Last September, Leon Berkelmans and Hao Wang published an interesting working paper for Australia’s central bank on urban residential construction in China up to 20401 . Since China is the number one importer of Australian iron ore, possible fluctuations of the real estate market in China cause concern in Canberra.
According to this study, residential construction in China will remain high for the next thirty years, with a peak in the next few years, but the annual construction growth rate will slow down. The authors note that China’s construction boom results from the economic growth the country has enjoyed for twenty years. To conduct their research, the authors used sets of data issued by official Chinese agencies and looked at similar experiences in Japan, South Korea and Taiwan. They noticed that Chinese data on urbanisation underestimate the extent of urban residential construction.
- For Berkelmans and Wang, demand for residential construction will be sustained by the path that urban development is following in China. Based on United Nations projections and their own calculations, the authors argue that China will be even more urbanized, with more than 70% of total population living in cities, by 2040. Further reforms to the Hukou system may increase this trend.
- Another factor for future residential construction growth is the increasing demand for floor space. According to the authors, as incomes increase, Chinese urban dwellers will be more likely to demand larger residential units. According to their study, urban floor space per capita may almost double between 2010 and 2040.
- However, Berkelmans and Wang believe that demolitions of dilapidated buildings will gradually decline as a result of the higher quality of the new constructions and the higher costs of expropriation (due to improving property rights for residents).
According to the authors, the GDP for residential construction will gradually decline from 9% in 2010 to 6% in 2020 and 2% in 2040.
Berkelmans and Wang stress the importance of steel in China’s construction boom, and argue that demand for steel will not increase in the short term. With continuous urbanisation and larger residential units, China will still require high amounts of foreign steel. Moreover, steel intensity may even increase in newly built residences, because of higher quality construction standards, higher buildings, and higher demand for underground car parks.
However, Berkelmans and Wang also note that, although demand for steel will still grow in the next few decades, steel recycling (resulting from demolition) will be more developed and will partly offset iron ore imports. But in the authors’ opinion, new opportunities will appear, and as a result more steel will be demanded to develop infrastructures in the new urban areas.
The authors clearly note that their forecasts on China’s GDP and urban development rates are assumptions. . However, their calculations give us some hints about China’s urban trends up to 2040, as do the UN studies . But, external factors, such as political and social reforms, may affect these trends. Furthermore, the historical comparison with other countries presented by the authors may not be very accurate, since concern for sustainable development is now progressively increasing in China. For example, the relation between income and floor space may not be verified if there is a political will to “save” spaces and control urban sprawl. Nevertheless, the authors’ assumptions will undoubtedly prove right on China’s high demand for steel.
The growth of China’s demand for steel is surely good news for Australia, a major iron-ore producer. With this interesting study, we can understand that the process of urban development occurring in China must be considered a global phenomenon that may affect the economy of foreign countries (in our case, Australia) and reshape international relations.
- Leon Berkelmans, Hao Wang, Chinese urban residential construction to 2040, Reserve Bank of Australia, Economic group, Research Discussion paper 2012-04, September 2012. 31 p. Full text available on line