China's Construction Market: A New Star in the East.

After decades of virtually no housing starts--and no income with which to refurbish existing structures--the trillion--dollar Chinese Li economy is poised to enter a new era where private market forces will direct and shape the newly released purchasing power of China's middle class.

Construction companies now number in the thousands, while panel, furniture and interior products manufacturers are in the tens of thousands. According to China's Ministry of Construction, China plans to start work on 380 million square meters (4.1 billion square feet) of new housing projects in 2000, with 5 billion more square meters (53 billion square feet) to be built with government funding by the year 2005.

As part of the initial package of housing market reforms of 1998, Chinese government agencies at local, provincial and national levels are selling off publicly held apartments and allowing new owners to either keep or resell the acquired property at their own risk.

In 1998 the United States and China also embarked on a bilateral Presidential Housing Initiative whereby the United States would provide expertise on mortgage management, low-income housing policy and building standards and codes that would favor the use of renewable resources, such as wood, in commercial and residential property development.

Equally significant is reform to the business mechanisms of real estate. For the first time in 50 years, public and trade organizations are drawing up mortgage lending, property transfer and real estate regulations especially designed for private property holders in China.

Privatized Property: The Switch Is On

Government programs do not tell the whole story; private--sector construction is now on the rise. For example, the international realty firm Century 21 opened its second franchise in Beijing in July 2000 while 84 Lumber of Pennsylvania has begun to ship prefabricated homes and other solid-wood construction products to southern China.

China is privatizing all spheres of its real estate sector, including trade in materials, investment and construction. In the first four months of 2000 alone, 49 new companies began importing timber and other solid wood products.

This is a far cry from the designated trading enterprise system of the 1980s where roughly only two state-owned agencies per province were permitted to import on a case-by-case basis.

Recent press reports indicate that China now has 25,000 real estate firms of which 5,000 are overseas (mostly from Hong Kong and Taiwan) joint ventures.

In June 2000, China also held the first China International Timber and Timber Products Exhibition. Grace Zheng, China Director for the American Forest and Paper Association's office in Beijing, notes that private housing developments are going up throughout China, including single-family detached and row housing construction, and some of these projects number in the hundreds of units.

Currently the national average commercial housing price is 2,100 RMB or $23 per square foot. With the average apartment size running 50 square meters or 540 square feet (half the size of a typical two-bedroom apartment in the United States), an unfinished apartment sells for $12,500. Apartment prices in the coastal cities, however, run much higher, with two-bedroom units selling for as much as 30 and 40 thousand dollars in Shanghai and Beijing.

Spending on Decor To Soar Even More

Since Chinese housing is sold unfinished, the boom in the renovation and interiors markets is heard even louder in the marketplace. According to the China Furniture Association, China's furniture and interior panel market sales both at home and abroad will be worth $20 billion in 2000. The China Building Decoration Association estimates that Chinese consumers will purchase 10 million cubic meters (or 350 million cubic feet) of paneling valued at $1.8 billion just for their homes this year alone.

Not only are consumers buying molding, paneling and window and door frames for their newly purchased homes, but they are replacing furniture more often. The average replacement period for furniture has fallen from once every decade or longer to once every four to eight years. Demand for furniture and interior panel products for China's rapidly growing hotel and commercial office sector is pulling additional billions of dollars into a market that 20 years ago was managed by underinvested government monopolies. According to FAS market reports from Beijing, over 300,000 luxury hotel rooms will need to be remodeled, including replacement furniture in the near future.

A Market of Promises and Pitfalls

The scale and scope of China's multibillion-dollar housing boom is expected to increase at rates approaching 10 percent a year for the next five years, according to China's Ministry of Construction. The expansion of the construction and interiors markets, however, is not without pitfalls.

In China's rush to overcome the poor investment strategies of prior decades, Chinese developers in the early 1990s put up ultra-luxury buildings almost exclusively, neglecting the needs of most of its consumers. Housing choices for overseas and business professionals were little other than $7,000-per-month expatriate housing and poorly constructed brick-and-concrete apartment dormitories with unreliable plumbing, ventilation and sanitation. Similarly, manufacture and installation of housing components, such as trusses and roof beams, were hit-and-miss efforts.

In the absence of zoning and performance-based building codes, architects, engineers and site workers had to work from irregularly designed building specifications. Confronted with unfamiliar technologies and components, builders often put up complexes of less than adequate quality and, more often than not, had no strategies or services with which to repair or maintain structural integrity and appearance.

The good news is, these problems are being overcome and demand for reasonably priced, high-quality products is up. According to the China Furniture Association, more than half of consumers preferred furniture made by joint ventures and 3.5 percent preferred imported furniture over all other options. Twenty years ago the consumer did not even have these options. (Note, though, that while demand for better quality products is up, the domestic market is burdened with an oversupply of low-quality interior and panel products.)

Changing wood policies are making their mark as well. The Chinese government in recent years has substantially reduced logging throughout much of the country and has reduced tariffs on most logs and lumber to zero, while significantly reducing tariffs on other value-added wood commodities.

Last but not least, U.S. market education efforts are starting to kick in. The American Forest and Paper Association, the American Hardwood Export Council, the Softwood Export Council and APA--the Engineered Wood Association--through their representatives in Beijing, Shanghai, Guangzhou and Hong Kong--are embarking on a nationwide, multi-sector program to introduce Chinese architects, designers, trade associations and standards organizations to the structural, environmental and aesthetic benefits that uniquely exemp1ify American solid wood products.

With total Chinese solid wood imports moving toward a record $4 billion in 2000, there is much room to grow for all U.S. manufacturers of structural components, exterior and interior finished products and furniture products for the home and office.

While U.S. flooring and softwood plywood sales to China are down due to rapidly expanding domestic capacity, exports of hardwood and softwood lumber, hardwood plywood, moldings and many other major value-added products have increased strongly.

The author is an agricultural economist in the FAS Forest and Fisheries Products Division.

WTO Spells Wood Trade Opportunity

China's accession to the World Trade Organization (WTO) will accelerate U.S. sales to China (including Hong Kong) that are already on track to exceed $200 million in 2000, making China our second- largest market in Asia and the eighth-largest market in the world.

Currently China's import tariffs on solid wood products average 11 percent, with tariffs reaching as high as 21 percent. There is also a value-added tax of 13 percent. China's accession to the WTO, however, includes a commitment to reduce the tariff rates on wood imports to an average of 4 to 7.5 percent by 2005.

For detailed information on China's WTO accession commitments for solid-wood tariff reductions, please see "China Announces WTO Offer for Wood Products" in the September 2000 edition of Wood Products: International Markets and Trade or online at: www.fas.usda.gov/ffpd/Newsroom/newsroom.htm