SocGen on China’s construction bubble

Societe Generale (SocGen) has released a fascinating 50-page research report entitled Chinese construction bubble – Preparing for a potential burst.

The report argues that the exponential growth of real estate and infrastructure spending in China is unsustainable and a painful adjustment will occur sooner or later, although SocGen acknowledges that it is impossible to predict when the slowdown or correction will occur.

Below are some of the key extracts and charts from the SocGen report.

We believe that the exuberance of the Chinese construction market is obvious. Various data, such as cement consumption and the number of sqm built within a year, indicate that China is running ahead of its development curve. Thus, Chinese construction needs to slow down to avoid a larger construction bubble with many underperforming projects. However, as we have seen with the 12th five-year plan, the central government is unlikely to promote such a policy as construction remains the easiest way to achieve its internal GDP growth targets and to reduce the risk of political unrest among the population. We thus face difficulties in determining the external trigger point that will lead to a slowdown or correction in Chinese construction activity…

China is undoubtedly a capex-led economy. Investments represented 46% of the country’s GDP in 2009 while private consumption was only 36% of GDP… Such reliance on investment is unprecedented among larger nations and all countries that have experienced a significant investment boom since WW2 have all gone through a recession sooner or later.

While we understand that this high share of investment is allowing China to catch up with other developed countries, the length and magnitude of China’s boom gives cause for concern. The key issue with such an enormous investment boom is the diminishing efficiency of investments…

Construction – A key component of China’s GDP growth:

In 2010, we estimate China spent more than $1,000bn on construction (including residential /non residential real estate and infrastructure), representing around 20% of its nominal GDP, or almost twice the world average as the left-hand chart shows. Construction spending in China grew at an outstanding rate of 17% per annum over the last 20 years, rising from $50bn in 1990 to around $1,100bn…

A major driving force behind the surge in construction spending in China was the sharp increase in the country’s urbanisation rate over the past two decades…

Real estate – Long-term demand is there but how to sustain current development rates?

Soaring house prices in Chinese cities have driven widespread concerns over the emergence of a large property bubble that could burst any time. The pace of Chinese real estate construction is unprecedented, raising questions about the balance between supply and demand for housing. Real estate investment growth averaged 25% over the past eight years and growth even increased to 34% in Q1 2011.

Rome was not built in a day but in China it takes less than two weeks!

China has built the entire European housing floor space stock (limited to Czech Republic, Sweden, Portugal, Greece, Poland, Netherlands, Spain, UK, Italy, France and Germany) in less than 10 years. Within 10 years, China has built slightly more than 16 billion sqm of completed residential floor space, enough to provide accommodation for 600 million people assuming 30 sqm per capita. Over the same period, the urban population increased by just 185 million. With around 1.8 billion square metres of new residential floor completed in 2010, China has built the equivalent of Spain’s housing floor space stock. This construction has already provided accommodation for 60 million people while the urban population only increased by c. 20 million. If China were to keep its current construction rate within the next five years, the 9 billion sqm of new housing built would provide accommodation for 300 million more people. China would thus have the available floor space stock to accommodate an urbanisation rate of 65-70%… the IMF’s forecast for 2030!

Although we understand the need for more housing construction as the rural population gradually moves to the cities, we are concerned by its development pace. At the current growth rate and assuming that the average number of people per household remains flat, the residential floor space per head would reach 40 sqm by 2015, above that of the UK or Germany…

Elevators & skyscrapers – Examples of real estate exuberance:

To further highlight the exuberance of the Chinese real estate market, we looked at the elevator industry. Sixty percent of the world’s new elevators go to China. The number of units delivered reached more than 300,000 in 2010 against around 10,000 in 1990, a compound growth rate of nearly 20%. The most surprising data is that, with an installed base of around 1.6 million units, the current delivery rate represents around a 20% increase in the installed base per year. Such an increase in the installed base looks unsustainable in the mid-term.

Real estate analysts often assess the pace of real estate construction by looking at the number of skyscrapers built around the world. Today China can boast nearly half of all skyscrapers due for completion worldwide in the next six years. Currently China has more than 200 skyscrapers (defined as a building over 150 metres tall) under construction, which is equivalent to the total number of skyscrapers in the US. In five years time, China is expected to have 800 skyscrapers. Skyscrapers are often seen as a trophy building yielding low returns and thus can be viewed as evidence of construction exuberance.

