On China's (Putative) Existent Estate Structure Bubble... Facts Vs Narratives
September 19, 2018
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The consensus view inward many parts of global fiscal markets is that China's economic scheme is footling to a greater extent than a giant leveraged existent estate together with infrastructure construction site at present, coupled with an export manufacturing sector that is before long to accept its competitiveness undercut past times USA tariffs. Most value managers volition non touching Fe ore stocks, for instance, despite depression valuations, believing that it is entirely a affair of fourth dimension earlier steel together with Fe ore need collapses every bit an unsustainable stair of Chinese debt-fueled existent estate together with infrastructure construction comes to an inevitable end.
It's a seductive narrative. TV demo exposes accept been aired showing ghost cities.* Red People's Republic of China consumes 50% of the world's steel together with 60% of the world's cement.** Surely something is amiss. This is ane ground why Chinese stocks are so cheap, every bit are many commodity producers (especially coal together with Fe ore), Chinese materials companies, together with Chinese existent estate companies. Current levels of earnings, it is argued, are simply unsustainable.
I believed inward this narrative for a spell too, until I really started to facial expression at some facts/statistics. So let's facial expression at some facts, instead of anecdotes. China's residential existent estate starts concluding yr were almost 1.3bn sqm.*** Red People's Republic of China also has almost 1.3bn people. Consequently, this stair of novel starts (which has been roughly aeroplane over the past times v years) represents a run-rate of novel residential starts of entirely almost 1sqm per person. Interestingly, inward Commonwealth of Australia - a marketplace where the faithful perish along to deny at that spot is a belongings bubble, together with that analogies to the pre-GFC USA are inappropriate because - with other things - 'we accept no overbuild', new residential starts inward 2017 were running at a flake over 50m sqm, or almost 2sqm per somebody - twice the charge per unit of measurement of China (albeit that higher levels of immigration/population growth distort the comparing somewhat, together with identify sizes are larger inward Australia).
In Australia, the average identify size per residence/household is almost 250 sqm. Let's assume 150 sqm is to a greater extent than appropriate inward China, where aeroplane living is to a greater extent than common, together with let's assume an average family size of three people (roughly the global average). In the long run (i.e. ane time Red People's Republic of China becomes developed together with everyone tin dismiss afford a modern residence), Red People's Republic of China volition so require, shall nosotros say, almost 50 sqm of modern residential existent estate per capita. That agency that China's electrical current stair of novel residential existent estate starts is consistent with edifice a novel living infinite for every somebody at a stair of roughly ane time every 50 years. Furthermore, Red People's Republic of China has abolished its ane tike policy, together with population growth is currently running at almost 0.6% pa. About a quarter to a 3rd of the novel provide is so required to encounter population growth. Consequently, the actual construction run-rate is really closer to edifice a novel identify for every existing somebody every 60-70 years.
That's doesn't seem unreasonable to me - fifty-fifty though construction is running at 3-4x the charge per unit of measurement of population growth, because it is worth remembering that individual belongings ownership was forbidden inward Red People's Republic of China until the belatedly 1990s, together with that much of the housing provide earlier together with so was communist-era. Half of the population was also withal living inward rural areas, together with so nosotros are talking almost around one-half a billion people urbanising. That's billion with a majuscule B. China's major cities are also speedily evolving together with developing (witness Shanghai's skyline straightaway vs. 20-30 years ago), together with so a lot of former buildings involve to endure ripped downwards together with redeveloped, every bit economical growth proceeds apace together with dry ground values rise.
Part of the work Red People's Republic of China faces is that the ground has never earlier seen economical growth together with urbanisation locomote on at this stair inward a patch every bit large every bit China. Consequently, aggregate numbers seem extraordinarily large, but they are much less so when reduced to per-capita measures. For instance, fifty-fifty at 0.6% growth, China's population growth is almost 10m a year. That agency they accept to build ane novel Commonwealth of Australia every 2.5 years, together with ane novel U.K. every six years, precisely to maintain stair with population growth, allow solitary upgrade existing Chinese living standards. Red People's Republic of China has one-half a dozen cities with urban areas of unopen to 10m people that most people accept never heard of (see here).**** The numbers are genuinely mind-boggling together with unintuitive. Perhaps the Chinese are non every bit stupid together with reckless inward their administration of the economic scheme every bit many Westerners would similar to believe?
