The cost of homes in China is falling! And it is falling at a sharper and sharper rate. Good news for those in Shanghai and Beijing hoping to join the property ladder, and bad news for Chinese property developers, but also those further afield too.
According to calculations made by Reuters (based on data from the National Bureau of Statistics in Beijing), “New home prices fell in 69 of 70 cities by an average of 5.1 percent from the year-ago period.”
This is a result of natural supply and demand, as real estate agents at Frank Knight LLP explain, “The developers have two to five years of stock to clear. So until that has been cleared, prices aren’t going up any time soon”.
This has already sent shock waves through the building industry in China, causing several major bankruptcies, including the firm Cement Shen, whose development ‘Peach Blossom Palace’ resulted in the companies collapse with debts of more than US$563m. There are now reports that Shenzhen-based Kaisa Group might also fold, owing in excess of US$10bn. Although with a sum that large, major moves are being made to restructure the debt.
When houses prices start to fall, it naturally slows down the number of new houses being built. This in turn, causes a reduction in demand for anything used in the building industry. And with a building industry as large as China’s, that affects global demand and global prices, especially for chemicals.
As Paul Hodges of ICIS states, “…chemical/plastic markets have (always) provided vital early warning of the problems ahead.”
Data from Global Trade Information Services shows that for the first time in 8 years, China is a net exporter of PVC. This is due in part to the fall in demand in the home market for many of the goods that are made with PVC, such as windows, cables and pipes.
As Hodges explains, “The property bubble caused net imports to soar to 1.5 million tonnes in 2009/10. Imports then began to be replaced by domestic production, (so that) by 2013, production had risen to reach 15MT, although new government policies meant demand was slowing. Last year production grew to 16MT – but only because exports nearly trebled from 400kt in 2013 to 1.1MT today.
Thus China has now become a net exporter of PVC. This is a major change from the previous position, where it had been the world’s largest importer.”
This has affected the balance of trade around the world, as China’s fall in demand and the increase in production has destroyed other regions export markets. For example, South East Asia is now a net importer of PVC, compared to the 240kt of exports it reported in 2009/10. Whilst in North America, despite its shale gas advantage, the export market has fallen to zero.
It is therefore wise that industry traders and manufacturers all take note of the price of property in Guangdong, not for reasons of relocation, but as a matter of business survival.