Does the Skyscrapers Curse Signal a coming Asian Crisis?

Austrian economist and professor Mark Thornton principal exponent of Skyscraper Index Model notes that skyscrapers has had a record of uncanny accuracy in the prediction of many crises which includes today’s Euro crisis.

At the Mises Blog, Professor Thornton writes,

The ECB has once again come to the rescue by cutting interest rates in order to forestall a collapse of the European economy. Also, in a “surprise” move, the Chinese central bank cut interest rates in response to a continuing slow down in economic activity.

When the Skyscraper Index issued a European crisis signal last summer the European stocks markets were riding a wave of optimism and the Euro was worth about a $1.50. Most European stock markets have lost considerable ground along with the value of the Euro. However, we can best visualize the economic trouble from where the skyscraper crisis signal was issued: in the London real estate market. The Shard Skyscraper (which issued the crisis signal by becoming the tallest skyscraper in Western Europe) opened its doors to a badly slumping real estate market. Its owners made the bad mistake of buying out one of its primary lessee at 70 pounds per square foot. Leases are now going for 55 pounds per foot and probably heading lower.

In addition to Europe, there has been a regional crisis signal in China and possible world crisis signals coming from both China and the Middle East.

As for the Middle East, the Burj Khalifa, the world tallest building at 2,717 feet (at the moment), which opened two years ago has now been considered a “distressed property”.

The crash of Dubai’s stock market serves as a harrowing reminder of the bubble bust.

Many of the other grand projects in the Middle East, after having been stricken by the crisis, had also been shelved.

Well, I have been repeatedly saying that the Philippines and ASEAN economies have been undergoing a business or bubble cycle.

And since skyscrapers and business cycles are almost joined to the hip, with skyscrapers as pathological manifestations of financial excesses, then current prestige based property trends could be ominous of a coming crisis with its epicenter in Asia, or even in Southeast Asia.

That’s because Asia has been the focal point of where most of the next generation of the world’s tallest buildings will rise.

China and South Korea tops the list, along with Indonesia and Malaysia who will be having their own signature towers.

However, the Middle East will still lay claim to the tiara of having the tallest, with Saudi Arabia’s proposed Kingdom Tower which which will be due for completion this 2018. Eerily, Saudi’s grandiose project seem to coincide with mounting financial pressures on Saudi’s welfare economy.

Some of the proposed tallest buildings in Southeast Asia and Korea (from Business Insider)

Menara Warisan Merdeka

Skyscraper City

Location: Kuala Lumpur, Malaysia

Height: 1,722 feet

The Menara Warisan Merdeka will serve as a residential, office, and hotel building.

The Menera is scheduled to be completed by 2015. When completed, it would be the tallest building in Malaysia, according to The Star.

Signature Tower Jakarta

Skyscraper Center

Location: Jakarta, Indonesia

Height: 2,093 feet

The Signature Tower Jakarta is a 119-floor building (with six floors below ground) that is scheduled to be completed in 2017.

The building will serve as a hotel and an office. If completed, it will be the world's fifth-largest building, according to The Jakarta Post.

Seoul Light DMC Tower

Skyscraper Center

Location: Seoul, South Korea

Height: 2,101 feet

The Seoul Light DMC Tower will be a hotel, residential, and office building.

It's scheduled to be completed in 2017. The building will use wind to power itself, and have interior gardens that act as "lungs" for the building, according to the tower's website.

For the rest of the list, you can see them here

The point is if the Skyscraper Index model’s accurate predictive capabilities should continue, then that time window of 2015-2017 could portend to an Asian Crisis 2.0

The relationship between the Skyscraper and the Austrian Business Cycle as explained by Professor Thornton [bold emphasis mine]

The common pattern in these four historical episodes contains the following features. First, a period of “easy money” leads to a rapid expansion of the economy and a boom in the stock market. In particular, the relatively easy availability of credit fuels a substantial increase in capital expenditures. Capital expenditures flow in the direction of new technologies which in turn creates new industries and transforms some existing industries in terms of their structure and technology. This is when the world’s tallest buildings are begun. At some point thereafter negative information ignites panicky behavior in financial markets and there is a decline in the relative price of fixed capital goods. Finally, unemployment increases, particularly in capital and technology-intensive industries. While this analysis concentrates on the U.S. economy, the impact of these crises was often felt outside the domestic economy.

