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.