17 January 2012

China SignPost #52–Digging In: Earthmover Sales Reflect Risks to China’s Economic Growth

Gabe Collins and Andrew Erickson, Digging In: Earthmover sales reflect risks to China’s economic growth, China SignPost™ (洞察中国), No. 52 (17 January 2012).

China SignPost™ 洞察中国–“Clear, high-impact China analysis.”©

–Earthmover sales are a useful economic indicator because China’s construction and fixed asset-driven economy is very heavy equipment-intensive. Also, construction machines are not a speculative asset in the way copper and other commodities can be.

–Earthmover sales are a forward looking indicator, since construction contractors buy machines based not just on current needs, but also on growth potential they see in coming months and years.

–Sales of bulldozers, hydraulic excavators, and wheel loaders in China’s domestic market slowed significantly in the second half of the year and were quite weak compared to trend. This matches up well with housing prices declines in major Chinese cities.

–Anecdotal data point to a large market for used heavy equipment in China, but sales of new machines are still the best bellwether for economic activity as the country’s fleet expands.

–Zoomlion, one of China’s largest heavy equipment dealers by market share, reports that its trade receivables (i.e. money owed to it by customers) was 67% higher on 30 September 2011 than it was at the end of 2010.

–This suggests some equipment buyers are falling behind on making payments, perhaps because a construction slowdown is reducing their revenue streams.

Finding data that accurately reflect real economic activity and are not easily manipulated for political reasons is a key challenge in assessing the Chinese economy. We believe that earthmover sales are one such indicator.

Contractors are very unlikely to treat earthmovers as a speculative value store the way many Chinese have stockpiled copper and other base metals over the past 18 months, despite the fact that they had no ability to consume the metal themselves (Financial Times). Rather, bulldozers, excavators, and wheel loaders are depreciating assets whose prices decline the moment they leave dealership lots.

The machines’ value comes from the work they can do, not because there is a futures contract in bulldozers. As such, earthmover equipment sales shed a truer light on the state of China’s real economy than do “apparent consumption” number for copper and other commodities. The other metrics are undeniably valuable, but their data are more vulnerable to distortion than earthmover sales are. …