By Aaron Puthan
China’s recovery from COVID-19 crisis remains uneven, with state investment and production leading a relatively weak consumer recovery. Two important trends are emerging that provide insight into both the near term growth trajectory, and how the investment landscape might shape up.
Trend No. 1: The property sector is showing signs of life after laying dormant for the last few years. Property transactions have rebounded strongly in the last few weeks and could be on the way to reaching new highs.
Why is it important? China’s property sector will be a very important factor in determining China’s growth outlook over the coming year, as well as how the Chinese economy impacts the global economy.
- Domestically, in China, housing alone is more than double the size of infrastructure construction, and the broader property sector is nearly three times as large. As a result, swings in property demand can have an outsized impact on new project starts, the pace of construction in the pipeline, and thus overall commodity and industrial demand in the economy. It also influences the sales of autos, appliances, and other home goods (i.e. new home sales tend to drive appliances and auto sales). In total, the property sector and corollary industries account for nearly a quarter of China’s GDP.
- Given its sheer size, it’s likely going to be difficult to meet any realistic growth goals without having a renewed housing rally. Moreover, residential demand is a privately determined variable: official policy plays a role, but so do things like market sentiment and expectations about the future. Thus, the property sector can give a better indication of private sector sentiment than other indicators, such as infrastructure investment or industrial production.
- Globally, China consumes 70% of global iron ore supply and 40% of global copper supply, and most of these raw materials are used in construction of real estate projects. During previous stimulus rounds in China (in 2009, 2012, and 2015) it was a housing boom that turned the Chinese economy around, and through imports it also helped lift the global economy.
However, does this surprising upside for Chinese property lead us to be more optimistic about commodities, resources, and by extension, those related equities? While China’s import of raw materials picked up in recent months, we think it’s likely still too early to call it a trend, unless we see this data continue to improve and reach new highs over the coming months.
Trend No. 2: Transportation is still in a deep contraction, down -30% compared to the prior year. The weakness is almost entirely from passenger travel – which was still down nearly 60% year-over-year in May.
Why is it important? Representing roughly 5% of GDP, it will be difficult for China’s economy to fully recover until this sector normalizes.
- Due to concerns over imported cases, international borders could remain firmly closed for some time. Domestic travel is still muted despite most internal restrictions being lifted, as people remain wary about leaving their home cities and provinces. Unexpected flare-ups of the virus mean travelers could still run the risk of getting caught in a new emergency quarantine situation (as we recently saw in Beijing, where a sudden flurry of new cases forced the government to abruptly ban all travel in and out of the city). As a result, domestic transportations, hotels, entertainment and other related industries could be under pressure for some time.
My take: Supporting a renewed housing rally and/or encouraging domestic travel could provide upside in the near term, though not without risks. High housing prices and oversupply issues (thus, high inventory levels) are China’s long-protracted headaches. And pushing for a rebound in domestic travel could bring second wave risks. Of course, China’s economy is far more complex than to be determined by just these two sectors, but with the consumer under pressure from higher unemployment and sluggish exports due to a weak global, the push and pull of property and transportation are likely going to be swing factors that determine China’s growth outlook in the coming year. □
- Image source
- Hall, Z. (2020, April 28). Chinese buyers consider return to international property markets. Retrieved July 16, 2020, from https://www.ft.com/content/146dcf22-848a-11ea-b6e9-a94cffd1d9bf
- Moss, T. (2020, May 13). Coronavirus Has Been a Boon for China’s Railways. Retrieved July 16, 2020, from https://www.wsj.com/articles/coronavirus-has-been-a-boon-for-chinas-railways-11589364002
- Reuters. (2020, July 14). China Posts First Import Growth Since Pandemic, Exports Also Up. Retrieved July 16, 2020, from https://www.nytimes.com/reuters/2020/07/14/business/14reuters-china-economy-trade.html
- Sider, A. (2020, June 16). U.S. Further Loosens Restrictions on Chinese Airline Flights. Retrieved July 16, 2020, from https://www.wsj.com/articles/u-s-further-loosens-restrictions-on-chinese-airline-flights-11592266502