A Time To Be Cautious

My model flashed a "SELL" for MSCI World Index last week. This is the first time since 2011 June that it happened. In 2011, we had a steep correction of global stocks from Sep to Dec 11. So I do respect my model.

S&P500 is on the brink of a SELL. The CAPE ratio is so high that the forecast returns for the next 5 years is around 2 - 3% on a real basis and 4 - 5% on a nominal basis. 

I never fancied European stocks since the middle of 2014. The Eurostoxx 500 just rose a mere 8% since July 2014.

From June 2014, I favoured the HSCEI and it rose around 10% since mid 2014, tech sector rose by around 12%. It is less of a "BUY" now. Valuations are not at the cheapest.

The KOSPI and Energy sectors have flashed a "STRONG BUY" recently. I won't be buying aggressively since the overall MSCI World is flashing a SELL. 

Emerging Market equities is a "BUY" so again, I'll be staggering my purchases. It has become cheap again after the recent sell down.

Asia balanced funds like Schroder Asian Income and First State Bridge is a strong BUY. I will continue to hold on to these positions.

Actually, contrary to most analysts' consensus views, bonds are a good buy. Europe, Asia, Emerging Market, China, India, Latin American bonds are STRONG BUYS. Many of these countries are suffering from deflationary pressures, which favours bonds over stocks.

I will be doing some rebalancing in Feb.

Renouncing Singapore Citizenship and Returning to Work

http://www.guidemesingapore.com/relocation/citizenship/renouncing-singapore-citizenship

Above is an article about renouncing citizenship and returning to Singapore to work. Since the policy is so open to foreigners, there is little advantages to hang on to the Singapore citizenship. The advantages of having another citizenship is that if Singapore falls on hard times, at least you have some place to go. The 2 million foreigners residing in Singapore will definitely leave, as their own countries welcome them back with open arms. Singapore citizens will have it difficult.

The Singapore male has it worse. He has 2 years of National Service liability and a decade of reservist training, which puts him at a disadvantage when being considered for a job by a foreign talent manager. There simply isn't a Singaporean First policy to ensure fairness to citizens.

There are plenty of misguided policies, such as the abuse of the PIC system, which is abused by SMEs run by foreign talents and citizens alike. Very little of the grants are given for productive uses.

Another grave error the government made was to favour MNCs over grooming of SMEs. The GLCs crowded out SMEs as well, so that retired generals can run these companies never mind their suitability. As a result, there is no Singapore run private sector that can be world class. MNCs have their own agenda and constantly threaten to uproot from Singapore if the government tries to "push" them into hiring more locals and giving them fair chance of promotion.

These policies will not change unless there is a strong signal given in the next election.... 

Property Outlook for Next Decade

Superior returns in property investing requires the availability of mortgages. Post GFC, most central banks have an added motivation to control asset bubbles. It means that when prices rise too high, most governments will curb mortgage lending. To achieve superior returns, you need to invest in cities which just experienced a major crash, e.g. the US, Portugal, Spain, Ireland, Italy, and Greece. You can be certain the governments will encourage lending to boost construction jobs and banks.

In most other countries, governments are curbing lending. It means that house prices can only rise in tandem with wages in future. However, I believe that commercial properties may experience less interventions because they generally do not affect families. Residential property prices are political hot potatoes, but not commercial.

WHAT’S GOING TO AFFECT THE VALUE OF MY PROPERTY IN THE LONG TERM?

• Pete Wargent
 
• Michael Yardney's Commentary, Property Investment
 
• January 11, 2015

If you’re interested in property investment you’re probably wondering what in store for property prices, not just this year but in the longer term.

There are many theories about what makes property prices move, but in the simplest terms, there are two factors that determine price: supply and demand.

These factors are themselves affected by a myriad of smaller factors such as availability of financing, affordability and tax laws, to name but three.

So, what is my opinion on the future for Australian residential property? Well, the markets have a tendency to make monkeys of those who try to make forecasts. I will not make a definitive forecast, but instead I’ll look at the fundamentals of the market and the probabilities in order to make investing decisions.

