Over the past few days and weeks, the market was worried from head to toe that the Chinese government’s move to cap rebounding property prices will hurt economic growth. Sectors that were tied closely to the property market, such as steel manufacturers, shipping companies, iron ore and coal producers were hit the worst. However, should investors worry as much as they are?
Real estate climate rises in February from last year’s December
China’s real estate climate rose to 97.92 in February from December’s figure of 95.59. The composite index was developed by China’s National Bureau of Statistics and it measures the aggregate business activity for land, capital and sales of real estate, which is useful in showing the trend of the Chinese real estate market. Figures above 100 shows prosperity or economic growth, whereas figures below 100 marks depression.
It is in the government’s interest to develop properties
Although rising real estate prices are a concern for the government, as the outgoing Prime Minister Wen JiaBao expressed in a recent press conference, the government also needs to keep economic growth in check so that firms are generating profits and growing. It is also in the best interest for the government to increase the availability of property supply as people from rural areas continue to migrate to urbanized cities in search of better life quality. As the real estate climate remains below 100, it is unlikely the government will move to halt the development of properties.
Building material prices are still low
As material prices for steel, iron ore and coking coal are still hovering near or at a four year low, the government could take this as an opportunity to increase developments of new constructions while capping housing demand and price in the short term. The latest data shows building materials input price continued to fall at a pace of -1.4% over three months until January.
In the short term, the Chinese market and the shipping firms will be negatively affected. However, the market could have priced in the news, and both medium and long term outlooks should favor dry bulk companies that transport iron ore and coking coal across sea: DryShips Inc. (DRYS) and Diana Shipping Inc. (DSX). This should also provide support for Market Vectors Steel ETF (SLX) that invests in steel companies, Market Vectors Coal ETF (KOL) and a popular iShares FTSE / Xinhua China 25 Index ETF (FXI).