Over the holiday period, the FT had another confirmation piece of the MB view that China is set to slow, particularly in the most commodity-intensive sector of real estate:
- PBOC has instructed banks to cut credit availability.
- Macquarie says concerns about virus-impacted growth are gone and structural reform has resumed.
- Chinese real estate sales surged in January and February year on year.
Sales and investment may have surged year on year but that is immensely flattered by base effects. More importantly, floor area starts actually fell compared to 2019 (blue circle makes the spot):
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We will need to see more data for a few months to confirm if this is a blip or trend. Especially so given new year Chinese data is dodgy even by Chinese standards.
There is a policy trigger for this in the already rolled out “three-red lines” policy targeting large developer leverage. Societe General wraps it up:
Deleveraging to resume
- Budget deficit and special LGB issuance quota both larger than expected
- Still, broad fiscal deficit is set to drop from 9.3% of GDP in 2020 to 7.7%
- No broad tax cuts; only targeted measures for MSEs, innovation and employment
- Further increases in direct fiscal transfer from central government to local public services
- Moderating infra, focusing on regional dev, urbanisation & tech
I am also quite concerned about the “pig in the python” of catch-up growth in Chinese realty. During Q4, 2020 Chinese steel demand skyrocketed. My hypothesis for that is that construction projects stalled during COVID restarted alongside a lot of new stimulus building combining to deliver a short-term boom.
If so, then there will be an equally sharp drop off in building activity in 2021 as project completions skyrocket just as the stimulus is curtailed.
This is one reason why iron ore looks vulnerable to major price corrections in H2, 2021.