Infrastructure – Is there anything left to build?

We conclude that a lot remains to be done…but also that a lot has already been achieved and, as with real estate, China seems to be running ahead of its development curve. The pace of infrastructure building in China has been unprecedented and looks unsustainable in our view…

China has almost 60 metres of paved roads per car while a similar ratio for developed countries stands between 15m and 35m. Obviously, the number of cars in China is expected to increase over-proportionally within the next few years, albeit it is likely to be insufficient to bring China back to international standards.

The Chinese highway network is almost on a par with that of the US despite having four times less cars. Under the 12th five year plan the network is expected to expand by a further 34,000km, which is more or less in line with the 33,000km of roads added under the 11th plan…

Cement consumption highlights significant over-construction:

A final example of an over-exuberant Chinese construction market can be found in the country’s cement consumption. In 2010, Chinese cement consumption exceeded 1,800 million tonnes, representing around 55% of worldwide consumption…

Per capita, the picture looks even more worrying. Indeed with average consumption of 1,400kg per head, China stands well above the world average ex-China of 300kg…

Spain represents an interesting example for assessing the outlook for Chinese cement consumption. Indeed, Spain had an over-proportional consumption per capita for years before it crashed with the financial crisis and the bursting of its construction bubble. Spanish annual cement consumption peaked at nearly 1,300kg per capita in 2007, ahead of the financial crisis. Four years later, Spanish consumption stands barely at around 500kg per capita, a 60% fall from its peak. Could China follow a similar pattern? Our analysis indicates that such high cement consumption is unsustainable and all countries where cement consumption has exceeded 1,000kg per capita for a number of years have gone through a construction crisis sooner or later.

Unconventional Economist
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  1. Here is a link to the report:

    And here is Society General predicting China doom two years ago:

    Haven’t time to read the report at the moment, but will later. Probably nothing new. Same old, same old – the bubble will burst. Probably will. Hasn’t yet. Reports of China’s economic death are premature (although much desired by some).

    China’s property bubble may burst tomorrow, next month, three month’s time, 2012 – and when it does, it does. We’ll deal with the fallout then. It would be pretty unBEARable to endure almost daily forecasts of its impending ending!

    It ain’t over, until it’s over.

      • Perhaps when you have some control over it – but we don’t. The ‘timing’ will happen when the timing happens. Soc Gen foretold of disaster two years ago. You can’t move forward when shackled by fear. So you adopt adopt a deeply philosophical view and get on with business – and business is very good, until it isn’t.


    • What’s less BEARable is China Fanboys telling you that it will last forever.

      Sadly, the RBA, Treasury, government and opposition are infested with Fanboys who are convinced it will last forever, so we sit idly by while our economy hollows out and our industrial base erodes.

      Imagine if the Americans closed down Silicon Valley in 2007 because there was so much more money to be made by flipping houses. That’s what passes for “policy” in Australia these days.

        • One is lacking talent, fullstop. One has a beacon of talent, but unlikely to exploit it.

          • Poor old Malcolm is left the job tearing shreds off the NBN — which is looking like a hopeless task after yesterday — when should be running the country.

            Oh but of course, you meant Christopher Pyne!

          • Are you sure? I thought Dennis Jensen would be more your style.

            Malcolm is probably the most rusted-on alarmist in the Parliament. I reckon he’s more alarmed than Bob Brown.

      • Lorax

        I don’t think anyone is saying it will last forever. It won’t. (Maybe for a few decades (if Saul Eslake is right) but there will be serious difficulties along the way.) But meanwhile, get on with it, a primer in the resources approach.

        Oh, as you well know, our industrial base has been in decline for decades – something to do with globalisation? And one of the reasons things are tough in some parts of the economy right now is that people have turned off the home ATM. They’re not spending as freely – again nothing to do with resources but a lot to do with peak debt.

        Unfortunately it is going to be very easy for the disgruntled to point an accusing finger at resources whereas really its unfortunate case of timing – FutureBoom economy meets Peak Debt economy.

