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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Sunday, 20 November 2016

China urbanisation: ain't over 'til it's over

China urbanisation continues

Pretty much every day for the past 10 years or so I’ve seen an article, or usually multiple articles, predicting the end of the world for China.

I must confess I generally don’t bother reading that many of them these days. I’m not too sure if many people in Australia do, to be honest. After all, what ultimately plays out over in China is well beyond the control of any individual; you just acknowledge the risks and get on with life.  

Despite the endless reports of doom and gloom, over that decade about another 217 million Chinese people have urbanised, and over the past year China has imported an unprecedented one billion tonnes of iron ore.

Between them China, Taiwan, and Hong Kong have imported 400 million of those tonnes of iron ore from just one Western Australian port!

Across the past three decades well over an additional half a billion Chinese have now become urban dwellers, an unprecedented migration in the history of the world.

With an economy that expanded at an average of close to 10 per cent per annum over that time, this has been a process that has lifted more than 500 million persons out of poverty, at least as defined by the World Bank.

At the beginning of the 1980s only 20 per cent of China’s population lived in an urban area, but following the decentralisation of local governments in 1980, today this figure has surged to around 57 per cent. It's a numerically breathtaking transformation!

Interestingly, only around 60 per cent of urbanisation is accounted for by actual migration, with the remaining 40 per cent swallowed up by the enormous expansion of the cities.

In recent times, Chinese authorities have announced that they aim to accelerate the urbanisation process to increase the urban population by another 250 million, including nearly 100 million by 2020.

While other Asian countries have achieved a similar rate of urbanisation, none has undergone anything on remotely this scale before.

Logistical challenges abound

To date, the urbanisation of China has continued apace, and per capita GDP has grown very strongly in cities such as Shanghai and Shenzhen.

Don’t get me wrong, though, I’m not arguing that the continued urbanisation of China will be smooth sailing, because for any number of reasons, it obviously won’t.

Indeed, risks abound and there are sound arguments for why the urbanisation rate could slow.

The threats posed by the Chinese credit bubble have been well enough documented, and unlike in Australia, it’s not only the increase in household leverage that is of concern.

Local governments have used financing vehicles to take on debt at a frantic pace to invest in the infrastructure needed to attract investment and jobs. It’s not so much the absolute level of debt that has been of concern as much as the rate of increased indebtedness - and the opaque manner through which financing has been accounted for through structured vehicles (i.e. dodgy, and off balance sheet).

Then there’s the need for reform of the hukou system of household registration, which restricts where determines where citizens can live, curbing labour force mobility.

And the sustainability of China’s urbanisation is far from only related to financial and administrative challenges.

You might remember from the Olympics footage that carbon emissions, air quality, and pollution are all major difficulties in China.

Water scarcity is another logistical challenge, for while China accounts for about a fifth of the world’s population, it has only 7 per cent of the world’s fresh water, leading to severe shortages in some cities.


Despite what you would think from online research on Google and YouTube, China’s cities are generally speaking not all that dense, instead being characterised by vast industrial sprawl and a recent explosion in the number of vehicles (the number of motor vehicle drivers in China is poised to exceed the size of the entire US population at well over 300 million).

Chinese cities could accommodate millions more persons if they were to be as dense as certain cities in, say, Korea, or Japan, and indeed some Chinese cities are now in the process of redensifying.

Even assuming that the rate of total population growth in China slows, and even if the accelerated urbanisation plans don’t hit their targets, it is still projected that by 2030 around 1 billion Chinese might be urban dwellers.

All of which means, according to the narrative of our major commodity exporters, that China’s demand for Australian commodities is likely to remain huge for years to come.

It’s definitely true that China’s services sector must play a greater role going forward, and as such the demand for steel may or may not be at or close to its peak, but an extra 250 million urban Chinese would nevertheless create massive ongoing demand for housing.

While some cities have overbuilt apartments at times, there will also be demand for more affordable accommodation. 

And if the cities continue to expand as projected over the next 15 years, there will be more construction of infrastructure, bridges, roads and highways, subway lines, irrigation, gas pipelines, connectivity, high-speed railways, ports and deep-water berths for ships, airports, industrial factories, oil refineries, and commercial buildings.

All that required water needs to be re-routed too, from the Yangtze and the Yellow River, a huge civil engineering project and an ongoing challenge between now and 2030.

So, it’s not all just blocks of apartments. 

These engineering projects will require iron ore, coal, copper, lead, zinc, and many more materials besides. China’s expanding middle class will also create demand for foodstuffs, and other products and services.

Froth and bubble

While Australia could not and should not expect today’s frothy iron ore and coal prices to persist for too long, research by the Reserve Bank of Australia has shown that Brazil and Australia sit well below China and other countries on a chart of global iron ore production costs.

The spectrum of production costs for coking coal and thermal coal is much more varied in Australia, though the industry is at least enjoying high spot prices for now.

No doubt there will be speed-bumps along the way but if by 2030 China’s urban population is likely to be around 1 billion, then Australia can capture a significant share of the demand for commodities. 

This isn't a blog post about a China miracle or anything like that. But for now China's urbanisation has continued, reflected in record imports of our main commodity. 

And then, there's India.