According to the Telegraph, optimists hope that China’s urbanization drive will stoke demand for years to come, but this too is in doubt. (We began our coverage of China’s teetering property market in Part One here.)
China’s workforce contracted by 3.45 million in 2012 and another 2.27m in 2013 as the demographic crisis began to bite. The number of fresh rural migrants to the cities each year has already halved from 12.5m to 6.3m since 2010. Nomura Bank is quoted as saying there could be net outflows by 2016.
The Chinese government is trying to argue otherwise, in their “National New-type Urbanisation Plan” released last weekend, in which they announced a massive building program to create low-cost housing, the urban environment in which to sustain them and the infrastructure to connect the country down to the smallest town.
As part of the planned infrastructure program, the FT reports that Beijing plans to ensure that every city in China with more than 200,000 residents will be connected by standard rail and express roads by 2020, while every city with more than 500,000 residents will be accessed by high-speed rail. Yet more airports will be built to ensure that the civil aviation network covers about 90% of China’s population.
The plan also calls for the redevelopment of 4.75 million household units in rundown shantytowns this year alone, with an expected total cost of Rmb 1 trillion ($163 billion), according to state media reports quoted by the FT. The paper supports the prospects for a continued construction boom by saying that only about 54% of China’s population lives in cities, compared with 80% in developed countries and roughly 60% for developing countries with similar per capita income levels as China.
The government’s plan aims to lift the urbanization rate to 60% by 2020, but a failing private construction sector will not be in a position to support such targets if the slide in their fortunes continues. A government-sponsored infrastructure boom may support commodity demand – demand for steel and iron ore, copper and oil – but if this is to be achieved by the private sector on the back of cheap and ready finance again, it will be compounding the problems which have already built up in the system.
If the aim is to merely liberalize existing laws to allow illegal workers from the countryside to become legal city dwellers, that could “migrate” 100 million workers from the country to the cities in a stroke, but wouldn’t actually increase demand for housing – the workers are there already. China’s Hukou system has been a barrier to the movement of labor for decades, and its very existence may be part of Nomura’s suggestion that we may see outflows by 2016; those workers residing in the cities illegally who lose their jobs often drift back the countryside when they lose employment.
What This Means for Metals Demand
So China faces a two-pronged problem, runaway residential construction has left the country with a massive overhang of floor space and a sector struggling under debt, at least in the majority of medium and smaller cities, resulting in falling house prices.
That alone is a major financial risk, but add in the knock-on effect of much slower residential building plot sales for local governments this year, and city and local state finances could be under strain too. Beijing’s infrastructure plans could support commodities demand in the medium term, but much remains to be seen in the detail before these plans become reality.
Meanwhile, the smart money is moving out of residential property and that says a lot about its prospects in the short to medium term.