A bleak view of China’s property prices/commodities nexus come from Stephen Wyatt, commodities commentator for the Australian Financial Review.
Wyatt argues that if Chinese policy makers “over-tighten” amid their efforts to cool the property sector, resulting in significant contraction in the Chinese construction sector, commodity markets could be “crushed” by the dual forces of a debt-burdened Europe and a fragmenting China.
The doom-and-gloom view is not far-fetched, he argues, given that commodity prices are already drifting lower amid concerns that Europe’s austerity measures could derail prospects for a eurozone recover – and as China’s policy moves to cool its hot property sector begin to bite.
Indeed, as the FT reports on Tuesday, commodities prices plunged to a seven-month low on Monday as oil and metals prices slid amid fears that Europe’s debt crisis would damage global economic growth and resultant demand for raw materials.
Wyatt cites research from Standard Chart Bank that shows (see graphs below) that property prices are falling very quickly in China’s tier one cities. Prices in Shanghai, Beijing and Shenzhen fell on average more than 20 per cent week-on-week during the first week of May, usually the peak sales period of the year given the national holiday.
In tier two cities, transactions fell sharply week-on-week in the first week of May, including Chongqing (down fell 24 per cent), Wuhan (19 per cent), andn Dalian (23 per cent) while prices have also fallen, by an average 18 per cent in the same period. Even so, sales remain strong and prices are still 6 per cent higher year-on-year in the first week of May, the research notes.
For global commodity markets, the twin issues are whether Chinese policy makers can engineer an orderly slowdown in the property sector without severely hitting construction activity and whether European debt can be successfully managed and steadily reduced, notes Wyatt. He continues (our emphasis):
It is a very uncertain time. Prices are falling… The euro is trading around its lowest level for 18 months, crude oil has fallen more than 15 per cent over the past two weeks to its lowest level in three months and copper has fallen more than 12 per cent in the past month.
Iron ore delivered to China (62 per cent iron content) has fallen from near $US190 a tonne a month ago to below $US170 a tonne today and Chinese steel prices, especially prices of construction steel are sliding lower as well. Rebar prices in Shanghai are down about 7 per cent over the past month but still up 30 per cent from their early 2009 post global-financial-crisis lows.
But with crude oil still above $US70 a barrel, if only just, and copper over $US3.10 a pound, with iron ore trading north of $US160 a tonne and steel prices in China still buoyant, commodities remain at historically lofty levels. In other words, additional negative news can still drive these markets a lot lower.
For now, notes Wyatt, most analysts think the collapse of Chinese commodities demand “unlikely”, as China’s policymakers are likely to succeed in efforts to cool the property market without derailing growth.
Among the latest utterances by China-watchers, Wyatt notes, both Andy Rothman, China macro strategist with CLSA, and StanChart economist Jinny Yan have argued that China’s housing market remains fundamentally healthy, with demand led by owner-occupier buying and fuelled largely by cash, not debt.
Like Rothman and Yan, many China analysts agree that once Beijing metes out the pain to property developers, over say the next six months, and sees a slower pace of economic growth in the fourth quarter, it will begin lifting its curbs, and property sales volumes will once again rise.That, for example, seemed to be the consensus view at CLSA’s China conference on Tuesday in Shanghai.
In coming months, however, commodities and Chinese property seem set for some “interesting times”, Chinese-style.
Related links:
Chinese property developers begin price war – FT Alphaville
China demand concerns hurt iron ore – FT
The China property splurge, up close and personal – FT Alphaville
More on that overheating Chinese property market - FT Alphaville
China’s liquid real estate bubble – FT Alphaville