{"id":6675084,"date":"2021-10-22T16:20:00","date_gmt":"2021-10-22T16:20:00","guid":{"rendered":"https:\/\/krieger.jhu.edu\/financial-economics\/?p=6675084"},"modified":"2021-10-22T16:23:37","modified_gmt":"2021-10-22T16:23:37","slug":"steeling-ourselves-for-less-steel-use-in-china","status":"publish","type":"post","link":"https:\/\/krieger.jhu.edu\/financial-economics\/2021\/10\/22\/steeling-ourselves-for-less-steel-use-in-china\/","title":{"rendered":"Steeling Ourselves for Less Steel Use in China"},"content":{"rendered":"\n
Herbert Stein, former Chair of the U.S. Council of Economic Advisors for R.M. Nixon, reminded his colleagues that \u201cif something cannot go on forever, it will stop\u201d. History is littered with speculators who went broke, betting against clearly unsustainable trends but forgetting that forever <\/em>is a long time. <\/p>\n\n\n\n Which brings us to the Chinese Real Estate boom of the past 20 years. By almost any metric imaginable, China\u2019s investment in residential real estate has gone from excessive to inconceivable. <\/p>\n\n\n\n But China is, when it wants to be, a command-based economy. And commitment to strong growth, time and again, led Chinese provinces to support ever more expansive housing construction, resulting in a rise of direct real estate investment from 5% to 15% of real GDP, with related sectors suggesting real estate gains influenced close to 30% of GDP. This unfolded amid paradoxically simultaneous surges in both housing prices and vacancy rates. <\/p>\n\n\n\n Until now. Evergrande Real Estate\u2019s <\/em>financial woes and the collapse of aptly named Fantasia Real Estate<\/em>, has been met by government comments that suggest safety nets of some sort will appear for swindled home buyers and duped individual investors. But no one, it appears, will throw a life line to developers. It looks like President Xi has judged that, for the real estate boom of the past 20 years, forever has arrived and the real estate boom is going to stop NOW. <\/p>\n\n\n\n One first official hint? Real GDP gains, year over year, as of 2021:Q3 fell below 5%, with the construction component of real GDP falling and with quarter-to-quarter real GDP going sideways. Increasingly, official talk is gearing forecasters to expect more weakness to come. <\/p>\n\n\n\n JHU has some data that corroborates the need for this to happen. We published an alternative measure of China\u2019s economic performance, based upon our analysis of satellite captured light intensity, emanating from Chinese cities. In a recently published paper the details describing this analysis is provided<\/a>.<\/em><\/p>\n\n\n\n In a CFE post, May 2019, we provided some summary discussion of the work: <\/p>\n\n\n\n In December of last year, we introduced a new measure for China\u2019s real income gains. The unique aspect of our effort reflects our statistical analyses of satellite imaging of nighttime Chinese city lighting. As we noted in our previous essay, analyses of the growth for nighttime city illumination, correctly filtered, closely mirrors the climb for national output for a whole host of countries. China, however, is a glaring exception. Gains for city lights have been systematically weaker than official estimates of Chinese real GDP growth, and this divergence has worsened over the past two years. <\/em><\/p><\/blockquote>\n\n\n\n A naive interpretation of our data would lead one to assert that China\u2019s claims about real gross domestic product gains are greatly inflated. We have a more nuanced view. Other critics of official data have done bottom-up analyses and conclude that China\u2019s real GDP data greatly overstates the level of investment activity\u2014the booming sector driving China\u2019s growth over the past decade\u2014a reflection of regional officials\u2019 exaggerating the gains for construction, in an effort to claim that they have met overall growth targets. <\/em><\/p><\/blockquote>\n\n\n\n We don\u2019t doubt that some officials provide fanciful claims about investment rates. We conjecture, however, that a significant additional part of the mismatch between our illumination data and the official GDP tally reflects the increasingly uneconomic nature of Chinese investments in office and residential real estate. Despite soaring vacancy rates, investment continues to rise. Increasingly, however, the buildings go up, but the lights don\u2019t go on. <\/em><\/p><\/blockquote>\n\n\n\n Last week we updated our analysis, capturing 2020 satellite suggested gains for the Chinese economy versus the official tally. Our results were eye opening. According to our data citywide illumination, in 2020, actually contracted <\/em>by 2.5%. <\/p>\n\n\n\n