China’s construction investment growth likely to continue in coming quarters

The turn in China’s construction investment growth is likely to continue expanding in the quarters to come. This would be driven by a scarcity of residential housing in the tier one and two cities, said Danske Bank in a research report. However, oversupply is still significant in the tier three and four cities and construction is expected to remain in doldrums for some time in these areas, according to Danske Bank.

China’s economy might have made it in securing a soft landing for the overall economy, but this is mostly because of strong growth in service sector.

The economy has had a hard landing in manufacturing and construction sectors, where the combined growth rates for the sectors dropped to 0 percent at the end of 2015 from more than 20 percent in early 2010. This is worse than the 2008-2009 financial crisis.

But the Chinese economy indicated signs of cyclical rebound in the early spring months. Three factors mainly drove the cyclical rebound: recovery in infrastructure projects, rebound in construction spending and a slight improvement in exports.

Last year, a considerable drop in interest rate boosted housing activity. Also, a reduction in the need for down payments for first and second-time buyers in September 2015 and in February 2016 helped in stimulating housing activity. In reaction to the above factors, China’s home sales grew sharply and aided in lowering some of the big oversupply of houses that had resulted in sharp decline in construction sector’s growth rates.

The increasing turnover in houses has provided the path for a rebounding in housing starts and growth in construction sector.

Around 50 percent of the global raw materials’ production such as metals is being consumed by China. A major portion of the 50 percent is utilized in the construction sector. Therefore a rebound in construction sector has supported the commodity prices. This is expected to continue in coming quarters.

“We expect this to have a moderate positive spill-over effect on emerging market commodity exporters such as Brazil and South Africa”, according to Danske Bank.

An increase in infrastructure spending is aiding in providing a lift to growth in the short term. However, this is just a temporary effect that is expected to ease in the second half of 2016.