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China’s Concrete Bubble Is Ready To Pop
Chinese construction keeps trending down with Sany the world’s sixth largest heavy machinery maker reporting a rise in profit of 5.3% 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.