Why US steel companies are worried about China’s ghost towns

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Oct. 29 2019, Updated 7:16 p.m. ET

Ghost towns in China

We’ve seen previously that one of the key reasons behind the growth in the Chinese economy has been government support. Since the housing and infrastructure sectors are key drivers of economic growth, China made significant investments in these spaces. To support economic growth, huge towns have been built but are now infamously known as ghost towns.

 

What are these ghost towns?

While a lot of infrastructure creation has taken place in the cities, a lot of images of the so-called ghost towns keep emerging. The image above is an example of these towns. There are buildings and roads, but no people. This is surprising for a country with 1.4 billion people.

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A lot of these cities were created to boost the local economies. Please note the real estate sector has a trickle-down effect on a country’s economy. It benefits steel, cement, and construction industries. Since these industries employ a lot of labor, China was able to provide employment opportunities to its citizens through these infrastructure investments.

Why these ghost cities should bother you

These ghost cities have unoccupied buildings. In a huge country like China, with the government dictating almost every policy, the towns should be occupied sooner or later. But this does represent a kind of excess inventory around the main cities. The excess housing inventory should put further pressure on the real estate market.

Since real estate is the biggest consumer of steel, steel companies should be worried. This is expected to drive down the future demand for real estate. A slowdown in the Chinese real estate market is a key risk for U.S. steelmakers like ArcelorMittal (MT), United States Steel (X), Nucor (NUE), Steel Dynamics (STLD), and AK Steel (AKS). Please note you can also access the industry through the SPDR S&P Metals and Mining ETF (XME).

Another key factor behind the growth in the Chinese real estate market was the support from state-owned banks. To reduce the risk in the banking system, China has made a lot of changes in banking regulations. We’ll discuss them in the next part.

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