How China's smallest cities play a crucial role for commodity prices

Photo: Getty Images

Chinese new home prices continued to push higher in May, and not just in the nation’s largest cities.

According to data released by China’s National Bureau of Statistics (NBS), prices nationwide rose by 0.9%, down fractionally on the 1.2% pace registered in April.

As a result, the annual increase accelerated to 6.9%, up from 6.2% seen previously.

Prices rose in 60 of the 70 cities surveyed by the NBS, down from 65 in April, with gains yet again led by the nation’s largest cities such as Shanghai, Beijing and Shenzhen which rose by 1.9%, 2.2% and 0.5% respectively.

In overall terms, prices in tier one cities rose by 2.4%, a deceleration on April’s 2.7% pace. Prices in smaller tier-two cities increased by 1.35%, again less than the previous pace, while those in the tier three cities and below registered growth of 0.4%, unchanged from April.

Although price growth has slowed in many larger centres, in part due to tighter restrictions placed on home buyers in cities such as Shanghai and Shenzhen, the Commonwealth Bank’s mining and energy commodities analyst, Vivek Dhar, believes that most attention in the report should be on the continued uplift in home prices in smaller cities, particularly given its implications for the outlook for Chinese commodity demands.

“While new home prices in China have generally improved in the last year, it is the price growth in tier 3 cities and below in the last three months that is most relevant for China’s commodity demand,” says Dhar, noting that continued price growth in these cities could see Chinese commodity demand strengthen, especially given they accounted for 80-90% of Chinese property construction in 2008 and 2009.

The question many are now asking is whether the strength in house prices in smaller Chinese cities can continue, particularly given they tend to be led by price movements in property prices in larger cities which are decelerating at present.

To Dhar, while a promising development if sustained, the recent strength is unlikely to herald a sustained uplift in commodity demand in the second half of the year.

“Higher inventories in lower tier cities will likely remain a problem for China’s property sector, not only weighing on commodity demand at some point, but boosting concerns that the recent price uptick is more speculative than fundamental,” he suggests.

“With China’s stimulus measures likely to fade later this year, we think construction demand will weaken by 4Q16.”

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