Now let's facial expression at overall steel demand. Red People's Republic of China comprises almost 50% of global steel demand, together with 30% of that goes into residential together with commercial existent estate construction; 30% into infrastructure development; together with the other 40% into 'other' (cars, appliances, industrial machinery, etc). Even if nosotros were to assume that Chinese need for steel for role inward infrastructure together with existent estate construction were to decline past times a 3rd inward the side past times side decade, that would trim back global steel/iron ore need past times entirely almost 10% (50% x 60% x 33%). Meanwhile, it is reasonable to await China's 'other' 40% of need to perish along to grow, every bit see degree need for identify appliances, vehicles, etc, rises (China's PPP gross domestic product per capita is almost US$10k - at that spot is a long way to go). Even if it grew entirely 25% cumulatively over the side past times side decade (i.e. entirely 2-2.5% pa), this would offset one-half of the decline inward need from construction, together with boost global need past times 5% (50% x 40% x 25%).
Furthermore, other countries similar Republic of Republic of India together with Association of Southeast Asian Nations nations tin dismiss endure expected to growth their steel need materially every bit they motility upward the economical evolution bend inward coming decades every bit well, spell steel need inward the European Union together with USA are also at a relatively depression economical ebb (and whatever migration inward manufacturing from Red People's Republic of China to the US, due to merchandise tariffs, volition also boost USA steel need together with offset whatever negative deport upon on Chinese steel need inward machinery). It is so reasonable, inward my view, to await 'rest of world' steel need to perish along to grow at say 2-3% pa (global population growth solitary is >1%). Rest of ground steel consumption should so grow past times possibly a cumulative 25% over the side past times side decade (at least), which would add together 12.5% to global need (50% x 25%). This would to a greater extent than than offset a pocket-sized decline inward Chinese consumption. After adding inward growing supplies of recyclable steel, global need for Fe ore should endure unopen to aeroplane over the side past times side decade, fifty-fifty if China's stair of existent estate together with infrastructure construction falls 1/3rd from electrical current levels (which would endure almost 40% per capita, adjusting for Chinese population growth).
Perhaps this is why the Fe ore cost remains stubbornly resilient, together with refuses to settle below US$60/MT? In the past times few months, the portion prices of many commodity producers, including Fe ore suppliers, has fallen sharply on growing pessimism almost the outlook for China's economical growth, together with yet the Fe ore 62pc benchmark fines cost itself has really risen from US$60/MT to US$65/MT. To many people's ears, narratives speak louder than data, but it is the information nosotros should focus on, together with Fe ore cost propose that the facts are non conforming with the narrative - at to the lowest degree non yet. Indeed, because Red People's Republic of China is probable to heavily get from hither inward reply to USA merchandise measures, it is fifty-fifty arguable that brusque term Chinese Fe ore/steel need may fifty-fifty surprise on the upside.
Time volition tell. I don't pretend to endure able to predict something every bit complicated every bit global steel demand; Chinese growth; or the Fe ore price. That's non how I invest. I don't effort to predict the future. I also would non deny that at that spot are fabric cyclical risks inward China, every bit at that spot are inward whatever economic scheme - peculiarly because the build-up inward debt over the past times decade has indeed been uncomfortably fast. I'm much to a greater extent than bullish on Red People's Republic of China structurally over the long term than I am cyclically inward the brusque term.
However, what I facial expression for is depression expectations together with asymmetry, where (1) the deport illustration is already widely believed together with priced in; together with (2) where at that spot is a plausible illustration that this prevailing bearish narrative could seek out wrong. And it is interesting to me that markets are projecting such a nighttime futurity for Fe ore/steel demand, together with yet it is non clear that such unqualified pessimism is warranted. And the same tin dismiss also endure said with honor to Chinese growth together with China/HK stocks generally.
I ain a 1.9% seat inward Ferrexpo (which trades at 3.5x earnings), which I accept owned since 2016 at an entry of almost 70p, together with also a 0.4% seat inward Fortescue Metals (which trades at a 5-6x cash spot P/E @ US$45/MT 58pc, although closer to high unmarried digits after including accounting depreciation inward excess of maintenance capex requirements), most of which I accumulated fairly late (at an average a footling below A$4). I also accept a much larger together with growing exposure to HK/China stocks overall, which I believe are also beingness heavily discounted on the footing that China's economic scheme is precisely a debt-fueled ponzi scheme.
LT3000
*Such every bit Ordos. Interestingly, reporters went dorsum several years subsequently together with were surprised to consider that many of the empty buildings were straightaway occupied, together with streets bustling with traffic.
**The gross Chinese cement consumption statistics facial expression much scarier than the steel stats, but they are partly distorted past times the fact that Chinese ofttimes uses concrete inward roads, rather than asphalt.