Here are just a few of the fundamentals to consider:

Demand:
The population of Australia is predicted to increase dramatically to somewhere close to 30 million by 2040

Immigration:
The majority of immigrants will be heading for the capital cities, in particular to Sydney, Melbourne, Perth and south-east Queensland

Supply:
Statistics on this vary significantly, but it is generally acknowledged that Australia has an acute shortage of dwellings in certain areas and is not building enough new properties to house the expected numbers of immigrants; this is especially true in some landlocked city areas

Expected inflation:
The target inflation rate of the RBA is 2 to 3%, although core inflation is a shade below the target at the time of writing

Demography:
Generally, the population is marrying later, living in smaller two-income households for longer, and the younger generation overwhelmingly want to live near the CBDs of cities

Population density:
The increasing population will mean denser traffic, and rising fuel prices will increase the importance of transport links to the CBD.

My opinion is that property will continue to increase in value, but we are unlikely to see the relentless double-digit growth that we have seen in past decades.

Crucially, credit growth is extremely unlikely to continue to expand at such a dizzying rate, and it seems to me that the RBA is likely to be far more hawkish on inflation than governing bodies of decades gone by.

I also feel that the events of and fallout from the sub-prime crisis of 2007-2009 may force the world’s central banks to adopt a slightly different approach – rather than only focussing on controlling CPI and turning a blind eye to asset-price inflation, they may take a more active role in the controlling and deflation of asset bubbles.

For these reasons, I rationalise that the most obvious proxy for future property market growth is likely to be the growth of household incomes: logically, the more people have to spend on their residence, over time the more they will spend (though immigration may make the growth rate slightly higher).

Over the last couple of decades, median household income growth has been very strong, at times close to 6% per annum, but this has been partly fuelled by a significant increase in the number of two-income households.

Looking forward, it is reasonable to believe that the rate of increase may be somewhat lower, perhaps nearer to 4-5%, and consequently median dwelling price growth is likely to be somewhat lower than it has in the past too.

While this might be a reasonable assumption to make for a longer-term average, it is worth noting that in the short term property prices rarely move in such a uniform manner.

History shows us that growth asset classes are likely to spend long periods with values either flat or falling before seeing a period of accelerated growth.

As property investors, we want to remain invested through as many of these boom periods as we can.

We would do well to remember that between 1960 and 1990, the average rate of inflation was 8%, wage growth was 9.7% and property growth was around 11% (thus outperforming the CPI by around 3%).

Whether or not we have such high rates of inflation in the future remains to be seen, but we should note that the RBA’s target rate of inflation is now far lower than historical levels.

Property price growth is not the conspiracy that many people think it is. Much of the increase in property values over time is simply driven by the inflationary nature of our economy. Things will cost more in the future than they do now.

Unfortunately for the doomsayers, I believe that our property prices are likely to be heading upwards when we consider a reasonable time horizon. In future decades, Australia’s property prices are very likely to be far higher than they are today.

The question is, if median property price growth in the future is only somewhere around 5% instead of the 7–10% that has been seen in the past, is property still an asset class we should invest in? For my money, the answer is an emphatic ‘yes’.

Remember that, as property investors, we are not too concerned with median price growth.

We want to significantly outperform median price growth through investing in harmony with market cycles, picking properties that are in continual high demand and selecting properties that we can add value to through renovations.

Specifically, in Australia I will be investing in two-bedroom, two-bathroom units (and sometimes even one-bedroom units) with parking that are in suburbs close to the CBDs of some of the major capital cities.

I will be seeking investment-grade units in the supply-constrained, lifestyle suburbs that have transport hubs or links for easy access to the city.

Nobody knows what the future will bring, but if the median price of property grows by 5% over future decades, as a property investor I will be looking for my portfolio to outperform the median growth by at least 2%.

I believe that these suburbs and types of properties will achieve that because they are highly sought after as a result of their local resources and facilities. Properties in desirable suburbs are also impacted less by affordability issues than some of Australia’s housing stock.

