Wednesday, August 7, 2013

Coming Collapse of China? (excerpt)

Based on the Skyscraper Index, China’s big collapse is likely to occur just after the completion of Sky City in the southern Chinese city of Changsha. On July 20, developers broke ground for this building, which will be the world’s tallest building, taller by 10 meters than Burj Khalifa. It is set to be completed in 2014. A CNN article has a nice chronology of the tallest building curse.

China’s economy is already slowing. That’s partly because the labor force is growing much less rapidly as a result of the one-child policy first introduced in 1978. In addition, the government is attempting to reverse years of horrible environmental pollution caused by rapid industrialization over the past few decades. Sunday’s NYT had a disturbing account of the problem titled, “Life in a Toxic Country.”

There is also a new official campaign to reduce corruption by government officials, who have been building lots of glitzy office buildings for themselves and driving luxury cars to get to work. This week, the government started to audit the books of all these officials in an attempt to measure how much public debt they’ve accumulated during their spending sprees.

All these issues could come to a head just in time for the completion of Sky City. No wonder that China’s stock market has been among the worst performing in the world. The China MSCI stock price index is down 8.9% ytd. It seems cheap, selling at a forward P/E of 8.5, which matches most of the lows since 1995. However, forward earnings has been essentially flat for the past two years. Net earnings revisions have been negative for 23 of the past 25 months through July.

There has been a great deal of criticism about the quality and accuracy of China’s official economic data, especially trade statistics. One way around the problem is to monitor the value of exports to China compiled by the countries of origin. The results aren’t pretty. Data through May show that dollar-denominated exports (on a 12-month sum basis) to China from the US, the euro zone plus the UK, Japan, and South Korea have been mostly flat to down in recent months. All together, they were down 4.9% y/y through May.

Today's Morning Briefing: Sky City. (1) Can superbull leap over tall buildings? (2) Shanghai Tower this year. Sky City next year. (3) China has world-class pollution and corruption. (4) Taking the glitz out of growth. (5) China's MSCI has lots of negative earnings revisions. (6) World trade at record high, but not growing much. (7) More upbeat indicators out of Germany (orders) and UK (output). (8) US exports rise to record high. (9) US oil trade deficit narrowing as domestic output soars. (10) ATA trucking index at record high. (11) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

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