Steel Products Prices North America
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CRU: China’s Construction Market and the Impact of Hukou Reform
Written by Greg Wittbecker
January 23, 2022
By Greg Wittbecker, Advisor, CRU Group
One of the hot topics resonating through commodity market forecasts is the risk to demand from a faltering Chinese real estate market.
The well-publicized financial difficulties of Evergrande have raised fears that the property markets could destabilize. Other developers such as Kaisa and Sinic Holdings have also struggled to serve debt. Eight of the world’s 10 most indebted property developers reside in China. Real estate represents more than 28% of Chinese GDP and construction overall equals about 33% of aluminum demand. Property represents about 40% of steel demand in China.
A “Managed Slowdown” in the Properties Market
Beijing is watching the developers’ problems very closely and has taken steps to minimize the damage…or as CRU Economics has aptly put it, “is managing the slowdown.” Many observers believe the government is seeking to stabilize the property market by loosening access to credit and keeping a tight rein on speculative excess in the sector. The rules restricting property purchases for speculation remain firmly in place. At the same time, lower interest rates and reserve requirements for the banks are increasing mortgage availability.
There is another possible solution to the problem that has not been considered, which may be the “nuclear option” if things get too bad. That would involve reforms to the “Hukou System.”
The “Hukou System” in China
For anyone who has ever quit a job, packed up, and moved to a new city, it may be a shock that people living in China enjoy no guaranteed right to relocate themselves. China has a household registration system, known as Hukou, that places significant limitations on domestic migration. The system was established in 1958 by Mao, but administration is increasingly left to local governments to manage. Because they have broad authority to set their own criteria for permanent Hukou status, local governments use these powers as a tool to attract high-skilled talent and manage urban growth.
The Hukou system is a core Chinese socioeconomic institution, dividing all citizens broadly into two subsystems: one for urban residents and another for rural residents.
The Hukou system requires all Chinese to register their place of residence at birth. To change their registered place of residence, they must obtain a special permit from their city’s local police department.
The Hukou system places special burdens on Chinese citizens seeking to move from rural communities to urban areas. Local governments scrutinize everything from an applicant’s total assets to their level of education. This makes obtaining permanent Hukou status in the major cities a pipe dream.
As a consequence, most rural migrants who move to large cities are stuck with the Hukou status of “temporary” or “transitory” migrant, a status that comes with far fewer privileges than permanent residency. This status restricts a migrant’s access to a wide range of public goods, from health care to unemployment insurance to housing funds. This means the migrant population cannot buy property.
This restriction is galling to immigrants considering that they present a major driver of housing construction in major cities. Local governments rely on revenues from property taxes. Essentially rural migrants have been the engine of that revenue stream…yet they cannot participate in the housing market as owners.
Reforming Hukou Could Open Huge Potential Demand
The Chinese central government is now recognizing the inequality in the system and the potential economic upside to reforming it. In the latest Census, the migrant population reached 376 million in late 2020 (26.6% of the nation’s population), up from 155 million in 2010.
In 2014, China launched a major initiative, the National New-type Urbanization Plan (2014-2020), and various other measures to reform the Hukou system. That really achieved little.
In 2016, the central government pushed for permanent residency rights for the 100 million rural migrants currently working and residing in the country’s small and medium-sized cities. Six years later, there has been no meaningful progress.
While the local governments appear to control this, we all know that Beijing ultimately calls the shots. With the real estate market in distress, it seems like an apropos time for Beijing to combine a major social-engineering reform with some pragmatic measures to prop up the property markets. Opening an entirely new class of property buyers equal in size to the entire population of the USA seems like a no-brainer.
Greg Wittbecker joined CRU in January 2018 after retiring from Alcoa, where he was Vice President of Industry Analysis and Managing Director of Alcoa Beijing Trading, based in Shanghai, China. His career spans 35 years in the aluminum industry, having also held senior commercial and management roles at Cargill, Wise Metals and Koch Supply and Trading. Greg brings perspective on the entire aluminum supply chain from bauxite to aluminum finished products and will be a regular contributor to SMU going forward. He can be reached at gregory.wittbecker@crugroup.com
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