17
january-february 2015
international
construction
ECONOMICOUTLOOK
Slowingmarket
>
Slowingmarket
C
hina’s economic growth rate will
continue to decelerate in the coming
quarters, owing to past excesses and lack
of organic engines of growth. Gluts in housing
and industrial capacity, as well as the excessive
lending that financed them, are weighing down
on the economy and stopping the government
implementing aggressive stimulus.
Despite the easing of housing purchase
restrictions and targeted credit easing for the real
estate market, housing price deflation and weak
residential construction have continued. Even
the export rebound has been unsteady, due to
renewedweakness in theEuroZone and theweak
US recovery.
Still, a hard landing is unlikely. Amore serious
concern and perhapsmore likely outcome is that
China could enter a prolonged period of low
growth.
Housing has been a key issue for China to
manage, and housing construction will continue
toweaken as houseprice expectations deteriorate.
The government’s housing market restrictions
have drastically cooled themarket.
Construction starts measured in floor-space
terms contracted -9.3% year-on-year in the
third quarter of last year and worsened further
in November. The downturn was partially
due to high base effects – housing starts in
January-September 2013 rose +23.3%, and the
construction starts decline hasmoderated from a
-27.4% trough inFebruary 2014.
Another drag in real estate is that investment
on public housing is tapering-off. This accounts
for about half of total new floor space inChina,
and plans are to start fewer public housing units
in 2015 than in 2014. This arguably highlights
the growing strains of funding for the ambitious
programme – local government finances areweak
and there is plenty of supply in some parts.
Still, China plans to start construction of 7
million public housing units in 2015, about
200,000 fewer units than in 2014.
It is important to note that tier-one cities have
stronger real estatemarkets than the restofChina.
New private unit sales in Beijing were reported
up +28.6% and by +28% in Shenzhen by First
Financial Bank in November. Indeed, Beijing
set a new land auction record in January with a
parcel selling forUS$1.39billion, demonstrating
continuedhighdemand for developers.
Inaddition tohousing, railway constructionhas
been a key element of bothChina’s urbanisation
strategy and investment pump priming. Chinese
rail experts have proposed a new high-speed rail
line linking Inner Mongolia’s Baotou city with
Hainan’s Haikou city.This would be the world’s
longest high speed rail line at about 3,000 km.
If approved, construction would start after
2016. Two new approvals for urban railways
have been announced for Hefei and Zhejiang.
Zhejiang’s will add 23 railway lines with a
total length of 1,413 km. Guangzhou has also
announced large-scale metro construction that
will add15new lines and229kmof rail between
2015 and 2025 – the largest investment project
(US$ 23 billion) in the city’s history.
Indeed, to stimulate investment and stabilise
economic growth, the National Development
andReformCommission (NDRC) has approved
43projects including airports, railways, highways
and urban railways since October. In addition,
news organisation Bloomberg has reported
indications that China is accelerating an
additional 300 projects with a value of US$1.1
trillion.
In addition to infrastructure, these would
includeoil andgas pipelines, health, clean energy,
transportation andmining, and suggests concern
that economic growth will slip below the level
needed tomaintain stable unemployment.
Reforms
In addition to stimulus and major projects,
China has announced a series of potentially
important reforms. First, it aims to conclude a
rural land reform pilot by 2017, covering land
expropriation, marketing collective land for
business use, rural homesteading and allocation
of land appreciation income.
Better financial management of agricultural
land is key to a market for land transfers, which
is integral to Chinese urbanisation plans and
ultimately future investment growth.
Also, Beijing, Guangzhou, Shanghai and
Shenzen are piloting real estate investment trusts
(REITs) to support funding needs for affordable
housing, which is to say commercial housing is
excluded.
Currently, affordable housing is fundedby local
governments, and with a construction target of
36 million affordable housing units in the 12th
five-year plan, the cost to develop this housing
would exceedUS$ 800 billion.
REITs provide a new source of funds during
a time of weak real estate market activity and
increasing regulation in shadow banking and
government debt.
BySector
The first chart indicates the slowing of residential
construction and the continued importance of
infrastructure. Non-residential structures will
follow a path closer to housing as export growth
will bemuchmore subdued than thepost-WTO-
entry boom years of the 2000s.
In addition, domestic consumption has not
Fortunately a hard landing for the Chinese economy still looks unlikely, but the constructionmarket is
clearly entering a period of slower growth.
Scott Hazelton
reports.
Construction by sector
Non-Residential
Infrastructure
Residential
Total Construction
0%
5%
10%
5.1%
5.4%
13.2%
9.2%
12.3%
11.6%
6.4%
6.7%
5.2%
6.0%
8.8%
9.0%
15%
2014-2018 2008-2013
2018-2023
