China's own just-released statistics for 2010:
the gross domestic product (GDP) for the year 2010 was 39,798.3 billion yuan
the total investment in fixed assets of the country reached 27,814.0 billion yuan (69.9% of GDP)
total investment in real estate development for the year was 4,826.7 billion yuan (12% of GDP) (17.4% of fixed assets). Note that this last is a very large discrepancy from November's Fixed Assets by Industry. If you read the tables, RE fixed assets in urban areas are 20% of the total.

Total freight volumes were up close to 15% in 2010. Building accounts for a lot of freight and a lot of basic materials production. Another way to back into relative contributions is by looking at industrial production:
II. Industrial Production Went up Steadily with a Substantial Increase in Economic Efficiency of Enterprises. In 2010, the value added of the industrial enterprises above designated size was up by 15.7 percent, or 4.7 percentage points higher than that in 2009. Of which, the growth in the first quarter was 19.6 percent, that in the second quarter was 15.9 percent, 13.5 percent growth in the third quarter and 13.3 percent growth in the last quarter. Analysis on different types of enterprises showed that the value added of the state-owned and state holding enterprises went up by 13.7 percent; collective enterprises, up by 9.4 percent; share-holding enterprises, up by 16.8 percent; and 14.5 percent growth for the enterprises funded by foreign investors or investors from Hong Kong, Macao and Taiwan. The growth of the heavy industry was 16.5 percent and that of the light industry was 13.6 percent. Among the 39 industrial divisions, 38 of them witnessed year-on-year growth. In terms of different areas, the growth in eastern, central and western regions went up by 14.9 percent, 18.4 percent and 15.5 percent respectively. The production and sales of industrial products went on well. In 2010, the sales ratio was 97.9 percent for the industrial enterprises above designated size, or 0.2 percentage point higher than that in the previous year.

In the first eleven months of 2010, the profits made by industrial enterprises above designated size reached 3,882.8 billion yuan, up by 49.4 percent year-on-year, or 41.6 percentage points higher than that in the same period of last year. Among the 39 industrial divisions, 38 divisions registered year-on-year growth with profits.
A substantial portion of that 15% increase in industrial production (aligning well with freight) must be building. Probably about 5%. The quarter on quarter figures steadily dropped.

I'd say the RE contribution should knock about 2-3% off 2011, but 4-5% off 2012. China won't want to let that happen. The worldwide economy just isn't so hot that exports and industrialization can compensate for what should be a significant decline in overall building.

Too much growth too soon. The benefits of pumping
money into the economy are now outweighed by
inflation in essentials. Lower standards of living all
It's always ugly when a Chinese dynasty loses the Mandate of Heaven.
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