bounce in chinese housing underpins better 2013

The headline economic data from China often seem to belie the severity of the movements in activity and the reaction from many markets. Take the PMI and industrial production data. While both have shown a downtrend for most of this year, it hasn't been particularly alarming.

The HSBC PMI showed a small improvement on the flash estimate in December, suggesting a modest tick up in industrial production in the current month.

Other data sets perhaps show a better picture of what is happening, particularly to heavy industry. Electricity production, for example, has been much weaker than industrial production. This is now swinging back off the lows, albeit off a low base. 

Many look to iron ore as a key barometer of Chinese activity given how leveraged it is to Chinese demand. After collapsing in August, iron ore has begin to tick back towards $140/t after its initial bounce back to $120/t. 

Movements in inventories have played a key part in first the collapse and the more recent bounce, with crude steel production, as reported by the NBS, actually been relatively flat when accounting for seasonality. 

Estimating Chinese steel production at this time of year is tricky as a number of small mills have in the past under-reported production in the final quarter of the year. 

It does appear that production has firmed though, with higher-frequency from CISA showing an improvement from ~80% of mills. So the crude steel production outlook does appear to be improving into 2013.

Some maybe concerned that this is also just a function of stock shifting that is not sustainable. But while the headline IP data have been relatively benign, there has been a much more momentous change in residential housing markets.  

Home sales have surged back in the past few months and as of November are rising ~20%YoY. With house prices also shifting higher, developers appear to be on steadier ground. 

There is a lag before this feeds through to construction (which is still negative). However, the shift in sentiment and likely improvement in construction activity means that this part of the economy will shift from a drag on activity to a significant positive. This is particularly good news for iron ore, which looks to be solid around current prices.