The construction industry in China, one of the largest in the world, has experienced significant growth over the last few decades. Rapid urbanisation and industrialisation in China have led to a surge in construction activities, including residential, commercial and infrastructure construction. However, in recent years, the construction industry faced ongoing pressure from policies designed to deleverage property developers, leading to more sustainable construction activity (Pang, 2022). Infrastructure spending from the Chinese government may boost the economy regardless, but it is unlikely to counterbalance the impact on the construction industry’s economic growth. Despite challenges in several construction sectors, the long-term economic development of the construction industry will remain to grow steadily over the coming years.
Overview of China’s Construction Industry – Market Analysis
According to Bloomberg, the Chinese government is investing 6.8 trillion yuan (approximately US$1 trillion) to fund various urban infrastructure construction, such as urban roads, water and gas pipe networks, and parks, which will account for most government spending on infrastructure projects. The total value added by the construction industry in 2021 was 9.72 trillion yuan (approximately 1.5 trillion US dollars), accounting for 6.2% of China’s GDP (National Bureau of Statistics of China, 2021). Nonetheless, construction grew by only 2% in 2021, down from 4% in 2020, as deleveraging reforms hit residential real estate developers.
In 2023, the construction industry’s value-added is expected to reach CNY8.75 trillion, representing a 6% increase. This is still slower than an estimated 7.9% nominal GDP growth for the year since the predicted GDP growth estimate for 2023 is 5.6%. Commercial property construction should pick up, with additional infrastructure projects beginning in 2022, and there should be little growth in residential property construction in 2023 (ING, 2022).
Smarter, Greener and Safer Construction Industry
In January 2022, the Chinese government unveiled a five-year plan to make the construction industry smarter, greener, and safer. As the Ministry of Housing and Urban-Rural Development stated, China’s construction industry will grow at the same rate as the overall economy, contributing 6% to the national GDP.
Additionally, the Chinese government has directed the construction industry to redesign its supply chain and working methods to reduce carbon emissions, adopt digital technologies, and improve building safety and quality. Notably, over 30% of the country’s new construction output must come from the prefabricated construction industry. Robotics is yet another area that the Ministry wants suppliers and contractors to concentrate on, which is especially true for companies that maintain buildings and factories that make building components. China anticipates further innovation in the industry over the next three to four years as construction firms are required to adopt newer technologies and reduce carbon emissions.
Challenges in the Construction Industry
Homebuyers are refusing to pay their mortgages as property developers in China delay construction projects, escalating the real estate crisis and putting banks at risk for bad debt. As of July 2022, buyers of 35 projects in 22 cities in China have decided not to pay their mortgages. The refusal to pay is engulfing China’s real estate market and its effect on the middle class, posing a threat to social stability. The Chinese banks must now prepare for homebuyer defaults, as they are already struggling with developer liquidity stress. Especially noteworthy is the fact that these developments occur at a time when the risks associated with the Covid-19 outbreak continue to increase and pose a threat to the sector. China maintains a gloomy outlook for the residential construction industry due to project completion delays and mortgage refusals.
Furthermore, the real estate sector’s deleveraging reform has been on the annual government policy framework’s agenda for some time. The government has reiterated that residential real estate is not for speculation but for residential use. To lower real estate companies’ leverage ratios, the government implemented the “three red lines” policy in August 2020, tackling property developers’ unbridled borrowing by restricting the amount of new borrowing they can raise each year (AlJazeera, 2023). As a result, China will ease borrowing caps for companies that meet all three thresholds under the new proposal, easing restrictions on developers’ debt growth based on how many ‘red lines’ they meet.
Development of the Construction Industry
The Chinese government is expected to make a significant investment in the economy. The infrastructure investment could increase employment soon, providing millions of Chinese job seekers with much-needed relief. Moreover, the investment may benefit the government’s long-term goal of becoming a more urbanised and high-income economy. One of their projects is constructing a 1,629-kilometer high-speed rail line from Sichuan province in the southwest to the Tibetan capital of Lhasa. It is one of the major infrastructure projects for which the government is expected to allocate funds.
The majority of the government’s expenditure on infrastructure projects is expected to go toward the construction of urban infrastructure, which includes parks, water and gas pipe networks, and urban roads, in addition to these investments. In the short- to medium-term, China anticipates that the government’s investments in the infrastructure sector will continue to support economic expansion.
References:
- Al Jazeera (2023) China may ease ‘Three red lines’ property rules: Bloomberg, Property | Al Jazeera. Al Jazeera. Available at: https://www.aljazeera.com/economy/2023/1/6/china-may-ease-three-red-lines-property-rules-bloomberg#:~:text=The%20%E2%80%9Cthree%20red%20lines%E2%80%9D%20policy%20was%20unveiled%20in%20August%202020,they%20can%20raise%20each%20year. (Accessed: March 2, 2023).
- Depreter, M. and Cecchi, R. (2022) China: The slump in the Chinese construction sector has a broad impact on different sectors and on the economy, Credendo. Credendo. Available at: https://credendo.com/en/knowledge-hub/china-slump-chinese-construction-sector-has-broad-impact-different-sectors-and (Accessed: March 1, 2023).
- Pang, I. (2022) China Construction: A policy-driven downtrend, ING Think. ING Think. Available at: https://think.ing.com/articles/china-construction-a-policy-driven-downtrend/ (Accessed: March 1, 2023).
- Research and Markets (2022) China Construction Industry Report 2022: Chinese government plans to pump $1 trillion into the construction of infrastructure megaprojects – forecast to 2026, GlobeNewswire News Room. Research and Markets. Available at: https://www.globenewswire.com/en/news-release/2022/12/05/2567157/28124/en/China-Construction-Industry-Report-2022-Chinese-Government-Plans-to-Pump-1-Trillion-into-the-Construction-of-Infrastructure-Megaprojects-Forecast-to-2026.html (Accessed: March 1, 2023).
- Research and Markets (2023) China Construction Market Report 2022: Size, trends and forecasts – industry is expected to register an AAGR of 4.4% from 2023 to 2026, Business Wire. Available at: https://www.businesswire.com/news/home/20230126005681/en/China-Construction-Market-Report-2022-Size-Trends-and-Forecasts—Industry-is-Expected-to-Register-an-AAGR-of-4.4-from-2023-to-2026—ResearchAndMarkets.com#:~:text=According%20to%20the%20National%20Bureau,this%20year%20to%204.8%25%20YoY. (Accessed: March 1, 2023).
