How much of the Chinese growth slowdown is just about construction?

Andrew Batson thinks it is simpler than many people make it out to be:

…these analyses…fail to even mention the most straightforward and direct explanation of why China’s growth is much slower today than it was in say, 2010 or 2007. It’s not like it’s a secret. From about 2003 to about 2010 China had the biggest construction boom of modern times and probably in all of human history. Then in 2011-12 the construction boom ended. That’s it. Really, that’s all you need to know. Well, you might need one more fact: housing and construction account for as much of a third of China’s GDP, once all their indirect linkages to other sectors are considered. I think a housing downturn explains very well the timing, severity and distribution of the economic slowdown that has actually occurred.

Here is the full post, which also criticizes the idea of the middle income trap.  I would add two points, which may represent a deviation from Batson’s argument.  First, I don’t think the Chinese growth slowdown is as sudden as a culling of media reports might suggest.  Second, to the extent the contraction is sudden, it is perhaps Chinese investors have woken up to the idea of a risk premium, and realized there is no eternal ten or even seven percent growth to validate so-so quality investments.  The dynamics of information arrival can compress economic adjustments into “too short” a space, a common theme in business cycle theory and not an issue restricted to contemporary China.


I prefer a middle income trap to a poverty trap.

Of course, if every investor in Chinese financial assets were weighted by the size of her investment, there wouldn't be that many investors; in other words, a relatively few investors are, essentially, realizing capital gains by selling financial assets to each other. In the U.S., that phenomenon is compounded by the existence of many and large mutual and other investment funds. Financial markets today aren't exactly what Adam Smith had in mind. Sure, one can argue that consolidation increases "efficiency", but it comes at a very high price - instability.

In the US government has made saving money to buy old assets to drive up old asset prices a high priority, while making it more costly to build capital assets by forcing 80-100% of the cost of building new capital come out of profits with next to nothing coming out if the tax collector.

Further, building new capital assets purely out of profits reduces your profits because you end up with too much supply unless you cut the prices AND PROFITS - to unload what your investment out of profits creates. Case in point is the fossil fuel industry - Obama tricked investors into becoming too greedy and investing too much building new capital assets flooding the market with oil that has destroyed nearly all profits. Obama tricked everyone into believing that he was over regulating investment and drastically cutting the ability to build new capital assets, so everyone thought they had found a loophole around the regulation blocking investment. And Obama's propaganda machine of the WSJ and Fox News kept preaching the lies of Obama blocking investment to trick everyone into thinking they were so smart in finding ways to get around Obama's regulations.

Now everyone is spooked into thinking that too much new capital assets are being built which will destroy profits, so the only way to protect yourself is to stop building new assets because obviously the claims that Obama's regulations are preventing others from building assets is a lie, so building new assets is going on and the profits from old assets are going to evaporate as too much supply hits the market.

The worst thing that could happen is high gdp growth in the US because that means too much production and thus too low profits like in China and the fossil fuel sector.

Is this distinguishable from the "US slowdown caused by a housing downturn" narrative? Scott Sumner call your office.

Professor Scott would say that China's continued growth after the construction bubble popped proves there was no bubble ... at least he says that about the US .

Housing boom bubble pops have uncertain lags, but a big boom pop has a huge effect as so many "good times" go bad.

Don't know you can leave out the financial sector.

Real estate investment was growing over 20% in 2013, 10% in 2014, 1% in 2015 (going negative in 2H) and yet GDP only fell from 7.9% to 6.8%.

The construction boom ended in 2011-2012, but the govt juiced the market in 2013 and debt levels increased into late 2014/ early 2015. The coal, steel and copper industries started blowing up in 2011/2012, but the economic crunch from housing didn't fully commence until 2014. There's a lot of bad debt issued over the past 4 years to keep all of these industries from experience recessions, and now the yuan is paying the price.

+1 - either China's real estate investment bust is overrated, or the numbers are cooked.

Notice TC is wisely "hedging his bets" by saying "First, I don’t think the Chinese growth slowdown is as sudden as a culling of media reports might suggest. Second, to the extent the contraction is sudden ...". This is akin to a grandmaster in chess "giving back material" when ahead on material (a chess term) to achieve a won game. No need to be greedy if you are ahead.

