China Property Sector Dangers Grow



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By John Richardson

HOPES for strong China chemicals and polymer demand growth in H2 partly rest on government stimulus money for infrastructure projects compensating for a weakening real-estate sector.

Whether its direct consumption of chemicals and polymers, such as the obvious polyvinyl chloride (PVC) – or indirect benefits accruing from the Keynesian multiplier effect – the theory goes that these government projects are only about to deliver benefits to the economy.

“Many were announced in December 2008, when the enormous economic stimulus package was also first made public, but constructions phases are only just beginning,” a senior sales executive with a North American polymers producer told the blog recently.

But this might well underplay the crucial importance of the property sector for consumer confidence as soaring real-estate values in major conurbations and cities have played a big role in boosting sales of everything from kitchen utensils to automobiles.

And as we’ve written about before, regional governments are heavily dependent for their income on land sales.

Declining land sales, and a reduction in the value of land in the ownership of provincial and city authorities, could blow a hole in their finances that might have wider implications for growth than is immediately obvious – e.g. less ability to fund job-creating investments.

So the health of the property seems to be critical to growth and yesterday, Xu Shaoshi, China’s minister of land and resources, predicted that real-estate prices were heading for a “comprehensive correction” by as early as the fourth quarter.

As today’s Lex Column in the Financial Times points out, a taming of the market would be a good thing because consumers are overstretching themselves by buying multiple properties. These are often investment properties, creating resentment among those either without their own homes or struggling to afford only one cramped condo on the edge of some hideously congested ring road. Mortgage costs, we’ve been told, account for as much as 60-70% of salaries in some major cities.

But Lex asks the very valid question about what impact price falls would have on the overall economy – and crucially, whether these declines would be orderly or whether they could spiral out of control.

The last period of price declines lasted only six months, between December 2008 and May 2009, continues Lex, but at that time supply was limited; not so now thanks to a huge splurge in stimulus-fuelled construction.

The slowdown in the real-estate market so far this year is the result of around a dozen tightening measures introduced since end-2009, including higher down payment requirements.

The central government could, of course, step in to relax a lot of these new rules should price falls start gathering dangerous moment. But by so doing they could add more air to the bubble.

Lex also argues that Beijing’s ability to turn around an accelerating correction could be limited by monetary policy that’s already incredibly loose, through lending and deposit rates that are already at decade lows.

It will be interesting to see what impact Xu’s comments have today on the Dalian Commodity Exchange’s futures contract in linear low density polyethylene ((LLDPE). Dalian, like any other futures market, responds to all the macro issues and is adding volatility to physical PE pricing.

At a broader level, his comments are only going to add to the feelings of unease and uncertainty in a polyolefins market in China struggling to digest very high stock levels.

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