China’s infrastructure sector remains strong, whilst the real estate sector is weakening
China’s National Bureau of Statistics (NBS) released their main macro figures for October this week. The general picture painted is of decelerating growth.
We believe Infrastructure and real estate are the key sectors to follow for the Dry bulk industry as these sectors combined constitutes close to 70%* of overall Chinese steel demand. As China’s market share in global steel production is more than 50%, these 2 sectors within China also represents more than 35% of global end user demand for steel.
China’s real estate sector constitutes 30%* of end user demand within the country and has been in a cyclical upturn since the start of 2016. However, in the last couple of months we have seen a clear deceleration in the growth within this sector as the Chinese government has tightened liquidity and regulations. Floor space of houses sold in September and October was down 5.7% and 8.6% respectively on a YoY basis, after being up close to 11% in the first 8 months of the year. Floor space of houses newly started posted a negative YoY growth of 2.9% in October after being up 11.5% in the first 9 months of the year. House prices in China are not growing at the same pace as in 2016 and the first half of this year. House prices in Tier 1 posted negative YoY growth in August and September but turned positive again in October. While prices in Tier 3 cities are still in a positive territory on YoY basis, the growth fell sharply from September. The price growth in tier 2 cities have also slowed in recent months.
The positive news for the real estate sector is that the inventories of unsold buildings in the sample we track is down 16% YoY. Thus, while we think that the growth in the real estate sector might turn negative next year, we do not expect a sharp downturn in the activity as low inventories should cushion the potential downturn.
The positive news is that China’s infrastructure sector, which constitutes 39%* of end user demand within the country, shows no sign of weakness. Fixed asset investments in the infrastructure sector was up 13.5% on a YoY basis in October. We, expect the growth rate in infrastructure investments to remain strong in 2018.
*Source:JP Morgan, Wood Mackenzie/Klaveness Research