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Don’t Fall for This China Head Fake

Since August 2011, I’ve been ushering in proof that the China growth story is slowing down. (See here and here.)

Now we have even more proof…

Last week, China’s statistics bureau revealed the economy grew by 8.9% in the fourth quarter – the slowest pace in 10 quarters. And full-year GDP growth checked in at 9.2%, down from 10.4% in 2010.

What amazes me, though, is that investors applauded the figures as a “clear” indication that China is headed for a steady slowdown, rather than a hard landing. And, in turn, they bid up share prices in Shanghai.

Can you say, “Denial?”

Stock Markets Don’t Lie

Remember, stock markets are forward-looking beasts. And ever since April 2011, the Shanghai Composite Index has been dropping.

That’s a much clearer signal to me that more trouble lies ahead for the world’s second-largest economy than one quarter’s worth of economic data.

So what do I make of the latest rally? It’s nothing more than a head fake. So don’t fall for it – the economic data and commentary coming out of China continues to indicate that growth is cooling.

Consider:

  • China’s richest man and Chairman of Sany Heavy Industry Co., Liang Wengen, recently said that construction machinery demand is weak. If anyone has a clue about construction demand in China, I’d say it’s Mr. Wengen. His comments don’t exactly instill optimism, now do they?
  • In 2011, home sales rose at their slowest pace in three years. And real estate prices are plummeting, too. For example, Sanya, China’s hottest property market in 2010, witnessed a 28% decline in prices in 2011 (through November), according Centaline Property Agency.

I’m not alone in my bearish thinking here, either. After the latest data release, an IHS Global strategist said China’s “economy is in the midst of an aggressive slowdown.” Preach it, brother!

Be Wary of the China Skyscraper Boom

If you have any lingering doubts that China is destined for a prolonged slowdown, consider the obscure, yet informative, Barclays Skyscraper Index.

It measures construction activity and reveals that construction of the tallest buildings in the world coincides with economic crises.

For example, the construction of three record-breaking buildings – 40 Wall Street, the Chrysler building and the Empire State building – coincided with the Great Depression

Well, guess what? There are about 125 skyscrapers currently under construction in China, with 65 set for completion over the next six years. In comparison, India is only planning to complete 14 skyscrapers in the next five years.

When so many skyscrapers go up, the Barclays Index suggests that after so much misallocation of capital, the economy is certain to come down.

So look out below!

Bottom line: If you still have a significant amount of money invested in Chinese equities, take heed. The latest economic data, stock market activity and the Barclays Skyscraper Index imply a significant slowdown could be in the works.

Ahead of the tape,

Louis Basenese