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June 2, 2021updated 25 Oct 2021 8:53am

China’s PMI shows bright future for construction, but prices are rising sharply

The construction sector in China has seen growth in 2020 and the future is set to be bright if there is caution on the prices of materials.

The China construction industry was one of only a few in the Asia Pacific to record positive real output growth in 2020, with the industry posting an expansion of 3.5% amidst the pandemic. China’s May Purchasing Managers Index (PMI) release shows the construction sector remains buoyant and continues to progress from strength to strength, lending further weight to GlobalData’s forecast for 7.7% real output growth in 2021. However, with economic recoveries around the globe in full swing, commodities and materials prices have continued to surge, posing downside risks for industry growth this year.

Business conditions in the construction industry continue to be more positive than the wider non-manufacturing sector, with the spread between the Construction PMI and Non-Manufacturing PMI increasing to 4.9 points. The construction PMI rose to 60.1 in May while the non-manufacturing PMI rose marginally to 55.2. Recordings above 50 indicate an expansion in output while those below indicate a contraction. The divergence between the two is due to the slightly less positive conditions in the service sector, which has been affected by more moderate than expected consumer spending, despite an increase in tourist flows and the Golden Week holidays at the beginning of May. The construction sector continues to be buoyed by strong fixed asset investment and the slighter than expected cut in the special bond quota.

Unsurprisingly, with China’s economic recovery in full swing, future expectations of business activity among purchasing managers in the construction sector remain upbeat. The Construction Business Activities Expectations Index (BAEI) increased by 0.9 points to 65.7 in May while the wider Non-Manufacturing BAEI fell marginally by 0.1 to 62.9. However, causing some concern is the rapid increase of construction input prices, with the Construction Input Price Index (IPI) recording successive growths since January of this year. The Construction IPI rose by 8.9 points to 73.6 in May, far exceeding the increase in the Non-Manufacturing IPI of 2.8 to 57.7. Increasing demand for raw materials has seen commodities prices surge, particularly iron and copper ores, with the prices of their derivative products, such as steel, rising as a result. Rising commodities prices have attracted the attention of the government, which has warned against material hoarding, speculation and monopolistic behaviour, resulting in a slight fall in prices.

The May PMI release paints a bright picture for the future growth of the construction industry in China. However, expectations must be guarded against the potential impact of a sustained increase in materials prices on the industry. Increasing global demand for materials to feed expansionary construction programmes, disrupted supply chains and increased freight costs are all likely to continue to generate upward pressure on materials prices over the course of this year and increase the likelihood of materials shortages.

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