Stimulating China’s construction sector comes with risks and rewards

27 February 2019 (Last Updated March 12th, 2019 09:08)

The heady days of double-digit growth in China’s construction industry have long gone.

Stimulating China’s construction sector comes with risks and rewards

China’s construction industry strengthened in the latter stages of 2018 and more public infrastructure spending is expected in 2019.

However, a return to the boom years of double-digit growth in construction is not anticipated anytime soon, with GlobalData expecting the industry’s expansion to remain on a general slowing trend.

China construction sector 2019

Construction activity in China expanded by 6.1% year-on-year in the fourth quarter of 2018, pulling up growth for the year as a whole to 4.5%.

Although this was a marginal improvement on the 2017 figure, the pace of expansion in 2018 was still relatively sluggish for the industry as a whole, bearing in mind that over the preceding 10 years China’s construction industry expanded at an annual rate of 11%.

Reflecting the weak performance in the buildings sector, total floor space of buildings completed dropped by 1.3% in 2018 compared to the previous year’s total.

China’s double-digit growth years

The heady days of double-digit growth in China’s construction industry have long gone, with the authorities taking steps in recent years to rein in excessive debt-driven investment in infrastructure and urban development that had resulted in excess capacity in infrastructure and industry, and oversupply in real estate.

But in a heavily managed economy, such as China’s, the government can reverse policy direction relatively quickly. In response to the property market slowdown, local authorities are now likely to reinvigorate demand by relaxing measures that had been imposed to avoid overheating in the market. The authorities are also likely to invest in infrastructure to support the economy as it sees fit.

For example, in October 2018 the State Council (China’s chief administrative authority) issued guidelines on increasing investment in various types of infrastructure, notably railways, roads, waterways and airports.

These policy changes are expected to ensure that annual construction output growth remains around the 4% mark over the next five years, with the potential for slightly higher growth in 2019–2020 if new infrastructure projects move to the construction phase without delay.

The construction industry’s performance will continue to reflect the ongoing struggles of China’s policymakers to deal with the challenge of supporting the expansion of the economy while limiting the financial risks associated with the excessive fiscal and monetary stimulus.

China: construction output growth (real, % change)

Source: GlobalData