Allan von Mehren
Danske Bank A/S
- China has today eased policy further aiming its ammunition at the ailing construction sector. It has cut the down payment for first-time buyers from 25% to 20% (in cities without purchase restrictions such as Beijing and Shanghai). The down payment was also reduced last year, by 5 percentage points, in an attempt to support housing.
- A major reason behind the economic challenges in China over the past couple of years has been a significant oversupply of houses, which has pushed the construction sector into a very hard landing following years of construction investment of around 20-30% annually (see chart below). Hence, in our view, a key to a recovery in China is to deal with this housing oversupply. Since November 2015, this has been a key policy priority. On 10 November 2015, president Xi Jinping said the government needed to ‘draw down the housing inventory’.
- Part of the problem with big overcapacity in the steel, cement and aluminium industry relates to the construction stagnation. Hence, turning construction is also key for dealing with industry overcapacity and bad loans in these sectors and so on.
- Chinese home sales picked up in 2015, rising to close to 15%. This has led to a reduction in oversupply but it is still not back to normal. With the new measure, the government aims to speed up the reduction in oversupply by supporting home sales.
- There is a small light at the end of the tunnel in housing starts as seen in the chart below but the y/y rate is still slightly negative.
- Supporting construction and dealing with overcapacity has a much higher priority in Chinese policymaking than boosting exports. This is another reason we do not see a devaluation as a likely move from China, as it would also risk destabilising the Chinese economy due to capital outflows and a global currency war. In contrast with cutting interest rates, it also does not risk adding to the depreciation pressure on the CNY.
- A moderate recovery of the construction sector is part of our case for a moderate improvement in the Chinese economy outside services. This should help ease the market fears of a Chinese recession.
- The hard landing in Chinese construction is a major reason global metal prices have been suppressed. For example, around 50% of global demand for steel, copper and aluminium came from China before the construction slowdown hit. The base metal markets have reacted positively to the news today, with prices up 1.0-1.5% despite overall negative risk sentiment today.
- A turn in base metal prices would also help to reduce global deflationary pressures. Hence this should have a positive impact on global inflation expectations and bond yields
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