        I understand some sectors will feel pain due to the high dollar but at the moment that is just life. Consumers will be relieved that due to the high dollar they are not being crucified at the petrol pump, that they can buy that big tv, that laptop or whatever at reasonable prices. That utilities across the country are in the process of imposing hefty increases in charges and the government is hell-bent on the enforcement of a carbon tax – again hitting the hip pocket (at least in peoples perception) is not the fault of resources.

        Currently we have low unemployment, low-ish interest rates, a generous social welfare system, a good (by most standards) health system available to all, acceptable free public education, all-in-all a good quality of life – but FFS, you’d never guess it to read the moaning that takes place here.

        To quote someone else – “We’re in a sweet spot”.

        • Do you pay $40k a year in mortgage payments? $10k a year in other credit ‘payments’? $20-30k in ‘living’?

          Debt peonage is a sweet spot? I’d call it slavery transitioning hell.

          I suggest you visit Ireland and talk to the locals (good to bad very quickly) and chat to people that were working and studying in the 60s (Nirvana if you perceive Australia is in a sweet spot*).

          *with about $30,000 in overseas private debt owed by every man woman and child funding your illusion.

        • Jesus Fanboy, its not just manufacturing. I’m about as far away from manufacturing as you can get, and I’m getting well and truly hollowed out at the moment.

          HTH are we gonna sell services to new Asian middle class when all we know how to do is dig holes and build houses?

          For people living in the tourist areas of Queensland it has everything to do with the strong dollar and Futureboom! I’m not discounting over-indebtedness as a factor, but if we weren’t living in a Quarry Economy chances are people in tourist towns would still have an income and could afford the mortgage repayments.

          Oh and yeah, utility prices are up because of a yet-to-be detailed, yet-to-be legislated, p*ss-weak, over-compensated carbon tax. Its got nothing to do with overinvestment in infrastructure like the energy regulator says.

          Honestly you talk some drivel sometimes.

          • Lorax

            I have never suggested we’d be able to sell services to the Asian region. I have little faith in the long-term global viability of our services sector. Have always questioned any reliance on it.

            My view is, given we operate in a globalised world and in the current circumstances, the only thing we have to offer (that has any potential of generating tens of billions in windfall revenue for the nation) is resources – and excluding various collapse scenarios, is the only sector likely to do so for some time.

            It is unfortunate that in times of transition, conditions are rarely favorable to all sectors. That is something for government to manage, surely.

            When(if) collapse comes – we will really be in a position to empathise with the Irish.

          • I don’t run the standard Treasury line. Treasury with a twist – perfect for a Friday evening.

            To my mind, Treasury has little alternative to do other than what they are currently doing. They have successfully kept a lid on consumer spending and property – simply by jawboning – and have not had to raise rates at all. They are in the challenging position of managing the end of the property boom via gentle deflation whilst simultaneously dealing with onset of the mining boom. A balancing act indeed.

            I have often been quite bearish in my views in the past but now, what the hell, run with it. Really, there appears no alternative – not any that I can fathom. I hardly need remind of my sophisticated philosophy – It ain’t, over until it’s over – in all honestly – what is the alternative, right here, right now?

            Which is pretty much what Treasury are doing – when it comes to services (one of the surviving sectors in the Great Transition) I’m a doubter. Unless we can develop niche positions for ourselves, absolute global excellence, services don’t really stand a chance in a region of a couple of billion, millions getting very good educations, millions well able to provide services, millions who speak the language. Services – I just don’t buy it.

            So, Treasury with a Twist.


      • +2

        Denial is rampant.

        What is concerning is the ludicrous comments and thought that there is nothing we (individuals, govt and corporate) can do about it…just take it in the blurter and whinge (and scream for a taxpayer funded bailout) – the Australian way.

  2. Average price per SQUARE METRE for property in Beijing is $US3,542 and the average annual wage in Beijing is US$7,411.20. Multiply the price per square metre by the area of the apartment and you can see that there is a serious affordability problem.

    Increasing interest rates to suppress their high inflation will do a lot of damage to the Chinese.

    • so will credit rationing, as invariably those who allocate it are going to do so to SoE’s only, which isn’t going to be the most efficient allocation of credit.

