HOUSING SECTOR CONTINUES TO STRUGGLE

Issues with the property sector remain, but infrastructure spending and China’s competitive advantage in solar, battery and EV tech are bright spots, writes Scott Hazelton

Mainland China’s economy continues to gradually improve with real Gross Domestic Product (GDP) growth expected to reach 5% for 2024. The economic outlook remains moderately positive. The Caixin China General Manufacturing Purchasing Managers’ Index (PMI) and the Caixin China General Services PMI improved for the fourth consecutive month and hit new highs in May. Business conditions improved with the fastest manufacturing output growth in nearly two years.

The new property rescue plan will need time to take effect. The buildup of residential inventory extended in May, climbing to 24.6% year over year through May with ongoing, albeit marginally eased, home sales contraction. Meanwhile, month-over-month average home price deflation for 70 surveyed cities continued to worsen.

The government commits to accommodative monetary policy alongside ongoing fiscal stimulus. The People’s Bank of China (PBC) governor vowed continued supportive policy to sustain economic recovery at the 15th Lujiazui Forum on June 19, although the ongoing debt pressure and the China-US interest rate differential will continue to contain the scale of monetary easing.

The housing market continues to struggle, despite key property market indicators showing marginal improvement. The slight uptick is insufficient to spur a recovery by the end of this year, making it likely that residential construction in 2024 will remain in negative territory.

Housing sales dropped 23.6% year over year in volume and 30.5% in value in May. Year-todate housing starts fell by 25%, compared with a 25.6% decline in the previous month, while housing construction completions edged up by 1.2% to a 19.8% decline over the same period. Annually, prices slumped by 4.3%.

The data comes despite the government’s ambitious plans to rescue the sector, which include removing the minimum interest rate and reducing the down payment ratio. Additionally, the government allocated a 300 billion yuan (US$41.3 billion) relending facility to help local governments buy unsold homes from distressed developers, aiming to clear excess housing inventory. Despite this, weak home price expectations and gloomy employment prospects continue to dampen homebuying demand. Residential construction is expected to fall 0.3% in 2024 before growing 1.9% in 2025.

Source: S&P Global Market Intelligence

Infrastructure investment

Despite challenges in the residential sector, total construction spending is expected to rise 3.1% in 2024, supported by substantial infrastructure investment. Infrastructure spending received a boost from the 1 trillion yuan (US$139 billion) sovereign bond issuance in late October 2023, with the majority slated for use in 2024.

Additionally, the government initiated the sale of 1 trillion yuan ultra-long-term sovereign bonds in May to shore up critical project investment for priority economic development, although the disbursement toward projects will take time. We have modestly revised infrastructure construction spending to 8% in 2024, from 7.5% in the previous update. Construction spending in mainland China will feature a 3.6% compound annual growth rate (CAGR) between 2023 and 2028, with growth led by the infrastructure segment. In the longer run, growth will improve to a 3.7% CAGR between 2028 and 2033. The infrastructure segment will again demonstrate the highest growth over the period.

The National Development and Reform Commission and the Ministry of Finance approved 38,000 projects, with an estimated demand for special bonds at around 5.9 trillion yuan (US$810.9 billion). Transportation projects have seen significant progress, with railway investment increasing by 10.5% in the first four months of the year. Other projects include the construction of the Xiamen Xiang’an International Airport.

We anticipate a slight decline of 0.2% in nonresidential structures spending for 2024, largely due to subdued sentiment in China’s real estate market. With lackluster consumer demand and an uncertain economic outlook, the business environment is likely to deteriorate, exerting pressure on planned investments. Of all segments, the office segment is expected to witness the highest growth rate in 2024, expanding by 1.8%. However, a glut of new office supply is in the pipeline, particularly for tier 1 cities, potentially driving up vacancy rates amid sluggish demand for office space.

Industrial construction growth is generally weak as manufacturing grows more strongly in other Asian countries. However, China maintains a significant competitive advantage in solar, battery and EV technology. It is noteworthy that US electric vehicle maker Tesla has obtained a construction permit for its energy storage project in Shanghai. Spanning 200,000m2, the plant has attracted investment of 1.45 billion yuan (US$199.2 million) and is set to produce 10,000 Megapack units annually, equivalent to nearly 40 GWh of energy storage capacity.

Commercial construction has an improving trend, but the outlook is still tepid. Lodging is a primary beneficiary, but even retail space, particularly in prime locations, offers opportunity. Warehousing and logistics continue to offer potential, but their growth is tied to Chinese export activity which has moderated as significant manufacturing has moved to lower cost countries.

The normally reliable institutional segment is challenged by national debt concerns, and the need to deploy fiscal spending to shore up housing and expand infrastructure. While health care construction grew by double digits over 2020-22, much of that was tied to Covid response, and health care construction will be a drag through much of 2024, although the level of spend will remain historically high.