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Henry Hao

Principal Economist View profile

Since the deleveraging reforms gathered pace in 2021 H2, China’s real estate sector has been trapped in a vicious cycle. The inability of cash-strapped developers to finish projects weakened potential homebuyers’ confidence. In turn, this resulted in sluggish home sales and further worsened developers’ cash flow. It is therefore not surprising to see a slump in activity in China’s real estate sector. For example, the floor space of building completed shrunk by 21.5% y/y in 2022 H1. What is more surprising is that another dataset – total construction completions – has shown resilience, with completions by floor space growing 3.4% y/y in 2022 H1 (Figure 1).

Historically, the monthly-released real estate data is highly correlated with quarterly-released construction data, as shown in the scatter plot below. Therefore, the real estate data is often cited to represent the performance of China’s overall construction sector as it is available more quickly (it is released monthly instead of quarterly). However, we should be more cautious this year as the relationship between the two datasets has deviated significantly from the historical pattern.

Fig 1 - China’s support for public construction resulted in a diverging trend

What caused the deviation?

To investigate the reasons for the deviation, we must first understand the major difference between the two datasets. The monthly-released real estate dataset is reported by corporate property developers, covering construction activity in the real estate sector in urban areas. On the other hand, the construction dataset is reported by the constructor, covering not only real estate development projects but also public construction projects, government-built social housing and individuals’ self-built housing, mostly in rural areas (Figure 2).

The property slump has led to shortfalls in land sales revenue, historically a major source of revenue for local governments.  But despite this, there should be ample funding for public construction projects this year – driven by the carry over and surplus funds of local government special purpose bonds from 2021, along with profit transfers from the PBoC and other stimulus measures. The divergence of construction and real estate data shows the strength of policy support for public construction and continuing deleveraging reform in the residential property sector.

Figure 2 - Real estate completions only account for 25 to 30% of the entire construction sector

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Henry Hao

Principal Economist View profile