Monday, October 26, 2015

Rapid Expansion of China Shopping Centers For A Declining Shopping Population...Implosion Dead Ahead?!?

Some interesting articles today regarding China's shopping malls. I wanted to put this in a broader context as it's very helpful to understanding the relative scope of China's growth and the issues around this. 
  • In the '14-'16 period, China's shopping centers are planned to grow by 80% (square meters) over existing retail footprint plus account for 62% of global growth.
  • China's core 15-64yr/old population will peak in 2015 and begin a multi-decade decline in 2016.
  • China's housing fueled credit bubble rose from $3.5 T ('03) to $28 T ('14) but the rate of growth is likely slowing precipitously.
  • The migration of shopping from brick and mortar to online (likes of Alibaba) is sure to increasingly pull significant revenue away from these stores.
  • With fewer total shoppers, slowing credit growth, and a shift to online shopping, where will the business come from to fill the near doubling of china's shopping centers???

Here's some quick context around the Global and China Shopping Center market:
Globally -
  • 925 million sq/m of existing "Gross Leasable Area" (GLA)
  • 79 million sq/m in the construction pipeline for '14-'16 
US - 
  • 620 million sq/m of existing GLA (3 states represent 28% of US GLA - California, Texas, Florida)
  • 11.1 million sq/m in construction for '14-'16...14% global total or 1.7% increase 
Europe - 
  • 154 million sq/m of existing GLA
  • 3.6 million sq/m in construction '14-'16...4% global total or 2.3% increase (vast majority of growth is Russia / Turkey).
Latin America - 
  • 34 million sq/m of existing GLA
  • 3.8 million sq/m in construction...5% global total or 11% increase (majority is Brazil / Mexico / Peru). 
China (plus HK) - 
  • 61million sq/m or 73% of existing GLA in Asia
  • 49 million sq/m in construction pipeline '14-'16...62% of global total and an 80% increase to current existing GLA in China. 
Takeaway, US has a massive amount of existing retail and China is building a massive amount of new retail.

China Demographics, Debt, and Oil Consumption 
From 1990 to 2015, China's core population (15-64yr/olds) rose by 273 million persons. As this annual population growth peaked and annual growth began decelerating in 2003, China's credit/debt bubble was borne, rising from $3.5 T to $28 T. This credit bubble coupled with large trade surplus' drove an increase in oil consumption from 5.6mbpd to 11mbpd.  An 8x's increase in debt resulted in a doubling of oil consumption representing real activity within the economy.  Plainly, credit growth was substituted for decelerating population growth to maintain Potemkin GPD targets.
But decelerating population growth was just the beginning. From 2016 to 2030, China's core population is estimated by OECD to decrease by 27 million. Said otherwise, (as shown in the chart below) the 0-64yr/old Chinese population will decline by 51 million persons by 2030 while the 65+yr/old population (absent income and largely dependent on the shrinking adult core population for their well being) will increase by 100 million.
Every year there will be fewer buyers (with means) and declining demand for an 80% increase in shopping gross leasable area (chart below).

Source: Cushman & Wakefield Retail Research. Shopping Centers > 5k sq.m in primary cities only
The below graph shows China's shopping center pipeline in relation to the rest of Asia. China's growth dwarfs everything else in Asia and likewise the world over.

Source: Cushman & Wakefield Retail Research. Shopping Centers > 5k sq.m in primary cities only
Online Retail: 
None of this even accounts for the migration of shopping from brick and mortar malls to internet giants like Alibaba and the like. Physical retailers often become the testing grounds for actual purchases made (more inexpensively) online and shipped to the buyers homes.

Conclusion - Not sure China's retail sector is the greatest short ever or if the Chinese government will somehow come to the rescue (again) but the obvious mismatch of new supply for diminishing demand is awe inspiring . Analysts who focus on this segment will know far more the debt loads and details on a company by company basis so I defer all trading suggestions to others.  Still, how ratings agencies can be so far behind the curve again raises serious questions about their supposed role in "rating" risk.
However, if red lights and sirens aren't going off for the implications to diminishing global growth, then you're simply wearing blinders and ear plugs. This is only one of so many areas in which China represents the majority of global growth since '08/'09 but demographics and credit suggest China's role of global demand driver has ceased and China (and the globe) is in for a very rough ride until the gross imbalances are repaired (aka, probably a long time).