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The bigger Asia builds, the harder it falls?

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Barron's Asia

Most economic observers have a favorite quirky indicator, a data set more amusing than scientific. Hemlines, divorce rates, traffic jams, beer consumption, Super Bowl winners, hair lengths, Big Mac prices, Google searches, you name it. Skyscrapers are mine.

Since the late 1990s, I’ve been amused and intrigued by the striking correlation between world’s-tallest-building projects and economic woes. It was the completion of Malaysia’s Petronas Towers coinciding with the 1997 Asian crisis that first hooked me. That followed similar links in 1970s New York and Chicago, where the World Trade Center and Sears Tower were completed amid fiscal crises, stagflation and the breakdown of the Bretton Woods monetary system.

Before that, in 1929, 40 Wall Street and the Chrysler Building presaged the Great Depression. The 1931 opening of the Empire State Building came even as the funk deepened. The Panic of 1907 dovetailed with the christening of the 47-story Singer Building and 50-story Metropolitan Life Building (both in Manhattan). History is packed with such episodes, from the biblical Tower of Babel to Dubai’s 818-meter Burj Khalifa Tower monstrosity in 2009 to the Shanghai Tower being completed, as fate would it, now. Perhaps it’s just a coincidence that Chinese stocks are crashing and Hong Kong’s dollar peg is under attack.

Could there be more to this Skyscraper Curse than just fun and games? Let’s hope not as this phenomenon — and the forces that tend to drive it — goes truly global, as in the entire international financial system. According to the Council on Tall Buildings and Urban Habitat, the world just reached the 100 supertall-skyscraper mark (defined as buildings 300 meters and higher). That No. 100 is in New York (432 Park Avenue) might not surprise investors suffering deep losses on Wall Street. Most of these projects are in Asia and the Middle East, though, raising many other what-if’s.

Most interesting is how quickly the projects are popping up — both literally and figuratively. It took 80 years to get to the first 50 supertall buildings from 1930 to 2010, but just five years to add the next 50. The next 50 of the future could be completed in even less time. What does this say about the state of the global economy today and where it might be heading? Perhaps nothing. Or, perhaps everything.

Efforts to building the tallest tower are as much about hubris and excess as technology. “Of course, the building of record-setting skyscrapers does not cause world economic crisis,” explains Mark Thornton of the Ludwig von Mises Institute, which espouses the Austrian school of economics. “The records are merely symptoms of the underlying cause of world economic bubbles: sustained artificially low interest rates by central banks.”

One could argue that 432 Park Avenue is more of the latter than the former. At 425.5 meters, it’s the 14th tallest building in the world and the No. 1 all-residential one. As the Council on Tall Buildings and Urban Habitat points out, “it’s remarkable not just for its extreme height, but for its slenderness as well. With a 1:15 slenderness ratio, the tower typifies the ‘superslim’ typology that has been made possible by advances in lateral resistance technology.” Such structures, it explains, are becoming a common sight in dense cities like Manhattan, where demand for luxury residences meets limited land availability.

In Asia, though, skyscrapers tend to be about marketing — a kind of architectural punctuation mark to make a skyline recognizable on CNN and scream “We’ve arrived!” The pride, global ambition and unlimited credit that often drive such one-upmanship make for a dangerous economic mix. This irrational use of public resources results in overcapacity, off-the-charts asset valuations and creates a top-down policy ethos that fools investors into believing nothing could go wrong. Look, we’re human. So impressed are we with construction crews reaching into the heavens that we forget it tends to be a metaphor for financial overreach.

Not surprisingly, a critical mass of today’s architectural vanity projects is in China and oil-rich Gulf states. And China is now growing at the slowest pace in 25 years, Shanghai is bleeding losses and markets are losing faith in the Communist Party’s ability to avoid a hard landing. Oil prices below $30 per barrel, meanwhile, are a clear and present danger to that construction mecca known as the Middle East. Perhaps it’s just a coincidence, too, that Saudi Arabia is racing to complete the Jeddah Tower, which will be humankind’s first kilometer-high edifice.

What about Tokyo? The Nikkei is entering bear market territory (down 21 percent from its recent peak in June) just as Mitsubishi Estate is working up plans for Japan’s tallest building, an $8.3 billion development. It’s also worth noting that Tokyo was putting the finishing touches on the 634-meter Skytree as a record earthquake hit in 2011.

Yet China is the real worry. It’s bout of skyscraper-itis coincides with towering debt of a magnitude the world has never known. Since 1999, Barclays economist Andrew Lawrence has periodically published a “Skyscraper Index.” By 2012, just as President Xi Jinping was taking the reins in Beijing, Lawrence had concluded that the curse is “certainly something to bear in mind when looking at China’s real estate markets.” Today, China’s ballooning $28 trillion credit bubble confronts the slowest growth since the early 1990s.

Beijing’s preferred growth inducer is supercharged spending on massive infrastructure projects, including skyscrapers. As a result, total debt reached an astounding 282 percent of gross domestic product in 2014. If that’s not curse enough, Xi may be losing control of the yuan at a time when the risks of debt defaults, epic stock volatility and social instability rise. Last summer’s $5 trillion equities selloff, remember, hurt middle-class Chinese far more than foreign investors.

Perhaps it’s just a fluke of timing that Beijing faces a high-wire act of repaying debt, while avoiding a fresh buildup of IOUs to maintain rapid growth just as Shanghai Tower opens. Or not.

William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com