Will China's Skyscraper Craze Herald The Beginnings Of An Economic Crash In 2012?

by: Timothy Woods

Countless analysts have predicted an impending decline of China's incredible economic growth over the last 20 years. And still the "world's factory" continues to grow its economy (10% average a year for the last 20 years). However there are now more analysts than ever treading much more carefully around the Red Dragon, as more potential signs of an economic downturn are apparent. These potential warning signs are of course merely speculative, and, as China has done so time and again, who is to say that the country will not just keep on growing?

Is skyscraper building going to be China's undoing?

China is home to 53% of the world's skyscrapers that are currently under construction. One survey claimed that China will see the equivalent of one new high-rise completed every five days during the next three years and within five years the country will have a total number of 800 skyscrapers. Barclay's Capital called this, "evidence of the expanding building bubble."

The Chinese are consuming steel and iron at unprecedented levels. They have more property projects in construction than any other nation in history. The colossal number of skyscrapers being built is accompanied by a government order of 36 million urban households by 2015.

In a report carried out by Barclays Capital last month, it found that over the last 140 years every period of skyscraper building is quickly followed by an economic downturn. The erecting of 40 Wall Street, the Chrysler Building and the Empire State building in New York, occurred just before the Great Depression. The 1997 Asian Financial Crisis began just as Kuala Lumpar's Petronas Towers was finished. More recently, Dubai unveiled the Burj Khalifa, the world´s tallest building, to the world in 2010. The building cost an estimated $1.5 billion. Just one month before, Dubai was saved from bankruptcy by its neighbor, Abu Dhabi, in a loan deal worth $10 billion. Soon after, the building´s rents plummeted by 40% due to the slump in the Dubai property sector. These are hard facts that cannot be ignored.

Why China's skyscraper obsession could push the country toward an economic crash

There are various reasons why skyscraper building can destabilize an economy. Building booms are usually a sign of excess credit. According to Andrew Lawrence, from Barclays Capital, skyscraper construction has historically "been characterized by bursts of sporadic, intense activity that coincides with easy credit, rising land prices and excessive optimism" but by the time of the skyscrapers' completion, the economy finds itself in a recession.

Added to this, there are other factors that could contribute to a downturn. China's growth has been so remarkable mainly because of an export trade at low costs that no other country has been able to match. However, since 2008, exports have inevitably suffered as a result of the global downturn. To counteract this, China has focused on real estate and infrastructure development (rail building, bridges, roads) but workers cannot pay the high rent prices, so the skyscrapers go empty and the roads not driven on.

There is even a belief that much of the skyscraper craze is down to simple competition among Chinese cities, particularly the smaller cities. Small by China's standards may still mean a population of a few million people. Analysts such as James Quinn highlight that the central government has lost control over local government. What may emphasize the slowing of the Chinese economy, the second and third quarters of 2011, showed growth of just 1.5%. With so many problems simmering under the surface, it is hard to imagine that the direction China is taking is sustainable.

Potential U.S. listed Chinese stocks to consider

Any potential economic downturn though not out of the question, will likely not happen in the immediate future but if it were to happen, it would be within the next five years. Chinese stocks however, remain to offer investment opportunities. Melco Crown (MPEL) was one of the best performing U.S. listed Chinese stocks of 2011, though at the time of writing, it recorded a fall from 11.91 to 11.82. Youku Inc. (NYSE:YOKU) is benefiting from China´s internet growth. At the time of writing, its stock is up 0.70% to 23.00. However saying that, Sohu.com Inc. (NASDAQ:SOHU) is down almost 2% on the previous day's trade, at 50.90. Baidu, Inc. (NASDAQ:BIDU), another of last year's strong performers is up 3.48% at 135.45. As China´s internet use exceeds the 500 million mark and just before Baidu announces its fourth-quarter results for 2011, on February 16 2012, this stock in particular has been tipped in some quarters.

Regarding China there are two general schools of thought. The first believes that China cannot be stopped. It survived the Asian Financial Crisis of 1997, it just keeps growing and growing, the country and economy is simply too big and its destiny is to overthrow the U.S. as the world's number one economy. Then you have your second group, the skeptics, who believe that China's very own pragmatic capitalism will catch up with the country. It is now in the grip of a bubble, and like every bubble, it will burst. In what Quinn likened to a "house of cards," China's economy is looking ever more precarious. Virtually every country that has gone through a property boom where bank loans are so easily attained, eventually goes through a downturn. "Oh, but this time it's different." Is it really?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.