BHP might be confident about the outlook for steel production (and its iron ore exports) in China, but this confidence is misguided at best given the black hole that is the country’s property sector.
The real story for China and Chinese steel demand this year will be the health of the country’s financial stricken property sector – its principal growth driver. it’s not healthy and if BHP CEO, Mike Henry expects this to suddenly improve overnight, then he is sadly mistaken
Buried in all the economic data from China this week was the real story about why the ‘re-opening story’ (which is essentially what BHP and Mr Henry are saying) is built on weak foundations which will need considerable strengthening before the Chinese economy can be said to be in good health and truly ‘open’.
The property sector is China’s largest growth engine and asset class and as this week’s data confirmed it is very unhealthy, broken in fact with no redeeming features at all.
And while many western analysts reckon that will change this year, it will be a very, very slow improvement if it does happen – one that will take years, not months. Moreover, with the growing realisation that a shrinking population will reduce demand for property (once the huge oversupply is removed) over time, the potential for stagnation and massive losses is rising.
That has all sorts of ripple effects throughout the economy, such as starving local governments (which sell land to property developers) of much needed revenues to spend on services and depressing demand for commodities and prices for construction.
So, in response to the pandemic, Beijing has just eased restrictions it had placed on the property industry to stop it from overheating and taking parts of the country’s financial system with it.
It’s a risky move because the coming losses will have to be revealed and blame attributed, if only to convince consumers and foreigners that the mess is being fixed up permanently and confidence in the future restored.
There was certainly a lot of repair and confidence-restoration needed judging by the property sector’s miserable 2022. At the moment both are absent.
That’s why concerns about prices and purchases remain very much ‘live’ after thousands of people protested off and on last year about uncompleted apartments and homes (because the developers ran out of money). Many are upset that they owe much more than their uncompleted units and homes are now worth.
On top of that there’s the still very visible ‘ghost’ apartment blocks and half-finished developments that are scattered across China and will have to be completed or demolished to change consumer thinking about the safety of property.
And while this is going on the central government can’t afford to ignore the revenue needs of provincial and municipal governments who used property sales and taxes (and investments) to generate revenues to pay for services and infrastructure. By all accounts the level of debt in local and provincial governments is crippling.
To assure markets – local and foreign – that the property mess is being cleaned up, China will have to produce believable data on the number of unsold/uncompleted units and houses, the amount of debt held by private and state-owned developers as well as total property debt of all levels of government.
There’s considerable doubt about whether we will ever see such data from a government whose leader, President Xi Jinping, is responsible for much of the mess.
After all he’s been in power for a decade or more and has been monstering property companies, banks and others (without regard to owners, buyers and consumers) since the 2015 slump.
Data on the performance of China’s property sector last year clearly shows it 2022 was the worst year on record.
And if there is to be a recovery this year, then the only way that will happen is because the level of investment, sales and activity are at record lows and any improvement, no matter how small, will look better than the disastrous year that 2022 was.
China’s property sector shrank by an unheard of 5.1% in 2022 from a year earlier, according to data from the country’s National Bureau of Statistics (NBS) this week.
The NBS said the sector contracted by 7.2% in the fourth quarter from the same quarter in 2021 which followed the 4.2% contraction in the third quarter.
The figures suggest that the property sector was one of the biggest drags on the economy last year which saw the second worst annual growth rate in modern Chinese economic data collection.
Growth through the year was 3%, less than half the 8.4% growth of 2021 and well under the government forecast “around” 5.5%.
Vice-Premier Liu He said at the World Economic Forum’s annual meeting in Davos on Tuesday that China would support healthy development of the property market as the sector was still a pillar industry for the economy.
During a video conference held by the Ministry of Housing and Urban-Rural Development on Tuesday, the regulator vowed to promote completion and handing over of homes to buyers, to help resolve financing risks for property firms and to equally support the balance sheets of state-owned and private property firms.
Nice words and some of these promises have been made before without tangible evidence of anything happening.
The NBS said China’s property investment fell 10.0% year-on-year in 2022, the first annual decline since records began in 1999, compared with a fall of 9.8% in the first 11 months of the year.
Property sales by floor area dropped 24.3% in 2022 from t2021, the biggest drop since the data became available in 1992, compared with a fall of 23.3% in the January-November period.
New construction starts measured by floor area declined 39.4% year-on-year in 2022, versus a 38.9% slump in the first 11 months of the year.
Funds raised by China’s property developers fell 26% from 2021 after being down 25.7% in January-November.
Average new home prices in China’s 70 major cities dropped by 1.5% year-on-year in December, after a November’s 1.6% drop which was the steepest pace since August 2015.
A combination of the property downturn due to mounting debt problems among developers and the impact of firstly the zero Covid policies of the government, and tough lockdowns and then a surge in COVID cases in December, helped keep prices falling.
Among the Chinese biggest cities, prices fell in both Tianjin (-4.0% vs 4.0% in November) and Shenzhen (-0.2% after flat reading) while Chongqing saw a flat price following a 0.7 percent rise previously.
But NBS data showed grew faster in Beijing (5.8% vs 5.7%), Shanghai (4.1% vs 4.0%), and Guangzhou (0.4% vs 0.2%).
On a monthly basis, new home prices fell 0.2% in December, the same as in November and was the fifth monthly decrease in a row.
The NBS said this week after the data releases that the property sector’s drag on economic growth in 2023 will be significantly lower than in 2022. The NBS is forecasting huge demand for owner-occupied and improved housing which is expected to effectively support the industry.
While that’s the plan, there will have to be some big collapses of bankrupt, zombie developers like China Evergrande, before the sector can start rebounding.
The government also lifted a ban on equity sales by developers, prompting many to tap into the capital markets to raise fresh funds.
Government controlled investors such as insurers and the various state-owned investment funds (some of which own the dud properties from previous collapses) will be strongarmed into buying into these issues, but that’s only half the equation – what about existing owner investors and future buyers?
The problem for many investors is that they want to sell and can’t get out of their purchases without more bank refinancing. Anecdotally few people want to hold overpriced property and pay full whack to developers or governments if the developer is going bust.
And the NBS and few other commentators have failed to mention the depressing news that China will need less, not more housing in coming years as the population, which fell for the first time in 61 years last year, continues to contract.