      Much better way to control inflation is to float the currency imo.

    • This is a CLASSIC bubble.

      There is so much inflation in the “land value” before anything gets offered to buyers of apartments, that the potential buyers can’t afford them.

      If this was an honest free market construction boom, the apartments would be affordable. The Chinese have gone in for “capitalism” in its worst form, not its best form.

  3. The paved road per car chart is the clincher. It makes an absolute mockery (a MOCKERY!) of the Fanboys claim that China is under-developed in terms of infrastructure.

    They are building infrastructure WAY faster than they need to.

    Now everybody, can you tell me what N.P.L. stands for?

    • OK after that stuff-up! I’ll go Newly Preferred Lending – following Party edict that such loans, clearly intended for the greater glory of the Chinese People and the further enhancement of the Beautification and Urbanisation policy of the People’s Republic, and as such, are forgiven.

  4. MontagueCapulet

    So they built 1.8 billion sqm of residential floor space in 2010. That’s 30 million 60sqm apartments, housing 90 million people (that’s the average size over there).
    At that rate, they’ll build another 120 million by 2015, add that to the 64 million apartments that are supposedly already empty and you get 180 million empty apartments, which could house 540 million people, which is greater than the 400 million people who are expected to move to the city by 2030.

    Sooner or later the government is going to realise that they actually have enough apartments already, and the rate of building will slow down to maintenance levels.

    When that happens, Chinese iron ore consumption is likely to drop significantly from the current 1.5 billion tonnes per year. And remember they produce 900 million tonnes locally, so the effect on imports could be dramatic.

    • MontagueCapulet

      The Chinese government announced they would build 36 million low-cost apartments over the next 5 years, with ten million in year one.
      This serves two goals – helps make apartments more affordable by increasing supply, thus relieving social pressures. And also keeps the construction gravy train going for the developers and local government.

      The implication is that they are DELIBERATELY creating an oversupply of apartments over the next few years, because cheaper apartments will reduce social tension brought about by inflation and unaffordable housing. Also, local government+business+ mafia are addicted to property development revenue, so the central government is putting off the day they have to deal with the construction bubble.

      If these are the drivers, I expect the construction boom to continue another 2-3 years even as prices moderate, until the apartment oversupply is in the 120-150 million range (up from 64 million empty apartments currently). They will keep building even as prices gradually decline because a moderate drop in prices due to oversupply is one of their goals, and they just can’t kick the construction habit.

      Around 2013-2014 the pressure to build more appartments will come off as supply becomes generous, and the complaints from investors who have lost money on falling real estate will become numerous, and price stability will become the new goal, so they will mandate a cutback in construction to stabilize the market.

      This wil result in the demand for seaborne iron ore dropping a couple of hundred million tonnes just about the same time as several million tonnes of new supply comes online in the Pilbara, Brazil and Africa.

      • When that additional supply comes on loan – price negotiations will be like those for coal in the 1980’s.

        Please Nippon Inc don’t be cruel.

        Drive up investment in supply and then drive down prices

      • Alex Heyworth

        If we really are the Lucky Country, demand in India will start to take off at about the same time China slows down.

        Aussies always did like a gamble.

  5. Lighter Fluid

    I’ve started to wonder if China’s elite is attempting to position themselves to enforce a “Beijing Consensus” on the rest of the world.

    It is quite apparent that there is a lot of debt out there in the SoE’s, govt financing vehicles etc, which is implicitly government backed but remains off-balance sheet. I remember reading that if all of this was to be accounted as public debt, then the Chinese government has a debt to GDP ratio in excess of 50-80%.

    We know China is positioning the Red Back to play a greater role in global trade, but what if the plan is for the Yuan-based global reserve currency? Obviously to do so they would need to dramatically increase the issuance of Yuan-based bonds. There’s plenty of hidden debt that is just waiting to be bailed out.

    What I wonder, is whether China is attempting to position the Yuan so that in future they can become the world’s debtor nation – rescue the bad debt by a massive issuance of CCCP-backed bonds – just as the US has been for the last 40-odd years. Is it too simple that China (and their US-trained financial/economic elite) are just trying to replicate the American economic growth trajectory of the last 100 years?