UPDATE: 87% of Skyscrapers Being Built in China and the Business Cycle

The Chinese press is spreading the story that 87% of skyscrapers (defined as buildings of at least 500 feet or 152 meters) are being built in China. For the previous post, see: Skyscraper Index Alert: 87% of World's Skyscrapers Being Built in China

I took these pictures with my phone, if I can find a large version online I will replace them later. First up is a pictorial of the tallest buildings in the world. The Dubai tower is cut-off at the right, and to the left, the next building would be the Sears Tower at 443 meters.

Next up are the buildings being built in China. The tallest in the world (Sky City) has stopped construction due to lack of government approval. According to the latest reports, construction is continuing on Sky City because the current construction (such as ground leveling) does not fall under the scope of a government investigation into the construction plans. (Chinese source) Still, If we assume it get's approval, China will have the tallest building in the world, followed by the Dubai tower, then three buildings in China, followed by the Mecca Royal Hotel Clock Tower, followed by four Chinese buildings, then the Tapei tower in Taiwan, giving China 7 of the top 10 tallest buildings in the world. The only proposed building that I'm aware can change that list is Busan Lotte World II, which would bump Taipei off that list.

Next up is a comparison with the U.S. This stat was covered in the prior post, but this graphic breaks the numbers down, showing us existing skyscrapers in the U.S. and China, those under construction, and those in the planning stages. China is already close to the U.S. in the number of skyscrapers, but it blows the U.S. away in terms of buildings under construction and planned.

Finally, in the prior post there was a breakdown of how many buildings were under construction or in the planning stages for ten cities. The numbers are broken out here again, but this time it includes the number of existing skyscrapers as well. Top to bottom the cities are: Shanghai, Shenzhen, Guangzhou, Tianjin, Beijing, Nanjing, Shenyang, Wuhan, Chongqing, Chengdu. (In the previous post Dalian was listed, here it is replaced by Nanjing.)

The skyscraper index:
The Skyscraper Index is a concept put forward in January 1999[1] by Andrew Lawrence, research director at Dresdner Kleinwort Wasserstein, which showed that the world's tallest buildings have risen on the eve of economic downturns. Business cycles and skyscraper construction correlate in such a way that investment in skyscrapers peaks when cyclical growth is exhausted and the economy is ready for recession. Mark Thornton's Skyscraper Index Model successfully sent a signal of the Late-2000s financial crisis at the beginning of August 2007.

The buildings may actually be completed after the onset of the recession or later, when another business cycle pulls the economy up, or even cancelled. Unlike earlier instances of similar reasoning ("height is a barometer of boom"), Lawrence used skyscraper projects as a predictor of economic crisis, not boom.

Careful statistical study has found that the height of buildings can not be used to accurately predict recessions or other aspects of the business cycle, but that GDP can predict the height of building construction.
The existing skyscraper index is based on the world's tallest building, which broke ground in July in China, but was then saw construction halted by government regulators. That 87% of skyscrapers under construction are in China is even more incredible and is a flashing neon red sign.

Mark Thornton's article is available here: Skyscrapers and Business Cycles
In response to the change in relative prices, more resources are allocated to long-term capital goods. Unlike other aspects of the self-adjusting market process, such as money, land, labor, and short-term or intermediate capital goods, these resources become suspended or fixed in long-term fixed capital goods. These resources become formulated in a highly specific capital good that may not be well suited to the alternative production processes of the postadjustment economy. As a result, all of the adjustment in these long-term fixed capital goods must come from a change in price and this will entail large losses and possible bankruptcies by the owners of these capital goods. To the extent that these types of adjustments are widespread, they pose a threat to capital markets and the banking system.
One of the key concepts of the Austrian school is that the artificial lowering of interest rates by the central bank leads to malinvestment. The artificial lowering of interest rates signals to the market that there is a large amount of long-term savings for use in long-term capital projects, which in fact do not exist. Borrowers then "tap" this savings and build fixed capital such as skyscrapers and infrastructure, leading to a distortion of the market demand and funding for fixed capital and the amount built. The only way to balance this misallocation of resources is to liquidate the bad fixed investments. In the mot simple terms, the supply of fixes capital, the supply of skyscrapers, exceeds the demand and so prices fall.

The first Cantillon effect is the impact of the rate of interest on the value of land and the cost of capital. A lower rate of interest tends to increase the value of land, especially in the central business districts of major metropolitan cities. Land values rise because lower rates of interest reduce the opportunity cost or full price of owning land. Treating the rate of interest as an exogenous cause, a reduction in the interest rate will increase the demand for land and result in an increase in land prices. However, the overriding issue with land is "location, location, location," so that the interest rate will have differential effects on land prices.
Exacerbating this effect in China is that local governments derive an extremely high portion of operating revenues from land sales.

The second Cantillon effect from lower rates of interest is the impact on the size of the firm. A lower cost of capital encourages firms to grow in size and to become more capital intensive and to take advantages of economies of scale. Production and distribution become more specialized and take place over a larger territory. Instead of a dairy farmer raising cows and producing milk for the domestic market, larger firms raise a greater quantity of dairy cattle, ship raw milk to processing plants and ship processed dairy products back to wholesale and retail distribution sites. The production of dairy products becomes more roundabout, but also more productive. As part of this more roundabout production process, firms develop central offices or headquarters, as well as marketing offices within their market territory. This increases the demand for office space in central business districts. This demand in turn raises rents and encourages the building of more, and still taller, office buildings within the central market district.
This is happening all over China, as the stats above show.

The third Cantillon effect is the impact on technology of constructing taller buildings. Inevitably, record-breaking skyscrapers require innovation and new, untried applications of technology. Buildings that reach new heights pose numerous engineering and technological problems relating to such issues as building a sufficiently strong foundation, ventilation, heating, cooling, lighting, transportation (elevators, stairs, parking), communication, electrical power, plumbing, wind resistance, structural integrity, fire protection, and building security. There is also a host of "public" issues connected with increases in employment density brought about by tall structures, such as transportation congestion and environmental concerns.[14] Beyond the mere technology it takes to build the world's tallest building, every vertical beam, tube, or shaft in a building takes away from rentable space on each floor built, and the more floors in the structure, the greater the required capacity of each system in the building, whether it is plumbing, ventilation, or elevators. Hence, there is a tremendous desire to innovate with technology in order to conserve on the size of building systems or to increase the capacity of those systems. Therefore, as the height of construction rises, input suppliers must go back to the drawing board and reinvent themselves, their products, and their production processes.
The world's tallest building, the Skyscraper City in Changsha, is planned to be built in less than a year, breaking the 410 day record held by the Empire State Building.

The Mark Thornton article goes into great detail. Recommended for anyone interested in the Skyscraper Index and how it relates to the business cycle. Skyscrapers and Business Cycles

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