2012-07-04

China's spiraling financial bubble

Over at Steve Keen's Debtwatch are two articles on China's growing debt financing schemes.

The Looting of China by the Kleptokapitalist Bourgeoisie Roaders
Zoomlion has an interesting business model, it is similar in many of ways to Caterpillar, except whereas Caterpillar report falling sales, Zoomlion reports astounding sales growth with a fivefold increase in revenue since 2007. Zoomlion customers sometimes buy ten concrete mixers when they planned to initially by one or two. They have a perverse incentive to buy more than they need because these concrete trucks are purchased via finance packages supplied by Zoomlion.

Then the machines can be garaged and used as collateral to borrow further funds from other lenders. Zoomlion continues to grow while cement sales have plunged. In May, cement output increased 4.3 per cent YoY, down from 19.2 per cent recorded last year. Zoomlion’s new debt of $22.5B buys roughly 900,000 trucks which could produce enough concrete (at six loads a day) to build over thirty Great Pyramids of Giza a day .
This is the type of financing that did in firms such as Lucent at the end of the Internet Bubble.

China’s Concrete Bubble
Chinese construction keeps trending down with Sany the worlds sixth largest heavy machinery maker reporting a rise in profit of 5.4% 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.
Concrete is a very good indicator of GDP growth and the slide in demand is a major red flag. The debt financing is accelerant should the economy slow sharply, which is a growing possibility.

Here's a look at the Baoshan Steel Index. As you can see, since peaking in 2011 there have been three price decline movements. The first was the cliff drop last fall (when the real estate slow down hit, Europe and U.S. debt crises were front page news), then a slow decline into February before a bounce into early spring. Since April 20, the decline has resumed at a steeper pace than the winter.
Chinese steel industry profits continue to shrink
The Economic Information Daily citing statistics from an industry association said the combined profits of China major steel producers dropped more than 94%YoY to CNY 2.53 billion in the first five months this year amid sluggish demand as well as severe overcapacity in the sector.

According to the report in May, the combined profits of the 77 steel mills surveyed by the China Iron and Steel Association slid 21.7%MoM to CNY 1.4 billion, even though the second quarter is supposed to be a peak season for the industry. Also in May over 30% of companies in the sector suffered losses.
Investors have priced a slowdown into shares of Sany this year (600031). Shares of Zoomlion (1157) have held up better, but they are both down sharply from their highs of years past.




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