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A Look at China’s Property Sector Trends

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China’s property sector

China’s property sector remains critical to iron ore demand. Investors in iron ore companies such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale SA (VALE), and Cliffs Natural Resources (CLF) should keep an eye on developments in China’s property sector. CLF forms 3.5% of the SPDR S&P Metals and Mining ETF (XME).

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Real estate indicators

  • The total floor area (in square meters) under construction by Chinese real estate development enterprises rose by 4.8% in the first seven months of 2016. The rate of growth fell by 0.2% compared to the first six months of the year. This was the third consecutive month in which growth rates fell on a monthly basis.
  • In the first seven months of 2016, building sales rose by 39.8% YoY (year-over-year) in China. However, the growth rate fell by 2.3% compared to the first six months of the year. This was the third consecutive month in which growth rates fell on a monthly basis.
  • China’s new construction starts rose by 13.7% YoY in the first seven months of 2016 after steadily falling for two years, as we can see in the graph above. However, the growth rate fell compared to the first six months of the year.

We’ve started to see moderation in Chinese real estate activity after a big spike earlier this year. The slowdown in Chinese construction activity is negative for metals (DBC).

Construction activity

China’s real estate climate index is useful for revealing trends in the Chinese real estate industry. Readings above 100 indicate economic growth, and readings below 100 indicate a slowdown in China’s real estate market.

The chart above shows the movements in China’s real estate climate index. The index has been on a downward trend, hitting multiyear lows late last year.

Although there was some improvement after that point, the index has now fallen for the last two months. The index read ~94.0 in July, down from 94.4 in June. The fall in the real estate climate index is another indication that construction activity has slowed in China.

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