Despite favourable base effects, China's real estate sector continues to search for the bottom, dragging the rest of the economy down with it.
IHS perspective | |
Significance | China's economy failed to stabilise early in 2015, despite increasing policy support during the last half year. |
Implications | Data point towards a particularly weak first quarter and probably also for the first half for China. The despondent real estate sector will continue to act as a large drag throughout the first half, if not longer. |
Outlook | Fiscal and monetary policy are likely to become the most accommodative since 2009, if not surpass those levels. If leaders push stimulus to levels seen in 2009, it will substantially increase concerns about systemic risk and willingness to reform, which includes allowing some excesses to unwind. IHS expects Chinese growth of 6.5% in 2015. |
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Growth remained weak in China across most sectors in January and February. Industrial output growth (6.8%) fell to a 72-month low, retail sales (10.7%) to a 109-month low, and fixed asset investment (13.9%) to a 168-month low. Although adjusting for prices somewhat cushions growth performance in some indicators, such as investment, overall signs still point to weak performance over the last two months and confirm concerns about a very weak 2015 in the making.
Private housing sector collapse
The residential construction sector experienced particularly deep declines on top of an already frail 2014. New housing starts contracted at the fastest rate in eight months, housing sales at the fastest rate since December 2008, and housing completions at the fastest rate in at least 15 years. The level of residential floor space started early in 2015 was the lowest since the same period in 2009. The industrial sector slowdown was primarily concentrated in manufacturing, while real output growth accelerated marginally in mining and utilities.
Continued weakness in the residential sector is especially concerning. Typically, real estate market contractions in China are broken when shifting to a new year. That is partly a result of easing policy coming online and gradually improving real activity over several months. Another large factor in historic rebounds around the New Year is the arithmetic fact that China cumulates most of its real estate sector data, which means the largest changes in official series' growth rates typically occur early in each calendar year, especially when compared with weak (or strong) performance in the year prior.
Unfortunately, neither helped facilitate a real estate rebound early in 2015, despite all earlier signs to the contrary. On the policy side, China eased housing market policy at the national and regional level throughout 2014, including mortgage policy adjustments late in the third quarter. Moreover, housing construction saw an enormous contraction during early 2014 that persisted throughout the year (again, partly due to cumulative data). The deepest contractions in 2014 were early in the year, with modest growth later on. That indicates that the housing construction sector will find it even more challenging to climb out of the deep contraction it is in as the year progresses, barring a major change in policy.
Of course, that does not mean that no housing units will be built in 2015 – far from it. Last week, China announced a target of 7.4 million public housing units breaking ground in 2015, matching the actual level of public starts in 2014. That target is a sign that China will maintain a high level of housing sector construction to keep demand for low-skilled migrant labour and access to affordable urban housing, but will not drastically increase public housing outlays beyond already historic highs. Notably, in 2014, China's industrial sector and real estate development sector were the largest source of slowing GDP growth, while the construction sector's contributions to real growth were steady.
Industrial sector woes deepen
With the housing sector slowdown so goes industry, where many segments developed over the last decade to almost exclusively service the housing market boom. Within manufacturing the largest decelerations where in electrical generating machinery, panel glass, caustic soda, and transportation equipment (including railways). By ownership, state-owned enterprises and domestic shareholding enterprises experienced the deepest declines – the first group is known for its high exposure to heavy industry. In addition to the heavy industrial sectors mentioned above, growth in semiconductors output slowed by half, while total export receipts by industrial firms slowed from 7.3% in December to 4.2% in January–February. The large divergence between trade growth and industrial export receipts growth highlights the degree to which seasonality around the Chinese New Year affects some sectors dependent on government offices being open – for example, customs clearance at ports. Therefore, the export receipts slowdown further adds to scepticism regarding the reliability of the lofty customs data for February, which is expected to moderate considerably in the coming months.
Outlook and implications
China's economy clearly weakened during the first two months of 2015. Only trade growth rates were strongly positive, and in that case almost entirely due to seasonality and weak base effects from a 2014 contraction. The continued housing market contraction is especially concerning; every prior real estate downturn in China since 1999 was broken by a shift to the New Year. Failure to grow on top of already deep contractions in 2014 signal that real estate is unlikely to provide any relief for real GDP growth during the first half of 2014, and possibly much longer.
Over the last three years, China experimented with varying levels of mini-stimulus, aimed at stabilising rather than accelerating growth. The first data for 2015 sharply increase the chance of substantially more stimulus on the horizon. If the government mirrors the stimulus programme of 2009 it may boost growth this year, but would certainly deepen long-term risks. Conversely, the government could stand by as the real estate and heavy industrial sector unwind their excesses. A mix between the two is the most likely policy choice. The exact size and duration of monetary and fiscal stimulus, and the degree to which it impedes rather than facilitates long-term reform priorities in China, will shape China's medium-to-long term outlook as well as growth this year. First among the reform priorities is allowing the market to act as the primary decision maker in the economy – including when some industries should contract or close. IHS expects growth of 6.5% in China in 2015.