It would be very easy to dismiss the skyscraper index as a predictor of the business cycle, just as other indicators and indexes have been rightly rejected. However, the skyscraper has many of the characteristic features that play critical roles in various business cycle theories. It is these features that make skyscrapers, especially the construction of the world’s tallest buildings, a salient marker of the twentieth-century’s business cycle; the reoccurring pattern of entrepreneurial error that takes place in the boom phase that is later revealed during the bust phase. In the twentieth century the skyscraper has replaced the factory and railroad, just as the information and service sectors have replaced heavy industry and manufacturing as the dominant sectors of the economy. The skyscraper is the critical nexus of the administration of modern global capitalism and commerce where decisions are made and transmitted throughout the capitalist system and where traders communicate and exchange information and goods, interconnecting with the telecommunications network. Therefore it should not be surprising that the skyscraper is an important manifestation of the twentieth-century business cycle, just as the canals, railroads, and factories were in previous times.

China Bubble: Ballooning Debt for Grand Projects

More signs of China’s ballooning bubble.

From the Bloomberg,

A copy of Manhattan, complete with Rockefeller and Lincoln centers and what passes for the Hudson River, is under construction an hour’s train ride from Beijing. And like New York City in the 1970s, it may need a bailout.

Debt accumulated by companies financing local governments such as Tianjin, home to the New York lookalike project, is rising, a survey of Chinese-language bond prospectuses issued this year indicates. It also suggests the total owed by all such entities likely dwarfs the count by China’s national auditor and figures disclosed by banks.

Bloomberg News tallied the debt disclosed by all 231 local government financing companies that sold bonds, notes or commercial paper through Dec. 10 this year. The total amounted to 3.96 trillion yuan ($622 billion), mostly in bank loans, more than the current size of the European bailout fund.

There are 6,576 of such entities across China, according to a June count by the National Audit Office, which put their total debt at 4.97 trillion yuan. That means the 231 borrowers studied by Bloomberg have alone amassed more than three-quarters of the overall debt.

The fact so few of the companies have accumulated that much debt suggests a bigger problem, says Fraser Howie, the Singapore-based managing director of CLSA Asia-Pacific Markets who has written two books on China’s financial system.

“You should be more worried than you think,” he said of Bloomberg’s findings. “Certainly more worried than the banks will tell you.

“You know how this story ends -- badly,” he said.

The boom from opening up of China’s economy is one thing, but a boom fuelled by government intervention is another—they are artificial and spent on projects fancied by politicians and not by the marketplace.

More from the same article,

A building boom by thousands of local governments became the backbone of the country’s stimulus program started in November 2008 -- on borrowed money. The financing companies were created starting in the 1990s and enabled provinces, cities, counties and townships to bypass rules barring most of them from directly selling bonds.

Projects undertaken include a stadium, which resembles Beijing’s iconic Bird’s Nest Olympic venue, in Jinan, the capital of eastern China’s Shandong province; and a superhighway in the country’s second-poorest province of Yunnan that stretches into the foothills of the Himalayas, where there are no cities of more than 1 million people.

China has been reversing the sustainable boom from burgeoning entrepreneurship paradigm, by transferring and squandering taxpayers money and reversing the entrepreneurship role for political goals—the preservation of the status quo for the political leadership.

Nevertheless delusions of grandeur projects represent as commonplace indicators of bubble cycles.

Austrian economists label this as the ‘skyscraper index’.

As Professor Mark Thornton writes

the cause of skyscrapers reaching new heights and severe business cycles are related to instability in debt financing and that the institutions that regulate debt financing should be reevaluated, if not replaced with more efficient and stabilizing institutions.

And yes I agree, this story ends—badly.

More Signs of China’s Bubble: Unused State of the Art Sports Stadiums

China’s manifold grand real estate projects like ghost cities and empty malls are manifestations of her “spend you way to prosperity” bubble economy. And there is more, China has been erecting ostentatious sports stadiums that has hardly been used.

The Business Insider writes

The stadium-building frenzy that took over China in the lead up to the 2008 Olympics hasn't stopped.

The glitzy new Shanghai Oriental Sports Center opened earlier this summer, and more venues are currently under construction in cities and towns across the country.

But these stadiums have one little problem: no one uses them.

China's domestic sports scene is still in its infancy — with basketball and a corruption-hit soccer league the only viable organizations.

Here are two samples of these grand edifices.

Click here to see more pictures of the hardly used stadiums from the Business Insider

China's Bubble And The Austrian Business Cycle

Is China in a bubble?

That's THE current debate between China optimists and pessimists.

And this has been accentuated by reports that China will surpass Japan, by next year, as second in the order of ranking among the world's economic heavyweights.

