China’s Con­crete Bub­ble

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Chi­nese con­struc­tion keeps trend­ing down with Sany the worlds sixth largest heavy machin­ery maker report­ing a rise in profit of 5.4% in the same quar­ter as a blow out in receiv­ables of USD $1.39  bil­lion  and cash reserves falling by USD $535 mil­lion  . Sany is clearly book­ing prof­its on 100% financed machin­ery while pro­vid­ing zero trans­parency on credit risk  and delin­quency . If the GFC has taught the world any­thing. then 100% ‘no money down” ven­dor finance should ring alarm bells. This all started about about 3 months ago when Zoom­lion started to aggres­sively financ­ing heavy machin­ery for any­one that wanted to sign up

An ana­lyst told the Inter­na­tional Finance News that Sany’s golden age of devel­op­ment has clearly passed. Recent news of staff cuts, changes to the wage struc­ture and offer­ing zero down pay­ments are per­haps the company’s way of seek­ing a break­through dur­ing this chal­leng­ing period, the ana­lyst said.

After los­ing mar­ket share Sany responded by unlock­ing GPS dis­able­ment that are nor­mally included in ven­dor finance deals and remov­ing the 20% deposit require­ment on new machin­ery .

As China slows, its con­struc­tion equip­ment mak­ers have been accel­er­at­ing pro­duc­tion – based on the sim­ple idea that long-term sur­vival can be ensured by get­ting big, fast. The amount of gear pro­duced by the indus­try increased by almost 80 per cent between 2008 and last year, when 484,316 units were made, accord­ing to data from Bloomberg. This was 13,256 more units than the indus­try could sell – in spite of a near dou­bling in exports to more than 40,000 units.

Even worse, also accord­ing to Bloomberg: demand for such equip­ment in China dropped 56 per cent in the year to April.

Matthew For­ney and Stella Zhou, writ­ing in Draganomics’ China Eco­nomic Quar­terly for June, look at Sany and its rivals. They note that indus­try exec­u­tives are talk­ing of a “col­lapse” and are look­ing to export their way out of trou­ble.

All of these com­pa­nies are react­ing to a sub­stan­tial mar­ket slow­down by expand­ing their financ­ing options. XCMG the 3rd largest heavy equip­ment maker in China sales soared by 44% in 2011 by intro­duc­ing ‘no money down’ ven­dor finance ,  open­ing four new fac­to­ries this week .

All of these com­pa­nies are buy­ing over­seas man­u­fac­tur­ers , XCMG is final­is­ing a deal to invest in pri­vately held Ger­man machin­ery man­u­fac­turer Schwing . Sany has just bought  Putzmeis­ter Hold­ing GmbH for nearly $500 mil­lion . Mean­while, Zoo­lion the com­pany we men­tioned in The Loot­ing of China has  investors increas­ingly con­cerned about the machin­ery manufacturer’s plan of rais­ing huge bank loans of up to 140 bil­lion yuan (US$22.2 bil­lion) , this seems an extra­or­di­nary amount of debt to raise for as yet an unstated pur­pose.  Zoom­lion, Sany and XCMG (as well as 30 oth­ers are head­quar­tered in Chang­sha, Hunan where by 2015 the city’s con­struc­tion machin­ery prod­ucts will account for almost a third of those sold glob­ally, ris­ing from its cur­rent 9 per­cent share. Whose Mayer Zhang Jian­fei, a for­mer direc­tor of high­ways at the Min­istry of Trans­port and World Bank adviser on trans­porta­tion, said that by the end of the 12th Five-Year Plan (2011–15), total sales in the city’s con­struc­tion equip­ment sec­tor will have hit 300 bil­lion yuan ($47 bil­lion) . who with that heavy machin­ery avail­able built one of those ghost cities you keep hear­ing about (if you fol­low this Google map link you can explore the scale of these cities for your­self) 

This is eco­nomic mad­ness on a scale never before seen in his­tory and it wont end well for any­one.

