China’s commodity super cycle is over: Credit Suisse’s Tao

The golden age of China’s infrastructure investment, housing boom, exports and policy stimulus is behind us, argues Dong Tao, Credit Suisse’s head of non-Japan Asia Economics, in a March 5 report to clients.

“The big picture is that China’s growth trend is expected to slow down 7% to 8% over the coming decade, from 10.7% recorded in the previous decade,” he writes. “As the economy shifts its growth engines away from infrastructure, construction and exports toward consumption, especially service consumption, the propensity of demand for commodities is bound to decline. Getting a massage simply does not use as much steel as building an airport.”

The Hong Kong-based economist, who has tracked China’s economy for more than two decades, notes that in 2011 it took 71 million tonnes of steel for one percentage point of gross domestic product (GDP) growth — figures that he says are “unheard of in the world’s modern history” — and forecasts that the ratio “should moderate” to 30 million or 40 million tonnes for every percentage point of GDP growth by 2020.  

“There will be cyclical ups and downs, which may affect China’s demand for commodities and commodity prices,” he says. “But we think China’s super cycle for commodities is behind us.”

Between 2000 and 2010, China was, in Tao’s view, the key factor behind the global commodity super cycle, with iron ore imports surging, in value terms, by 42.5 times, thermal coal by 248 times and copper by 16.2 times. During the same period, China’s aluminum production jumped 441.8%, cement 219.5% and steel 396%.

But that growth is a thing of the past, he maintains, and after a decade of “very aggressive” infrastructure build-up in everything from highways and railways to airports and power stations, infrastructure investment is down by 25% after adjusting for inflation in the twelfth five-year plan — lasting until 2015 — from the eleventh five-year plan. And the actual moderation could be even larger than that, he says, given China’s fiscal stimulus program and infrastructure investment by local governments in 2009.

In terms of housing, Tao says home ownership in China’s cities has reached 67%, which he argues is above the world average, and would be even higher if rural areas in China were included. Housing prices have escalated beyond the reach of many salary earners, he adds, with the average Chinese having to spend 10 years of wages to pay for an average apartment, compared to the world average of six years.

As far as China’s exports are concerned, “it may take 10 years before the legend of the ‘world’s factory’ disappears, but the best times are certainly behind us,” he writes. Although cyclically exports seem to be on a rebound, structurally China’s competitiveness has been eroded by surging salaries among migrant workers, he argues.

While Tao does not rule out the possibility of minor fiscal subsidies for consumption and a reshuffling of the tax code — and concedes that restrictions on bank lending have eased a little — he asserts that “there is no way” the government will launch another massive stimulus program.

“The consensus among the decision makers is that the stimulus package in 2009 did more harm than good to the long-term sustainability of growth,” he explains.

“In this short note we intended to ignore all the cyclical factors and ask whether China’s mighty demand for commodities will return in the medium term,” Tao writes. “We think the answer is ‘no.’”

Tao comments that China’s industrial model is changing, moving from industrialization and modernization fuelled by labour migration from rural areas to the coastal areas and into export industries, towards a new model of industrialization and modernization that takes place at the local or village level and creates new needs for commodities.

He also notes that policy-makers in Beijing are concerned that higher housing prices have created social instability and want to make sure the population can access subsidized housing. The government’s target is to build 36 million units during the twelfth five-year plan.

“Progress was disappointing last year, as local governments have neither the money nor the incentive to deliver,” he says. “We think policy housing construction is likely to accelerate over the next two years, though it is not clear who will pay the bill at this moment.”