4 mins
CONSTRUCTION REBOUNDING
China’s zero tolerance approach to Covid has hurt its economy. While its property market is still overheated, overall indications point to solid growth for construction,
China’s real Gross Domestic Product (GDP) grew 3.9% year over year (y/y) in the third quarter, a dramatic improvement over the second quarter’s 0.4% y/y performance. Despite the recession affecting the property sector, construction sector growth accelerated to 7.8% y/y in the third quarter, from 3.6% y/y in the prior quarter.
Construction’s rebound was driven by government-led infrastructure investment acceleration and state-owned enterprise (SOE) investment spending. Infrastructure investment grew 8.6% y/y through the third quarter, 1.5% higher than the first half. Fixed asset investment (FAI) by SOEs expanded 10.6% through September.
Yet, the economic recovery entering the fourth quarter remains wobbly, as China continues to struggle to contain Omicron outbreaks with its zero-covid policy. Except for industrial production, all major economic activity indicators softened in September and the country’s economic recovery lost additional steam in October.
Industrial production growth decelerated and service sector output growth fell to a scant 0.1% y/y. Fixed asset investment (FAI) remained relatively stable, growing 5.8% y/y year-to-date in October, compared with 5.9% y/y in the previous month. State-owned firms fared better than private enterprises.
The property sector remained in deep recession. Housing starts plummeted 38.5% y/y YTD in October, while housing sales and mortgage loans dropped 28.2% y/y and 24.5% y/y, respectively.
The outlook for Chinese construction is generally positive, although volatility is likely over the next couple of years. China’s nonresidential structural spending is tied not just to domestic demand, but global output.
Total real construction spending is expected to continue its post-pandemic rebound, growing 4.0% in 2022, still well below its long-term trend. Between aggressive Covid containing measures and a global economic slowdown, China only sees a marginal increase in real growth to 4.2% in 2023 and 4.6% in 2024.
Residential construction will show virtually no growth in 2022 and will remain below average in 2023. Mainland China’s average new home prices fell by 2.4% y/y in October, widening the drop from September, according to the National Bureau of Statistics survey of 70 major cities. While new home price declines have persisted for 14 consecutive months, the latest release marks the lowest reading since the deflation started in September 2021.
Residential construction
On 11 November, China rolled out a propertysector support package focused on financial relief for property developers. The 16-point package includes measures such as expanded financial support for property developers and loan payment extensions. However, given the erosion to housing values owing to the protracted housing market downturn and sustained policy crackdown on the property sector, a quick rebound is unlikely.
Non-residential structures are also struggling for growth. The problem stems from the office segment, although industrial structures are also well off their pace. With its increasing urbanization, work-from-home is not as significant a phenomenon in China as in Europe and North America. Beijing alone added almost 100,000 square meters of grade A office space in the first quarter of this year, even as vacancy rates were increasing.
China’s industrial construction sector also faces challenges. Overcapacity in sectors such as steel, chemicals, food processing, utilities and some types of equipment has become an issue. Additionally, China has lost share to other developing Asian markets with lower labour costs, and some companies are diversifying their geographic footprint to reduce their reliance on China. Relatively strong opportunities can still be found in electrical and electronic equipment, communications equipment and transportation equipment.
Commercial construction fares better. Even retail space offers opportunity as China still has an evolving consumer market. Stronger potential exists within the hospitality sector as lockdowns become less prevalent.
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Infrastructure stimulus packages
When the construction economy slows, China has typically boosted spending on infrastructure. This appears to be the strategy again; over the late summer, several new stimulus programs were announced, totalling over RMB1.1 trillion (US$154 billion). The composition of this spending appears different from prior interventions.
Historically, China has invested disproportionate amounts in transportation infrastructure, particularly high-speed rail. While there remains a healthy transportation spending dose, there is a new emphasis on such things as energy and water conservancy and IT and logistics. The focus appears to be on energy conservation rather than generation or transmission/distribution, so energy infrastructure growth tails off.
It takes time for infrastructure projects to get underway; expect growth to ramp up in 2023 and peak in 2024. Real growth in infrastructure spending will exceed 6% in 2024 and, even as it retreats, we see several years with real growth in excess of 5%. The delayed implementation suggests that material prices could be retreating as growth develops, limiting any potential overheating of commodity markets. It is also the case that infrastructure work, and particularly the evolving mix of infrastructure work, is less material intensive than the structural investment for which it is compensating. iC