28 January 2012

China's Skyscrapers of Doom?

In a recent blog post, Brian Wang described an exciting new mass-production method for building skyscrapers more quickly and efficiently, recently developed in China. China has been rapidly boosting the number of high-rises in its cities, even before this development. Now it seems likely that skyscrapers will be rising above Chinese cities more rapidly than ever.

Is this a good thing for China, or does it portend the approach of an economic collapse for the celestial kingdom?
Amid the ongoing bubble watch in China’s real-estate sector, new research Wednesday showed the mainland is home to more than half of the world’s skyscrapers currently under construction.

Barclays Capital said that China is now flashing some of the telltale signs of a bubble on its Skyscraper Index, which is designed to track the correlation between tall buildings and an impending financial crisis.

Slightly over half of the 124 skyscrapers due to be completed in the next six years are in China, according to Barclays, which cited its own in-house research and website Skyscrapernews.

The construction binge will increase the number of skyscrapers in Chinese cities by 87% the report said, noting that the average height of buildings under construction is also increasing.

Barclays analysts said the frenzied activity in these lesser-known cities amounted to “evidence of the expanding building bubble,” adding that its Skyscraper index has acted as barometer of widespread misallocation of capital that can see instances of excesses dating back to before the Great Depression. _Marketwatch
Barclay's suggests that an economic collapse could occur in China as early as 5 years from now, if the past performance of "the skyscraper index" is any guide.

Here is more on the skyscraper index of doom from an article published on Al Fin almost one year ago:
Chinese government officials believe high-rises "show their progress in terms of urbanization and modernism," spur wider development by boosting investor confidence, and symbolize "a city's desire to become modern and international," says Chiow, a Chinese-American based in China for the past 15 years. _USAToday_via_ImpactLab
Lawrence showed that in almost all cases the initiation of construction of a new record-breaking skyscraper preceded major financial corrections and turmoil in economic institutions. Generally, the skyscraper project is announced and construction is begun during the late phase of the boom in the business cycle; when the economy is growing and unemployment is low. This is then followed by a sharp downturn in financial markets, economic recession or depression, and significant increases in unemployment. The skyscraper is then completed during the early phase of the economic correction, unless that correction was revealed early enough to delay or scrap plans for construction. For example, the Chrysler Building in New York was conceived and designed in 1928 and the groundbreaking ceremony was conducted on September 19, 1928. "Black Tuesday" occurred on October 29, 1929, marking the beginning of the Great Depression. Opening ceremonies for the Chrysler Building occurred on May 28, 1930, making it the tallest building in the world. _Mises

Table 1: World's Tallest Buildings
Completed Building Location Height Stories Economic Crisis
1908 Singer New York 612 ft. 48 Panic of 1907
1909 Metropolitan Life New York 700 ft. 50 Panic of 1907
1912 Woolworth New York 792 ft. 57 ——
1929 40 Wall Street New York 927 ft. 71 Great Depression
1930 Chrysler New York 1,046 ft. 77 Great Depression
1931 Empire State New York 1,250 ft. 102 Great Depression
1972/73 World Trade Center New York 1,368 ft. 110 1970s stagflation
1974 Sears Tower Chicago 1,450 ft. 110 1970s stagflation
1997 Petronas Tower Kuala Lumpur 1,483 ft. 88 East Asian
2012 Shanghai Shanghai 1,509 ft. 94 China?
If large buildings are constructed due to high utilisation and strong demand for space, they can be very profitable over their lifetimes. But if a skyscraper is constructed as a symbol or monument to the "greatness of a nation's political structure," the building may remain the empty prayer of a cargo cult.
China is building 44% of the 50 skyscrapers to be completed worldwide in the next six years, increasing the number of skyscrapers in Chinese cities by over 50%, says Andrew Lawrence, an Asian property analyst at investment bank Barclays Capital.

China is already host to six of the 15 tallest, completed buildings in the world, according to the Council on Tall Buildings and Urban Habitat, at the Illinois Institute of Technology in Chicago.

