Readers will recall the Skyscraper Index, that colossal monument to human folly which so often predicts imminent recession for those that dare build to the heavens. In China, it is literally crumbling:
- The US consulate has warned Americans to steer clear of a shaking Shenzon skyscraper.
- There was no earthquake.
- Shenzen has 297 buildings above 150m.
I am sure that many an Australian body corporate on the end of Chinese construction methods and materials can sympathise.
But the troubles of one dodgy tower pale into insignificance against what is transpiring for the wider Chinese ghost city developer market. As I have noted throughout this year, China’s “three-red lines” policy for major developer deleveraging has also crushed construction starts 10% below 2019 levels:
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Now regulators are moving to tighten off-balance sheet sources of funding as well:
- More developed are going to go under. 27% of bond defaults this year are in the segment.
- Macquarie says construction activity will fall.
- Shadow finance has been a key source of funding for ponzi-builders like Evergrande.
- The finance is often a daisy chain of counter-party guarantees into JVs.
- They are already contracting.
- Real estate is 29% of Chinese GCP.
And it is 40-50% of Chinese iron ore demand, meaning it is 28-35% of worldwide seaborne iron ore demand.
Chinese construction is literally all that matters to the price of iron ore and it is entering a very nasty recession.