About Craig Tindale

CEO in the software and technology industry qualifications economics and computer sciences well read on Minksy, Marx, Fisher , Schumpeter , Veber and dozens of of others
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  • RickW

    re:
    RJ
    July 6, 2012 at 7:39 am | #
    Noel Kelly
    July 6, 2012 at 12:52 am | #
    .….…
    Not true. More debt always means more sav­ings. In part the huge increase in our non Govt debt lia­bil­ity is a result of our desire to save (requir­ing debt assets) and the refusal of Govt to play their part by run­ning MUCH LARGER DEFICITS.
    End Quote
    The first two sen­tences are cor­rect but it does not fol­low that gov­ern­ments must run much larger deficits — that is not desir­able.

    Gov­ern­ments should be enforc­ing reg­u­la­tions designed to limit the crim­i­nal activ­i­ties of finan­cial firms rather than being com­plicit in the crim­i­nal behav­ior. Also leave the insol­vent com­po­nent of these firms die rather than con­tin­u­ing to suck wealth from the rest of the econ­omy.

    In a saner invest­ment envi­ron­ment there would be more peo­ple pre­pared to invest in busi­nesses rather than save. The only sane invest­ment options at present are in your own busi­ness and/or items that reduce your per­sonal con­sump­tion such as solar pan­els, hous­ing insu­la­tion, more eco­nomic motor vehi­cle, etc. These are invest­ments where the return can be cal­cu­lated ratio­nally.

  • Steve Hum­mel

    Steve H., why take such a tor­tu­ous path when you can just accept things are they are and be con­tent.”

    Well, because then I’d actu­ally be some kind of mys­ti­cal mystic.…instead of just a Bod­hisattva.

  • RJ

    In a saner invest­ment envi­ron­ment there would be more peo­ple pre­pared to invest in busi­nesses rather than save.”

    Money when cre­ated by

    DEBIT DEBT
    CREDIT BANK CREDIT (MONEY)

    Does not dis­ap­pear. Rather it just moves from bank account to bank account

    So money that fol­lows the sav­ing path rather than the con­sump­tion path will even­tu­ally find its way into invest­ment assets

    LIKE

    Govt bonds
    Shares
    Prop­erty
    etc

    The prob­lem today is NOT ENOUGH GOVT DEBT = too much non govt debt (as this sec­tor has to try and make up the short­fall) and too lit­tle sav­ings and money for con­sump­tion (unem­ploy­ment) and invest­ment.

    And more Govt debt could be gen­er­ated by say a large tax cut. Or higher pen­sions or ben­e­fits. Not just more govt spend­ing (or waste).

  • RJ

    Steve Hum­mel
    July 6, 2012 at 4:21 pm | #

    Steve H., why take such a tor­tu­ous path when you can just accept things are they are and be con­tent.”

    You can not accept the world as it is. So you drift into impos­si­ble make believe (as many do). 

    For exam­ple you accept debt free money is not pos­si­ble. But still want it.

  • Let us not for­get that some coun­tries are a Com­mu­nist dic­ta­tor­ship, they run the coun­try just like Stalin did/is, and they don’t need to fool peo­ple like in a demo­c­ra­tic soci­ety. If you dis­agree they will silence you or worst send you to a re-edu­ca­tion forced labour camp.
    Can any­one really believe sta­tis­tics, fig­ures or any­thing from such oppression?In time this will end in an eco­nomic, cul­tural and human­i­tar­ian cat­a­stro­phe, min­imise your expo­sure, and only invest in your­self.

  • Steve Hum­mel

    So you drift into impos­si­ble make believe…”

    No, it is you who are deluded because you still think that you can achieve Val­halla (or even begin to pad­dle in its direc­tion in a “leaky old boat”).…WITHOUT SIMULTANEOUSLY FREEING THE INDIVIDUAL ALSO. That makes YOU the his­tor­i­cally igno­rant hope­less romantic.…not me.

