This analyst says China's smallest cities will play a crucial role in the outlook for commodities

China Photos/Getty Images

China’s hot east coast property market continued to cool in December, according to data released by China’s statistics bureau on Wednesday.

As this chart from the Commonwealth Bank shows, the slowdown in property price growth has been both sudden and sharp — particularly in the nation’s largest tier-one cities — as tighter restrictions on home purchases in many larger centres started to bite.

Prices in both tier-one and tier two cities prices declined in December, falling by 0.15% and 0.1% respectively, a far cry from the 2% plus monthly gains seen just a few months earlier.

And while they continued to grow in smaller cities — classified as tier-three and below — there’s now signs that those markets too are now starting to cool.

It’s that development, says Vivek Dhar, a mining and energy analyst at the Commonwealth Bank, that markets should be watching when it comes to the outlook for commodity demand in China.

“Price growth in tier 3 or smaller cities though is most relevant for China’s commodity demand,” Dhar says, noting that tier 3 and below cities accounted for around 80-90% of total new property construction following China’s stimulus in 2008 and 2009.

Given the price declines reported in larger centres in recent months, and the fact that price movements in smaller cities tend to lag those in the nation’s largest cities, he says that a “risk to commodity consumption is if these policies end up aggressively slowing price growth in tier 3 cities and below”.

“We could see Chinese commodity demand slow later this year, helping push commodity prices lower in 2017,” he says.

China will report Q4 GDP, along with industrial output, retail sales and urban fixed asset investment figures for December, on Friday, January 20.

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