The Economist underscores the mainstream polemic, (bold emphasis mine)

``NEXT year China will overtake Japan to become the world’s second-largest economy. Its rapid ascent has led some to question whether China will follow in Japan’s footsteps, with the bursting of a massive bubble followed by years of decline. But China is still far poorer than Japan was at its peak, and thus has more room to improve productivity. A transition of surplus labour from agriculture to industry and services would increase efficiency and bring its economy more in line with the developed world. And China’s stimulus package has produced much needed infrastructure that will reinforce future growth. But in the long run, a shift away from investment and exports towards domestic consumption would make China’s output more sustainable, and help it to avoid experiencing a bubble like Japan's."

I do not share the mainstream economic gobbledygook.

Although establishing China's current conditions would likely be tricky and complicated.

First, we share with the bears that China could be in a bubble if they continue to pursue current interventionist policies on their banking, finance and the real economy.

For instance, easy monetary policies and a massive jump in money supply are suspected to have buoyed prices of real estate and the stock market as bank credit (circulation credit) have been presumed to have channeled into speculative activities.

Empirical evidence of this would be the emergence of several uninhabited or ghost cities [see China's Ghost Cities].

In the Austrian Business Trade Cycle, the manipulation of interest rates essentially leads to massive clustering errors or huge malinvestments that will eventually unravel-hence the boom bust cycle.

To quote Dr. Richard M. Ebeling, (bold emphasis mine)

``Unfortunately, as long as there are central banks, we will be the victims of the monetary central planners who have the monopoly power to control the amount of money and credit in the economy; manipulate interest rates by expanding or contracting bank reserves used for lending purposes; threaten the rollercoaster of business cycle booms and busts; and undermine the soundness of the monetary system through debasement of the currency and price inflation.

``Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from their interventions, regulations and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

Nonetheless, Chines corporations have remained cash liquid and may not have reached the state of wild orgy of misdirected investments.

According to the US Global Investors, ``Despite government infrastructure spending boom in China this year, Chinese companies have not aggressively deployed cash so far and corporate bank deposits kept soaring and reached around $3 trillion as of October. There exists a remote risk of “herd spending” down the road when domestic demand picks up strongly and profit cycle restarts, eventually resulting in economic overheating." (see Chart upper right window)

Moreover, private spending has taken over public spending since September; see chart above from US Global Funds

In other words, for the meantime it would seem like some semblance of economic recovery, however as earlier cited, the persistence of present policies are likely to foster massive economic and financial imbalances.

Moreover, China's stock market as signified by the Shanghai (topmost chart below) and the Shenzhen (bottom) benchmarks are quite distant yet from ALL time highs. [chart courtesy of Bloomberg]


Like in most bubbles, both real estate and the stock market benchmarks would likely reach new highs before inflecting as in the case of the Japan (1990) and the Asian Crisis (1997) with the exception of the US mortgage crisis (2007-8) [see previous post The Lost Decade: US Edition].

One possible factor that could offset or extend the bubble cycle would be China's thrust to integrate with Taiwan [see Tomorrow’s Investing World According To The Bond King] and with ASEAN [see Asian Regional Integration Deepens With The Advent Of China ASEAN Free Trade Zone].

In addition, while there have been indeed some signs of bubble, usually in the context of grandeur edifices such as China's unveiling of Speeding Bullet Train program, to quote Bloomberg,

Picture from Bloomberg

``Train C2019 covers the 120 kilometers between Beijing and Tianjin in 30 minutes, passing peasants in fields burning corn stalks and warrens of shacks occupied by people who aren’t sharing in China’s economic boom.

``The line is part of China’s 2 trillion yuan ($292.9 billion) investment in a nationwide high-speed passenger-rail network that may be too much train, too fast."

...these may not seem as extravagant yet-relative to other recent bubble afflicted economies or markets as Dubai.

In Why Dubai’s Debt Crisis Isn’t Likely THE Next Lehman, we noted, ``Dubai’s meteoric rise via profligate projects produced many of the world’s landmark projects (boondoggles), such as the only seven star hotel, the Burj Al Arab, the world’s tallest skyscraper, Burj Dubai (uncompleted), biggest indoor ski slope, Ski Dubai, largest shopping mall (in terms of total area and not gross leasable space), the Dubai Mall, the world’s biggest theme park, the Dubailand and the Palm Islands, the Palm Jumeirah, has virtually challenged Abu Dhabi’s role."

You see, 'delusions of grandeur' typically herald bubble climaxes, such as the emergence of towering skycrapers...
or even in the art markets as previously posted see Global Art Market As Bubble Meter, China's Fast Expanding Role

Bottom line: Political policies based on path dependency suggest that China will mostly endure a boom-bust cycle, although it may not necessarily redound to a Japan model or experience. However, these policy based imbalances would likely evolve overtime, and will be manifested in diverse asset markets, before facing her fateful day of reckoning.