- The spreading balance-sheet crisis at real estate firms is a warning for policymakers as a swing in the fortunes of the steel industry would have significant repercussions for China’s economy, with cement, glass, and household appliances all vulnerable to demand drops.
- The broadening spillover impact of the property downturn was also seen elsewhere.
- China’s steel rebar output fell in recent months due to easing property market demand.
Debt issues at a major Chinese property developer have now spilt over into the steel sector, an important artery of the country’s industrial engine, and have begun to spread to other critical areas of the world’s second-largest economy as reported by Reuters.
China’s economy
The spreading balance-sheet crisis at real estate firms is a warning for policymakers as a swing in the fortunes of the steel industry would have significant repercussions for China’s economy, with cement, glass, and household appliances all vulnerable to demand drops.
Steel firms are also massive employers that support a vast supply chain.
In the final quarter of 2021, the property market took a further hit as the unease in the sector shook already weak buyer sentiment, with unsold housing stock in China’s 100 biggest cities reaching a five-year high in November.
Demand for homes is expected to ease further in 2022, hitting downstream manufacturers of household products.
Cement production, another construction material, was down around 16% for September-November year-on-year and was lower versus the same period between 2017 and 2019.
The broadening spillover impact of the property downturn was also seen elsewhere.
Reversal in fortunes
Steel producers were among the best performers of the entire Chinese economy over the first three quarters of 2021, with China’s 28 major listed mills pocketing over 106 billion yuan ($16.61 billion) in net profits, up 174% year-on-year and 129% higher than in pre-pandemic 2019.
But the boom times in the steel sector are over.
The paralysis that has struck China’s mammoth construction industry is triggering a rare contraction in building activity across the country.
New construction starts by floor area have contracted from a year earlier since July – their longest stretch of declines since 2015.
The closely-tracked steel equity instruments and commodities futures have captured the reversal of fortunes.
After gaining roughly 90% through mid-September, the CSI steel equities index (.CSI930606) has plunged 27% since, while futures prices for construction materials rebar and wire rod have tumbled 24% and 31% respectively from their historical highs to erase almost all their gains this year.
Uncertain outlook
Property-related sectors are the single biggest contributor to China’s economy, accounting for 28% of GDP in 2021, down from a recent peak of 35% in 2016.
The GDP share is broken down into a 7% direct contribution from the property and a 21% indirect contribution from construction and through sectors along the supply chain such as machinery and equipment, according to Moody’s.
If the contraction in construction spending endures, it will then affect the producers of appliances and white goods that constitute a key part of China’s critical manufacturing base.
“Property construction has been the engine of China’s economy for over two decades now,” said Frederic Neumann, Co-Head of Asian Economics Research at HSBC.
“With building activity likely to remain depressed for quite some time, growth will inevitably shift down a gear or two.”
Did you subscribe to our newsletter?
It’s free! Click here to subscribe!
Source: Reuters
