China has that sinking feeling

Just when you thought China’s property woes could not get any worse, a report from a group of Chinese universities suggests that nearly half of the country’s major cities are sinking!

The study covered 82 Chinese cities, each with a population of over 2 million, using radar observations from Sentinel-1 satellites to measure vertical land motion. Data was analysed from 2015 to 2022 which showed 45% of urban areas had subsided by more than 3mm per year, while 16% had fallen by more than 10mm a year. Five regions of China are most affected including Beijing which have some 67 million residents, with the greatest concern for those living in coastal cities. In 2020 about 6% of China’s population lived below sea level, but in 100-years this could be over 25%. With the land sinking and sea levels rising, millions of Chinese could be at risk of flooding.

China has a long history of dealing with subsiding land. For example, Shanghai has sunk over 3 meters over the past century. However, the problem is getting worse given the greater number and weight of buildings. An additional factor is the extraction of groundwater to serve the expanding urban population. As groundwater is extracted, the soil is drained and tends to subside.

China is not alone in facing increased subsidence in major urban areas. Cities such as Houston, Mexico City, Delhi, Osaka and Tokyo have all been affected. In Indonesia, the government has voted to relocate the capital Jakarta to another location by 2045, as the city is already below sea level and is sinking by up to 15mm each year. The UK is also having to face the challenge of rising sea levels, with the Environment Agency planning for a new Thames Barrier to be in place by 2070 to protect London.

Meanwhile, the Chinese authorities have been instigators of major infrastructure projects, but given the country’s current economic woes, has it the appetite to address the potential flooding risk in major urban areas? The confidence of Chinese property buyers has been knocked by the problems amongst the country’s heavily indebted property developers. The thought that your recent new home purchase could be sinking, is hardly likely to improve your mood.

What have we been watching?

Markets focused on the latest Federal Reserve meeting and the outlook for US interest rates. The basic message was do not expect an interest rate cut anytime soon. Market uncertainty around the timing of interest rate cuts is now likely to persist over the Summer. Although cooler-than-expected labour market news on Friday brought back the possibility of a first interest rate cut in September. Meanwhile, the situation in the Middle East showed some signs of de-escalation with Israel offering Hamas a 40-day truce in Gaza in return for the release of scores of hostages. However, PM Benjamin Netanyahu said Israel would launch an invasion of Rafah regardless of truce talks with Hamas.

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In the UK, shop price inflation eased in April, as non-food goods saw deflation. According to the BRC, inflation dipped to 0.8% as food inflation slowed to 3.4%, but non-food dropped by 0.8%. This week we await BOE’s interest rate decision, which we expect to herald future rate cuts, although no change in position is expected.

Although not as bad as some had feared, PM Rishi Sunak is likely to remain under pressure after a poor performance in last week’s local elections. Given the apparent popularity of the Reform Party, he is likely to face growing pressure from within the party to veer to the right.

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Eurozone CPI inflation was 2.4% in April, the same as in March and in line with expectations leaving the European Central Bank (ECB) on course to cut interest rates in June. Core inflation dipped to 2.7% from 2.9%.

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The US Federal Reserve (Fed) voted unanimously to hold interest rates at 5.25-5.5%. Given ‘hotter’ than expected inflation and the US economy still running strong, the market was instead focused on the tone of the subsequent press conference. Fed Chair Jerome Powell said that it was not prepared to cut interest rates anytime soon and that there had been a lack of further progress towards the target inflation. Additionally, the Fed announced it is going to slow the pace of Quantitative Tightening (QT) from June from $95bn to $60bn. The rationale is to slow the reduction in US bank reserve balances, and Powell said it is keen to avoid a repeat of 2019, when overnight rates spiked on a number of occasions.

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The Japanese yen strengthened against the U.S. dollar, briefly heading below 153, marking its strongest week in over a year. Leading to speculation that Japan’s monetary authorities were in the market supporting the currency.

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China’s April PMI business activity indicator pointed to a slowdown in growth in both the manufacturing and service sectors although both remain in expansion territory.

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Brent oil dropped to $83.40 as efforts to advance a temporary ceasefire in Gaza continued.

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Finally, the ‘washout winter’ has continued into spring and has not been great news for British farmers with waterlogged fields. Estimates suggest some crop yields could be down by up to 20% which could feed into the price of a range of goods from beer to bread and biscuits. Last week saw the introduction of post-Brexit physical border control checks on some food from the EU. Taken together, these events may put upward pressure on the prices and feed into inflation data, so we must hope this does not deter the Bank of England from getting on and cutting interest rates.

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Read Last Week’s Alpha Bites – Pothole Politics

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.