Something that concerns Chinese construction, or lack of it, that people might find interesting. In or around 2013-2014 the world appeared to have passed through peak steel, peak aluminium, peak copper, and no doubt peak quite a few other metals.

Now to be clear, peak here refers to the amount of new metal mined rather than the total amount of metal used in manufacturing. Because these metals are highly recyclable the world can reduce the amount it mines while still having an increasing amount available for use.

Oil use is up with its fall in price, but since not enough new wells are now being drilled (or dug these days) to make up for depletion in old fields, its price will rise at some point and so we are probably at or near peak oil.

What does this mean for Cowen's favorite city-state, Singapore. Singapore's sovereign equity fund (Temasek) is heavily invested in China stocks (about a third of its portfolio) and no doubt has suffered significant losses (Temasek is private so the amount of the losses is unclear), while Singapore's general purpose fund (GIC) is heavily invested in Chinese real estate, including industrial real estate. Temasek claims its losses aren't significant because most of its stock is preferred (giving it first priority in liquidation). As for the real estate, losses won't be known until its sold. In any case, after decades of double digit returns, Singapore's sovereign funds may be headed for a fall.

So the Chinese have built a lot of housing that's currently unoccupied. So what? That doesn't mean it will be unoccupied forever. Isn't the new housing basically the "infrastructure" that Obamaphiles were advocating during tough times in the US? If you asked the Chicoms about this they'd say that they built the stuff when workers and financing were available and cheap. Now they can move their peasants in from the sticks and put them in apartments instead of shanty towns as they join the wage slave modern world. Why is a leveling of housing construction a sign of imminent recession?

China's population is slated to start falling in a few years.

Also, a lot of the empty buildings are luxury apartments valued at far above what most people can afford.

Does that just become deadweight loss though as prices are lowered until buyers are found?

Are the number of households about to decline in China? Particularly urban households? Even in declining US metro areas, new subdivisions are still being built.

No Chief Martel, the infrastructure the US Govt should probably be using ultra low interest rates to advantageously finance would include fixing bridges, water systems, power transmission systems, airports, and so on. It wasn't more housing being called for.

Actually, there was more housing being called for, that was the "housing bubble". Other factors caused it to explode, not a fall in demand for a place to sleep at night. Power transmission systems aren't completely a government entity just yet. Airports and regional water systems aren't, or at least shouldn't be, a federal concern but maybe the latter-day Henry Clay fans might disagree. In fact, they do, since federal encroachment on local affairs involves some return on confiscatory taxes, even though the return might well be in goofy passenger rail projects.

No, Chief, Obama wasn't president during the housing bubble, so Obamaphiles were not calling for more housing. Try again.

Your concussion syndrome is acting up again. After the 2008 financial avalanche the leftist/Keynesian chorus was clamoring for "shovel ready" infrastructure investment to put the unemployed to work. I forget who was the POTUS then but distinctly remember the words "shovel ready" on his teleprompter. I guess public housing, which is common in China and the US, is a consumer good rather than infrastructure. My mistake.

At this very moment Obama's administration is promoting 3% down mortgages for borrowers at a credit score of 620 backed by the income of people who are not on the loan. The mind boggles. I can understand the article of faith on the left that the government did absolutely nothing to encourage the housing bubble -- it's a bad argument, but it's at least an argument. This... this is just rank disbelief in the notion that lending standards even matter.

At any rate, low nominal rates could also mean this is a really bad time to spend other people's money, because there isn't much ROI out there.

China's population: the mid-range estimate of demographers is that China's population will continue to grow during the first half of this century, and then decline by over 400 million in the second half. 400 million! That's more than the population of the U.S. What that will mean to China and the rest of the world is uncertain, but what is certain is that it will mean something.

Why can’t Chinese construction be falling because they’ve entered the middle income trap, limited by their current oft-deplorable institutions? If they were floating their currency and embarking on a series of political reforms to bring them in line with South Korea and Taiwan, continued >5% real growth would be a lot more plausible. Unfortunately (particularly for the Chinese citizenry) they seem to be imposing more capital controls and cracking down on dissidents. And the air pollution numbers are still nigh-catastrophic.

The regional argument is unpersuasive because it relies on official RGDP data (which is not even comparable year-over-year according to its source) and an uncertain model of what catch-up growth should look like

Right now the best description of the Chinese economy seems to be inscrutable.

Comments for this post are closed