How Fear and Greed Affects Investment Decisions

Most of my clients suffer from a basic investing mistake: they cut their winners, hold their losers. It seems counter intuitive but one should always cut loss from a losing investment and let winners run. Even I sometimes fail to heed this advice.

The level to cut loss is an art. I make my decisions based on the following:

1. If the asset is still undervalued, e.g.  For forex, I usually set it at around 200 bps. For stocks, if more than 30% below fair value, I will also set it at around 20%.

2. If the asset is over valued, e.g. If a stock is above its fair value, I will set the stop loss at 10%. But generally I will sell half immediately.

3. If the asset is AT fair value, or hovering around the fair value range, I will set the stop loss at 15%.

Stop losses cannot be applied to illiquid assets like property.

Most stock markets are on neutral territory now, meaning that I will set the stop losses at 15%. Remember that stock markets can fall over 50% in a bear market.

I recently noticed that the SGD yield curve is "kinked". The SOR was pushed above 0.6% to protect the SGD from sliding too far from USD. It is a bad sign for Singapore's economy and usually precedes a recession. I will avoid most Singapore stocks in general.

Thankfully, the yield curves of major economies, e.g. Eurozone, UK, the US, Australia, China are normal, but flat. It means we should see slow growth ahead but no recession.

It is not a good time to get greedy in 2015. Go for the bombed out sectors like oil and gas. Put your finger on the trigger but do not pull it. I see many fearful investors of oil and gas.

FEAR AND GREED

It is sometimes said that it is greed which drives investment markets up and fear which makes them plummet. But that’s not quite right.

The above chart intends to demonstrate that markets have a tendency to oscillate around a fair value, (however you may measure fair value) becoming well over-valued in a bull market and materially under-valued in a bear market.

The long-term trend is up (with earnings in the stock market or household incomes in property markets) but prices fluctuate around and tend to revert to the mean.

Bull markets often have a tendency to run for much longer than we think they will, but why? A part of the reason is that fear of missing out.

It’s very easy to sit out of investment markets when they are ticking along with inflation, but what happens when the next door neighbours, your work colleagues and mates down the pub are all “making a killing”?

Even at the risk of losing money, you might jump into stocks or property if only to avoid being the only person not “getting ahead”.

WHY HAVE OIL PRICES PLUNGED AND WHAT DOES IT MEAN FOR INVESTORS? | DR SHANE OLIVER

• Michael Yardney
 
• Michael Yardney's Commentary, Property Investment
 
• January 11, 2015

Oil prices have fallen more than 50% over the last year.

While lower oil prices are negative for energy producers and this has been weighing on share markets, ultimately it will be positive for growth in industrial countries, Asia and Australia and this should help drive share markets higher by year end.

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital explained the causes of this and it’s implications in a recent Insight. Here’s what he said:

INTRODUCTION

The past year has seen the world oil price fall by more than 50%.

Late last year as the fall accelerated this started to act as a drag on share markets and this has resumed at the start of this year as the oil price has continued to slide.

But what’s driving the oil price plunge and isn’t a fall in oil prices meant to be good news?

WHY HAS THE OIL PRICE COLLAPSED?

Put simply the oil price has collapsed because the global supply of oil has surged relative to demand.

Last decade saw the price of oil go from $US10/barrel in 1998 to $US145 in 2008.

Black lines show long term bull & bear phases. Source: Bloomberg, AMP Capital.

This sharp rise in the oil price both in nominal and real terms encouraged greater fuel efficiencies (use of ethanol, electric cars, etc) and more importantly encouraged the development of new sources of oil.

A significant example of this has been the surge in US shale oil production this decade which has taken US oil production back to 1980s levels.

We are now seeing benefit of this.

Source: Bloomberg, AMP Capital

This is similar to what occurred in response to sharp rises in oil prices in the 1970s, which then resulted in much weaker prices through the 1980s and most of the 1990s.