    Row on toward your delu­sional, sci­en­tis­tic dreams of “Santa Catalina, the island of romance.”

  • Steve Hum­mel

    And it’s not what you call money, its the qual­ity and inclu­sive­ness of the inten­tions you mean to put it to, that is impor­tant.

  • Steve Hum­mel

    Our Cul­tural Her­itage of pro­duc­tive poten­tial, the true, never dimin­ish­ing and always expand­ing value and source from which debt/credit/money could be cre­ated.

    Cap­tured Gov­ern­ment and pri­vate and Cen­tral Banks are com­plicit and cor­rupt enti­ties whose moral, eth­i­cal and ratio­nal stand­ing is puny by com­par­i­son.

  • Steve Hum­mel

    The real prob­lem we face is that peo­ple believe that machines are more pow­er­ful than under­stand­ing and wis­dom. I do not wish to dimin­ish the actu­al­ity or power of either. Just make a hyp­no­tized world break free of the all pow­er­ful machines who have cap­tured their con­scious­ness and cre­ated a Matrix they mis­take for actual real­ity.

  • RickW

    re: RJ
    .….…..
    So money that fol­lows the sav­ing path rather than the con­sump­tion path will even­tu­ally find its way into invest­ment assets
    LIKE
    Govt bonds
    Shares
    Prop­erty
    etc
    The prob­lem today is NOT ENOUGH GOVT DEBT = too much non govt debt (as this sec­tor has to try and make up the short­fall) and too lit­tle sav­ings and money for con­sump­tion (unem­ploy­ment) and invest­ment.
    And more Govt debt could be gen­er­ated by say a large tax cut. Or higher pen­sions or ben­e­fits. Not just more govt spend­ing (or waste).

    End Quote

    If you want to blame gov­ern­ments for prob­lems then it is their inabil­ity to take action against the crim­i­nal activ­ity in the finan­cial sec­tor, not the government’s lack of debt. Gov­ern­ments have con­tin­ued to encour­age the crim­i­nal activ­ity by sup­port­ing insol­vent firms to main­tain busi­ness as usual — cre­at­ing more gov­ern­ment debt so the fat salaries and bonuses can con­tinue to be paid.

    Arguably the best way out is to let the insol­vent firms fail rather than the gov­ern­ment tak­ing on more debt. This is the fastest way to elim­i­nate debt that can­not be repaid. The longer the cor­rupt behav­iors are sup­ported by pub­lic funds the more entrenched they become. So gov­ern­ments do not nec­es­sar­ily need to take on more debt to solve the debt prob­lem.

  • David Jenk­ins-Flint

    My word! The edit­ing of this arti­cle, if it occurred at all, is hor­ri­ble! It’s a shame that your report­ing must lose such a great deal of cred­i­bil­ity sim­ply because it wasn’t proof read before post­ing.

  • Craig Tin­dale

    David not want­ing to cor­rect your com­ment.… but you need a comma after because 🙂

  • Noel Kelly

    @RJ

    Think we’re using dif­fer­ent mean­ing for ‘savers’, sus­pect mine is unortho­dox. That being some who saves large deposits and plans for high inter­est rates at some point dur­ing the life of a loan. For them, cur­rent lend­ing prac­tices means assets val­ues have been over priced for decades.

    Ie Being told by a real estate agent the I should be pay­ing 1000 times weekly rent for a house. I told him 750, 800 tops. I’m old enough to remem­ber 17% home loan rates & 23%/24% rates for busi­ness loans, and the resul­tant fail­ures.

    Also your model looks to be too sim­ple. That may be true in sim­ple econ­omy, with­out inter­nal divi­sions (bor­row­ing here funded by OS savers) and with­out mod­ern bank­ing (credit cre­ated against frac­tional reserves).

    cc @RickW