..."The appetite in China for high-rises, in the last five years and the next five, is bigger than ever before in the history of building," says Silas Chiow, China director for Skidmore, Owings and Merrill, the U.S. architectural firm, founded in Chicago, responsible for the Burj Khalifa.

The firm is currently engaged in 50 China projects, including the tallest buildings in eight separate cities.

Chinese government officials believe high-rises "show their progress in terms of urbanization and modernism," spur wider development by boosting investor confidence, and symbolize "a city's desire to become modern and international," says Chiow, a Chinese-American based in China for the past 15 years. _USAToday_via_ImpactLab

China is already full of "ghost cities," "ghost housing projects," "ghost office complexes," and "ghost shopping malls."

There is no denying the huge number of people living in China -- many of whom could use better and larger living and working space. But the economic structure of Communist Chinese society is rife with the mal-allocation of resources and enterprise. Corruption permeates the culture, driving much of the "road to nowhere" construction frenzy. Too much of the GDP-inflating construction is of a shoddy nature -- certain to collapse far sooner than projected lifetimes suggest.

Will the "Skyscraper Index" prove prophetic for Potemkin China of the cargo cult, or will the middle kingdom defy the curse of the world's tallest buildings?

More on skyscraper index:
From Mises.org
From CNN here and here

China's empty skyscrapers and office buildings

Amazing satellite images of some of China's ghost cities

World's loneliest shopping mall

More: And just in case you are still thinking that China may be ready to lead the world, perhaps you should think again:
We hear constantly how China's economy has "leapfrogged" other nations and now ranks third in the world — still behind the U.S. — with a total GDP of $3.3 trillion. The truth is more complex.

China has 1.3 billion people. So you're spreading that economy among one-sixth of the world's humanity. As the chart shows, China's economy on a per-person basis — the real measure of success — doesn't even come close to ours. The average American produces over $42,000 a year in goods and services; the average Chinese produces $2,800. That's an enormous gap in productivity.

Moreover, in its recent rankings of economic freedom, the Heritage Foundation put China 135th out of 179 countries. The U.S., even with all its current problems, ranks ninth. Who's the leader?

Citizens in big cities such as Beijing and Shanghai live a privileged existence, well-documented by the Western media. Deep inside rural China, however, hundreds of millions live in near-absolute poverty. This isn't a country ready for global economic leadership.

China's economic success has been driven by mercantilist policy of beggaring its own people in the interest of building up massive trade surpluses. Its foreign currency holdings now total $2.9 trillion, and most of that is in U.S. Treasuries and other dollar-denominated assets. That's China's hole-card in talks with the U.S. _IBD
China's ongoing construction boom may be evidence of an economic bubble getting ready to burst. Or it may be possible that China is wealthy enough to be able to afford this massive misallocation of resources into an "infrastructure to nowhere," and not pay a significant price. Time will tell.

Cross-posted from an article originally written for Al Fin Potpourri


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Blogger Bruce Hall said...

In 2007, I wrote:

Does that also mean that China's power elite have converted from a Marxist philosophy to a capitalist philosophy?
I'm not convinced that is the case. Capitalism and central government management of the economy are not necessarily compatible. But limited capitalism may be a tool to be employed by a power elite... especially when the labor used to power the limited capitalism is powerless to demand anything. Some might argue that China's policies might be closer to mercantilism. Regardless, rather than accumulating gold and silver, classic mercantilism, the Chinese are accumulating the world's currency... U.S. dollars. The nation is gaining wealth, but not necessarily the whole population.

What this means is that "China" is not subsidizing the U.S.. Rather it is the Chinese laborers who are subsidizing the U.S. in order to build U.S. dependency on Chinese manufacturing... in order to build wealth for the Chinese government.


Nothing much has changed.

Saturday, 28 January, 2012  
Blogger al fin said...

China is also buying a lot of gold these days.

The massive infrastructure build-up and "global commodities hoarding and overuse" has been mainly driven by corrupt state owned enterprises and local governments.

Corruption knows no ideology.

Tuesday, 31 January, 2012  

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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