Other factors playing a role in the oil price collapse include:

• Slowing growth in the emerging world. The emerging world was a key source of growth in oil demand last decade but emerging country growth has slowed over the last few years in response to various economic problems. In particular Chinese economic growth has slowed to around 7% compared to 10% or so last decade.
• A rise in the value of the $US in response to relatively stronger economic conditions in the US. This weighs on most commodity prices as they are priced in US dollars. However, the oil price has also collapsed in euros, Yen and the $A so its not just a strong US dollar story.

However, the surge in the supply is probably the main factor.

In fact it was arguably OPEC’s decision last November not to cut production but rather to maintain it and try and force other producers to cut that has accelerated the fall.

In a big picture sense oil is just part of the commodity complex with all major industrial commodities – metals, gold, iron ore – seeing sharp price falls over the last few years as the commodity super cycle has shifted from excess demand to one of excess supply.

HOW FAR COULD THE OIL PRICE FALL?

How far the oil price will fall is anyone’s guess just as how much it would rise last decade was.

However, history tells us that it can fall much further than you think until supply is finally cut back.

In the 1980s and 1990s the oil price fell more than 70% before the bottom was hit (see the next chart). More recently oil prices plunged 78% through the GFC but the fall was short lived and supply in recent years has expanded not fallen as a result of the US shale oil revolution.

Source: Bloomberg, AMP Capital.

So a fall back to around $US40 a barrel or just below, ie a roughly 75% fall from the 2008 high is reasonably likely.

This level should start to force supply cutbacks amongst more marginal producers but, as we saw in the 1980s and 1990s, once prices bottom its likely to be followed by a period of base building rather than a quick surge back up.

WHAT ARE THE IMPACTS OF LOW OIL PRICES?

The plunge in oil prices has both positive and negative implications.

This has been reflected in sharp falls in energy share prices and a back up in high yield debt yields in the US, reflecting concerns about indebted US energy companies, and a collapse in the Russian sharemarket and Ruble on worries about the oil dependent Russian economy and a re-run of the 1998 Russian debt default.

And it’s these more visible impacts that have dominated the broad share market reaction to the oil price plunge over the last few months.

However, lower oil prices are a huge positive for the global economy generally. Oil price hikes lift business costs and are like a tax on households and so a surge in oil prices played a big role in the recessions of the mid 1970s, early 1980s, early 1990s and in 2008-09.

This all works in reverse for oil price slumps as business costs fall and the lower price of fuel provides a boost to household spending power. Rough estimates suggest a boost to growth in industrialised countries and in Australia from the 50% fall in the price of oil of around 0.7% if the fall is sustained.

Asia is likely to see a slightly bigger boost as most of Asia is a net importer of oil. Lower energy prices will also bear down further on inflation, which in turn will mean more pressure on China, Japan and Europe to ease further and a possible further delay in the timing of the first Fed rate hike.

In Australia the December quarter CPI to be released later this month is likely to show inflation running around 2% providing plenty of scope for further RBA easing.

For Australian households, the plunge in the global oil price adjusted for moves in the Australian dollar indicates average petrol prices have further to fall towards $1/litre (see next chart), as the usual lags work through.

In fact some service stations have already dropped the petrol price to 99.9 cents a litre.

Source: Bloomberg, AMP Capital.

Current levels for the average petrol price of around $1.13/litre represent a saving for the average family petrol budget of around $14 a week compared to mid last year. If sustained this will amount to $728 a year, which is a significant saving.

If the 99.9 cent/litre price becomes the norm then the saving will rise to $988 a year (see next chart). Some of this extra discretionary income will likely be spent.

Source: AMP Capital

So the fall in oil prices should provide a solid boost to growth over the year ahead.

IMPLICATION FOR SHARE MARKETS

Share markets have initially reacted negatively to the fall in oil prices because the negative impact on energy producers is what is most visible and this is being magnified by the steepness of the fall.

To be sure this impact could linger for a while yet and some sort of blow up – like further problems in Russia or a default by a more marginal energy company – cannot be ruled out.

