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Can China’s Real Estate Keep Supporting Its Economy This Year?

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Jan. 29 2019, Updated 10:30 a.m. ET

China’s steel demand

As China (FXI) is the world’s largest steel consumer, investors should watch the country’s steel demand. In this part, we’ll look at China’s real estate and automotive sectors, its two largest end consumers of steel.

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China’s property market

China’s property market has been declining for the past few months. Since the sector directly affects 40 industries and is the mainstay of steel and iron ore, steel and iron’s demand outlook has been negative.

China’s real estate market grew 2% in the fourth quarter of 2018, compared with 5.9% in the fourth quarter of 2017. In December, the number of cities reporting a month-over-month drop in prices increased for a fourth straight month, and average new home prices grew more slowly than in November.

Real estate restrictions

Some of the real estate sector’s weakness was due to Chinese authorities’ real estate credit restrictions aimed at reining in debt risks. Loans in the Chinese property sector grew 20% last year, compared with 20.9% in 2017. Chinese consumers are spending and investing more cautiously due to domestic and export uncertainty linked to the country’s ongoing trade conflict with the United States (DIA).

China has announced several stimulus measures to arrest the slowdown and balance risks, and more such measures are expected. For more on these measures, read Will China’s Latest Attempt at Propping Up Its Economy Work?

Auto sales

China’s automotive sales have fallen for the past several months, and they fell 2.76% YoY (year-over-year) to 28.08 million units last year, marking their first decline since 1990. In December, China’s vehicle sales fell 13% YoY to 2.66 million units.

China’s economic growth might be slowing, even excluding the effects of its trade disputes. However, the government is trying to support the economy, which should flow through to the steel sector. Therefore, miners such as Rio Tinto (RIO), BHP (BHP), and Vale (VALE) shouldn’t see marked declines in their realized prices. China’s supply-side reforms, on the other hand, dragged down steel exports last year but benefited US companies such as U.S. Steel Corporation (X), AK Steel (AKS), and Nucor (NUE). Cleveland-Cliffs (CLF) also benefits from lower steel imports.

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