Chovanec: China data part 2

Patrick Chovanec [CV here] is writing a series on China’s prospects for a hard or soft landing. In this post Patrick takes a closer look at the real estate sector and its connections to the broad economy. This is a necessarily long post with lots of data. I won’t attempt to summarize – except to say that Patrick’s evidence weighs more on the side of less 2012 growth. I continue to wonder about China’s impact on the Australian dollar – it is hard to see much upside for the AUD.

As China enters 2012, concerns that its economy may face a “hard landing” have entered the mainstream. In recent weeks, Paul Krugman (“Will China Break?” in the New York Times) and Robert Samuelson (“China’s Coming Slump?” in the Washington Post) both penned hand-wringing op-eds warning of an impending Chinese downturn. It’s interesting to see the rest of the world starting to wake up to the worrying trends we’ve been discussing on this blog for some time now.

When people talk about a “hard landing,” they’re usually talking about a sharp deceleration in GDP growth, which brings with it both business failures and unemployment. In two earlier posts (Parts 1 and 1A), I examined a variety of data points that suggest China’s real estate market is in the midst of a serious downturn. In this post, I want to take the next step beyond this and explore the impact of collapsing property prices on the pace of broader economic growth, and the prospects of a “hard landing”. (Originally, I promised to discuss the impact on China’s currency and inflation, but in thinking about it, I realized this places the cart before the horse. I’ll turn to this question in Part 3).

There are two ways that the drop in the property market translates into slower economic growth: direct and indirect. The direct impact is fairly obvious: to the extent that China’s real estate developers are overextended, and preoccupied with selling off their existing inventory in order to stave off bankruptcy, they won’t be commissioning any new projects — maybe not for quite a while. That means no work for construction companies, which in turn won’t be buying any new construction equipment. It also means less demand for steel (construction reportedly accounts for 40% of China’s steel demand), cement, glass, copper pipes and wiring, etc. It also means less furniture and fewer appliances to fill those new homes (although, as we know, many Chinese investors already leave the units they buy empty anyway). The estimates I’ve seen say these sectors dependent on property construction account for between 20% and 25% of China’s total GDP.

Frankly, you don’t need a real estate collapse in order to trigger a serious slowdown in these sectors. All you need is a pause in the hitherto frantic pace of construction. (…)


Read the whole thing » Here are several of Patrick’s recent related posts on the China outlook — I highly recommend a careful reading of the series:

Update: here is an excerpt from China’s 2011 GDP Numbers which updates the real estate sector fractions used in this post:

There are two pieces of data I saw, easily lost in the fine print, that I found particularly revealing. First, the NBS disclosed that real estate investment accounted for 13% of China’s GDP in 2011 (compared to Stephen Roach’s estimate of 10%), and grew at a rate of 27.9%. However, I noticed something that I admit I missed before, in my earlier calculations — that this is a nominal rate (not adjusted for inflation) whereas the GDP growth rate figures are real (they take inflation into account). The real (and therefore comparable) rate of expansion for real estate investment in 2011 was 20.0%.

Let’s close with the closing paragraph from Patrick’s most recent 20 January post:

I also want to emphasize — before we get totally preoccupied with the fate of the property bubble — that the property story is really just one aspect of a much broader investment boom that has been driving the economy. If real estate accounts for 10-13% of GDP, investment in fixed assets accounts for roughly half. The health of the property sector is particularly important in China because of the pervasive role that land values play in underwriting lending, but the risks to China’s economy extend far beyond the market for homes and offices. For China, real estate is just the tip of a much larger iceberg, one that I’ll explore in my next “China data” installment.

If you have counters to Patrick’s analysis please comment.