Many investors are enamored with how China can keep a 7%+ growth rate going as the rest of the world only begins to dig out from recent economic events. There are many reasons this GDP growth rate has been able to be maintained although a large capital surplus of US dollars and a burgeoning middle-class that wants to be like America stand out as two of the more visible. Although for the moment the real looming question is if China can maintain this strong growth rate.
Perhaps the first cracks beginning to show are in the Chinese central development plan, stemming from their ability to get things done quickly. If the government wants to build more coal plants, they will be in place in record time. If they want roads to link outline areas, they are up and running in no time. For the commercial real estate market, however, this ability to get things done quickly may be a double edged sword.
A major trend within China for years has been the migration of young middle-class workers to cities where they can find better wages than on the family farm. Naturally the government recognized this trend and built an abundance of high rise buildings and luxury condominiums. In today’s marketplace this would appear like a foresighted move as the world economy recovers and the domestic economy continues to grow.
Within China, however, circumstances are a bit different when one considers the average worker makes under $2,000 per month and might buy a $160,000 condo. It’s also worth pointing out that the spaces businesses and consumers might buy/lease are stripped to the floor and not built out, adding additional costs. In short there is an over abundance of space within the high rises of China’s cities and nobody to lease or buy. So, who is going to service the debt for these spaces? And most importantly, which sectors of the construction industry will be affected?
Although one should make the distinction between commercial construction and infrastructure development, all should be aware that if a commercial real estate bubble among Chinas high rise structures is developing, material providers to build out these structures, along with new construction companies, will suffer. Chief among these material sectors are: copper, cement, carpeting, metal studding and ceiling materials. This is not to suggest that if the central government turns its attention to infrastructure development such as bridges, ports and water type projects that damage to the commercial material sector will not be lessened but research needs to be completed as to how much exposure a company may have to the commercial construction sector.
In the global environment we live in, care should also be taken in international linkage. If a company sells in China, a decline in commodity prices and foregoing exchange could also occur. One also needs to keep an eye on the central government’s use of its $7 trillion in reserves. At present these thoughts may be speculative but then again a little speculative hindsight may be a good thing given what the rest of the world has seen over the past few years.