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Amundi: Why cement means calling time on China’s economic recovery is premature

Rising cement prices were offering a clear signal that China's economic growth will remain stable for the year ahead, said Mo Ji, chief economist for Asia ex-Japan at Amundi, on Wednesday.

She noted that cement offered a more accurate gauge of China's economic activity given its short shelf life. In contrast, commodities such as iron ore which are closely tracked to predict China's economic fortunes can also move due to financial arbitrage, not just changes in demand and supply conditions.

"It can only be stored one month. If there is no on-the-ground activity, how can the cement prices go up? It's really demand," she said, adding that meant infrastructure and other construction was continuing.

Amundi had around 1.0 trillion euros ($1.068 trillion) under management as of the end of September.

China's spot cement price was around 272 yuan ($39.61) a ton by mid-January, compared with an average regional price of as low as 206 yuan a ton in the first quarter of 2016, according to data from Credit Suisse.

Among other commodities, iron ore saw its price more than double in 2016 to around $80 a metric ton, despite China's port stocks climbing to a two-year high, although the government of Australia, a major exporter of the metal, said in early January that it expected prices to fall as much as a third this year.

A man fills a wheel cart with cement at a construction site of a residential skyscraper in Shanghai on November 29, 2016.
Johannes Eisele | AFP | Getty Images
A man fills a wheel cart with cement at a construction site of a residential skyscraper in Shanghai on November 29, 2016.

Ji also wasn't concerned that China's construction market might be heating up too much, at least not yet.

In December, average new home prices in 70 major cities on the mainland rose 12.4 on-year, after tacking on 12.6 percent in November, Reuters reported. Prices in Shenzhen, Shanghai and Beijing all rose more than 23 percent on-year in December, the report said.

While she noted that China's property market might be in bubble territory, she didn't think it would burst this year, although she couldn't exclude 2018 yet.

"If it's a bubble, a bubble has to burst," she said. "That will be [when] in the tier one cities, land prices are higher than the potential rate of return for developers."

Once developers' returns from selling apartments fall below the land cost, the market will turn, she said.

The effect could be catastrophic, with a hard landing not just for China, but possibly also globally, Ji said, noting that China's property sector touches around 200 other sectors.


But currently, the government appeared to be tightening property policy, potentially staving off financial turmoil, at least ahead of the leadership transition later this year, she noted.

China's President Xi Jinping was expected to use the Communist Party of China's 19th national congress, set for autumn, to consolidate his power and tap new allies for key leadership posts, as five of seven Politburo Standing Committee members were likely to retire.

But that also meant that China was likely to put any economic reforms on ice for the time being, Ji noted.

"The political transition means they have to make everything stable. The political transition means social stability, economic stability, political stability. Everything has to be stable," Ji said. "You cannot do any reforms."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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