China’s property market is a giant bubble and Australian analysts have failed to understand its implications.
OUR futures are tied to steel demand in China, and what a beautiful symbiotic relationship this is. The Chinese want more and more steel production, and we supply more and more iron ore at higher and higher prices. A few weeks ago we heard Marius Kloppers of BHP Billiton state that the Chinese would demand twice as much in 20 years.
Will the good tidings never end? Well, it seems that they have already, on March 5 2010.
This date marked the start of the 18th Chinese National Congress and, in his agenda-setting opening speech, Premier Wen Jiabao called on the audience to “resolutely” abort the property bubble. The bottom line is that China has not got enough people to put in all of its buildings at the current price.
In an attempt to maintain both economic growth and the communist politburo at the commanding heights of the economy, they may emphasise technology and creative industries.
For Australia, it doesn’t matter what China moves the economic incentives towards, we are more concerned with what they will move the economic incentives away from. The answer is, enterprises that use a substantial amount of steel.
A study of excessive capacity in office buildings, by Jim Chanos on Bloomberg, drives the point home. Using round numbers, China has 1 billion inhabitants and is currently building 3 billion square metres of office space. That’s three square metres of office space for every man, woman and child.
Enough? They already have up to 50 per cent vacancy rates in office space in Beijing, according to Jack Rodman of Global Distressed Solutions LLC.
The lobbies of new, empty skyscrapers are used as bicycle racks to house the bikes of construction workers who are putting up another unleasable skyscraper next door.
Geoff Dyer wrote a great article in The Financial Times titled, “China: No one home”, in which he says residential construction is in the same nonsense state. Build it and they will come? Not with a one child policy. There are simply not enough people to fill the new apartments. The average urban-dwelling Chinese family already lives in a larger, newer apartment than any other Asian nation, yet tens of millions of apartments are empty.
We need to look at Chinese demographic trends to really understand this. In 1994, the laws governing internal migration were eased. In 1995, about 5 million peasants moved to the cities. By 1997, 20 million moved from the countryside to the cities.
A couple of years ago, the stream slowed. When rice prices went through the roof it seemed to stop altogether.
The relative benefit had been narrowed to less than the train ticket, although there will probably be a new wave as the unpopular restrictions are further removed.
On a per-capita basis, the Chinese consume virtually as much steel as the Americans did in 1972, according to the IMF. That was an important year in the American steel industry because that was when their steel consumption peaked.
China’s population, crimped by the one child policy, will only grow by a handful of per cent between now and 2025, the lion’s share of which will be in the over 65s cohort.
Then the Chinese population will be ageing at the fastest rate in the world and declining outright.
According to George Magnus’ brilliant The Age of Aging, the population of the Chinese labour force is peaking somewhere between 2009 and 2011 and the numbers between 15 and 60 years old will fall by around 60 million between 2014 and 2024.
Sure, the Koreans and Japanese had a much higher peak in their per-person steel production, but their steel industries were disproportionately geared to exports; relatively small countries exporting to a large world. China produces about 47 per cent of the world’s steel.
But what of all the goods China produces and exports that contain steel? This is the first step in a long road of defending a hollow argument. Korea and Japan also export a lot of things containing steel.
For Marius Kloppers to be right, each Chinese person would have to double their consumption of steel. That just isn’t going to happen. Not with steel consumption already at historic peaks. Not with scores of half empty and some completely empty cities, built because each preceding building banked profits.
Senior Chinese officials have said they know they must change the mix of their economic activity. They have done it before; it was during last year’s National Congress that they switched incentives around to get into this mess.
And they should. I think they will. The implications are obvious.
Roland Nelson is a Perth-based economic consultant.