***1,280.98m sqm, according to the National Bureau of Statistics of Red People's Republic of China (see here).
****The next Chinese cities accept urban (not greater metropolitan) areas of betwixt 8-12m people: Harbin, Wuhan, Hangzhou, Xi'an, Shenyang, Dongguan, together with Nanjing. I'm willing to bet most Westerners (excluding those who invest inward or arrive at work concern inward China) accept non heard of at to the lowest degree some, if non most, of these cities.
It's a seductive narrative. TV demo exposes accept been aired showing ghost cities.* Red People's Republic of China consumes 50% of the world's steel together with 60% of the world's cement.** Surely something is amiss. This is ane ground why Chinese stocks are so cheap, every bit are many commodity producers (especially coal together with Fe ore), Chinese materials companies, together with Chinese existent estate companies. Current levels of earnings, it is argued, are simply unsustainable.
I believed inward this narrative for a spell too, until I really started to facial expression at some facts/statistics. So let's facial expression at some facts, instead of anecdotes. China's residential existent estate starts concluding yr were almost 1.3bn sqm.*** Red People's Republic of China also has almost 1.3bn people. Consequently, this stair of novel starts (which has been roughly aeroplane over the past times v years) represents a run-rate of novel residential starts of entirely almost 1sqm per person. Interestingly, inward Commonwealth of Australia - a marketplace where the faithful perish along to deny at that spot is a belongings bubble, together with that analogies to the pre-GFC USA are inappropriate because - with other things - 'we accept no overbuild', new residential starts inward 2017 were running at a flake over 50m sqm, or almost 2sqm per somebody - twice the charge per unit of measurement of China (albeit that higher levels of immigration/population growth distort the comparing somewhat, together with identify sizes are larger inward Australia).
In Australia, the average identify size per residence/household is almost 250 sqm. Let's assume 150 sqm is to a greater extent than appropriate inward China, where aeroplane living is to a greater extent than common, together with let's assume an average family size of three people (roughly the global average). In the long run (i.e. ane time Red People's Republic of China becomes developed together with everyone tin dismiss afford a modern residence), Red People's Republic of China volition so require, shall nosotros say, almost 50 sqm of modern residential existent estate per capita. That agency that China's electrical current stair of novel residential existent estate starts is consistent with edifice a novel living infinite for every somebody at a stair of roughly ane time every 50 years. Furthermore, Red People's Republic of China has abolished its ane tike policy, together with population growth is currently running at almost 0.6% pa. About a quarter to a 3rd of the novel provide is so required to encounter population growth. Consequently, the actual construction run-rate is really closer to edifice a novel identify for every existing somebody every 60-70 years.
That's doesn't seem unreasonable to me - fifty-fifty though construction is running at 3-4x the charge per unit of measurement of population growth, because it is worth remembering that individual belongings ownership was forbidden inward Red People's Republic of China until the belatedly 1990s, together with that much of the housing provide earlier together with so was communist-era. Half of the population was also withal living inward rural areas, together with so nosotros are talking almost around one-half a billion people urbanising. That's billion with a majuscule B. China's major cities are also speedily evolving together with developing (witness Shanghai's skyline straightaway vs. 20-30 years ago), together with so a lot of former buildings involve to endure ripped downwards together with redeveloped, every bit economical growth proceeds apace together with dry ground values rise.
Part of the work Red People's Republic of China faces is that the ground has never earlier seen economical growth together with urbanisation locomote on at this stair inward a patch every bit large every bit China. Consequently, aggregate numbers seem extraordinarily large, but they are much less so when reduced to per-capita measures. For instance, fifty-fifty at 0.6% growth, China's population growth is almost 10m a year. That agency they accept to build ane novel Commonwealth of Australia every 2.5 years, together with ane novel U.K. every six years, precisely to maintain stair with population growth, allow solitary upgrade existing Chinese living standards. Red People's Republic of China has one-half a dozen cities with urban areas of unopen to 10m people that most people accept never heard of (see here).**** The numbers are genuinely mind-boggling together with unintuitive. Perhaps the Chinese are non every bit stupid together with reckless inward their administration of the economic scheme every bit many Westerners would similar to believe?
Now let's facial expression at overall steel demand. Red People's Republic of China comprises almost 50% of global steel demand, together with 30% of that goes into residential together with commercial existent estate construction; 30% into infrastructure development; together with the other 40% into 'other' (cars, appliances, industrial machinery, etc). Even if nosotros were to assume that Chinese need for steel for role inward infrastructure together with existent estate construction were to decline past times a 3rd inward the side past times side decade, that would trim back global steel/iron ore need past times entirely almost 10% (50% x 60% x 33%). Meanwhile, it is reasonable to await China's 'other' 40% of need to perish along to grow, every bit see degree need for identify appliances, vehicles, etc, rises (China's PPP gross domestic product per capita is almost US$10k - at that spot is a long way to go). Even if it grew entirely 25% cumulatively over the side past times side decade (i.e. entirely 2-2.5% pa), this would offset one-half of the decline inward need from construction, together with boost global need past times 5% (50% x 40% x 25%).
Furthermore, other countries similar Republic of Republic of India together with Association of Southeast Asian Nations nations tin dismiss endure expected to growth their steel need materially every bit they motility upward the economical evolution bend inward coming decades every bit well, spell steel need inward the European Union together with USA are also at a relatively depression economical ebb (and whatever migration inward manufacturing from Red People's Republic of China to the US, due to merchandise tariffs, volition also boost USA steel need together with offset whatever negative deport upon on Chinese steel need inward machinery). It is so reasonable, inward my view, to await 'rest of world' steel need to perish along to grow at say 2-3% pa (global population growth solitary is >1%). Rest of ground steel consumption should so grow past times possibly a cumulative 25% over the side past times side decade (at least), which would add together 12.5% to global need (50% x 25%). This would to a greater extent than than offset a pocket-sized decline inward Chinese consumption. After adding inward growing supplies of recyclable steel, global need for Fe ore should endure unopen to aeroplane over the side past times side decade, fifty-fifty if China's stair of existent estate together with infrastructure construction falls 1/3rd from electrical current levels (which would endure almost 40% per capita, adjusting for Chinese population growth).
Perhaps this is why the Fe ore cost remains stubbornly resilient, together with refuses to settle below US$60/MT? In the past times few months, the portion prices of many commodity producers, including Fe ore suppliers, has fallen sharply on growing pessimism almost the outlook for China's economical growth, together with yet the Fe ore 62pc benchmark fines cost itself has really risen from US$60/MT to US$65/MT. To many people's ears, narratives speak louder than data, but it is the information nosotros should focus on, together with Fe ore cost propose that the facts are non conforming with the narrative - at to the lowest degree non yet. Indeed, because Red People's Republic of China is probable to heavily get from hither inward reply to USA merchandise measures, it is fifty-fifty arguable that brusque term Chinese Fe ore/steel need may fifty-fifty surprise on the upside.
Time volition tell. I don't pretend to endure able to predict something every bit complicated every bit global steel demand; Chinese growth; or the Fe ore price. That's non how I invest. I don't effort to predict the future. I also would non deny that at that spot are fabric cyclical risks inward China, every bit at that spot are inward whatever economic scheme - peculiarly because the build-up inward debt over the past times decade has indeed been uncomfortably fast. I'm much to a greater extent than bullish on Red People's Republic of China structurally over the long term than I am cyclically inward the brusque term.
However, what I facial expression for is depression expectations together with asymmetry, where (1) the deport illustration is already widely believed together with priced in; together with (2) where at that spot is a plausible illustration that this prevailing bearish narrative could seek out wrong. And it is interesting to me that markets are projecting such a nighttime futurity for Fe ore/steel demand, together with yet it is non clear that such unqualified pessimism is warranted. And the same tin dismiss also endure said with honor to Chinese growth together with China/HK stocks generally.
I ain a 1.9% seat inward Ferrexpo (which trades at 3.5x earnings), which I accept owned since 2016 at an entry of almost 70p, together with also a 0.4% seat inward Fortescue Metals (which trades at a 5-6x cash spot P/E @ US$45/MT 58pc, although closer to high unmarried digits after including accounting depreciation inward excess of maintenance capex requirements), most of which I accumulated fairly late (at an average a footling below A$4). I also accept a much larger together with growing exposure to HK/China stocks overall, which I believe are also beingness heavily discounted on the footing that China's economic scheme is precisely a debt-fueled ponzi scheme.
LT3000
*Such every bit Ordos. Interestingly, reporters went dorsum several years subsequently together with were surprised to consider that many of the empty buildings were straightaway occupied, together with streets bustling with traffic.
**The gross Chinese cement consumption statistics facial expression much scarier than the steel stats, but they are partly distorted past times the fact that Chinese ofttimes uses concrete inward roads, rather than asphalt.
***1,280.98m sqm, according to the National Bureau of Statistics of Red People's Republic of China (see here).
****The next Chinese cities accept urban (not greater metropolitan) areas of betwixt 8-12m people: Harbin, Wuhan, Hangzhou, Xi'an, Shenyang, Dongguan, together with Nanjing. I'm willing to bet most Westerners (excluding those who invest inward or arrive at work concern inward China) accept non heard of at to the lowest degree some, if non most, of these cities.