However, the risk of a major threat to the global economy or share markets from energy producers is low:

• US energy production was a bigger share of the US economy in the 1980s and yet the mid 1980s collapse in oil prices helped boost the economy and share markets back then;
• While the Russian economy is facing a crisis (made worse by its own actions in Ukraine), a 1998 style Russian public debt default looks unlikely. Russian public debt is low at around 9% of GDP compared to more than 50% of GDP in 1998, public debt in foreign currency is trivial and foreign exchange reserves are much higher now. Private debt is more of an issue now but much of it is owed by just two companies (Gazprom and Rozneft) who have foreign exchange earnings and the Russian central bank has indicated it will help out companies meet foreign exchange obligations.

More broadly, its likely that over time the positive impact on global growth and hence profits from lower oil prices will dominate and this will help drive share markets higher by year end.

After oil prices plunges into 1986, 1998 and 2008 US shares gained an average 23% over the subsequent 12 months.

As a result any significant dip in share markets in response to lower oil prices should be seen as a buying opportunity.

Source: Oliver’s Insights.

Property Bubbles Pop Up Everywhere. Watch Out for Chinese Developers in 2015....

Chinese Developers and Kaisa Group

Recently, a mid tier Chinese developer called Kaisa suspended its stock. The Chairman and CFO resigned. To compound matters, HSBC recalled the HKD400m loan because of a clause that allows the bank to recall a loan if the Chairman resigns. Rumours on the internet are abound that Mr Kwok Ying Shing, the Chairman, is linked to Zhou Yongkang, the fallen former security chief. The company is financially sound.

- RMB93.7 billion of current assets as at 30 June 14, comprising RMB58.4b of properties under development, RMB10.5b of deposits for land acquisition and RMB9.4b of cash.

- It had RMB 52.0b of current liabilities, comprising RMB20.1b advance proceeds from customers, RMB11.0b advance deposits received, RMB8.0b of accrued construction costs and RMB6.0b of short term borrowings. If you strip out non cash items like advance from customers, the current liabilities is only RMB20b.

- This meant that Kaisa had in excess of RMB73b of working capital and its current ratio is around 4x.

- Operating profit is RMB2.1b 6m to June 14. Finance income is a positive RM28.5m. Net positive in terms of interest income puts the company in a very strong position. In the 6m to June 13, finance cost was RMB2.2b vs RMB387m of finance cost. The interest cover is nearly 8x.

It is a shame that due to politics, HSBC is willing to pull the rug under Kaisa's feet. In the next few weeks, it will be very crucial to see if other banks are willing to support Kaisa, and the government that locked up Kaisa's projects are willing to resolve the issues. Right now, no charges are even pressed on the company, which is very puzzling. With this incident, other Chinese developers' bonds and share prices could come under pressure as investors fear the political equation coming into play. If Kaisa falls, Chinese banks could come under pressure to write off their loans. There may be a chain reaction on the Chinese economy.

I've also read that the lock up of projects is to prevent asset transfer. This further reinforces the theory that Kaisa is being persecuted for legal reasons, or political reasons. The government does not want the company to transfer projects to friendly hands, but instead wishes to seize it.

Examples of Major Cities with Property Bubbles

When rental yields drop below borrowing costs (interest rates), it is a sure sign that prices have either risen or rents have fallen to unsustainable levels. If one cannot even service the interest from rental income, investment activities, which is usually backed by mortgages, will be shaky. Here is a list of a few cities on shaky grounds. 10 out of 11 cities are from Asia:

1. Taipei, Taiwan: 1.65% gross yields. Price to income ratio 25.79.

2. Macao, Maco: 1.88%. 30.5x

3. Yangon, Myanmar: 5.23%. 32.15.

4. Kowloon / Hong Kong, Hong Kong: 2.55%. 31.1x.

5.  Makati, Philippines. 4.6%. 24.0x.

6. Beijing, China 2.7%. 33.1x.

7. Singapore: 2.5%. 35.1x.

8. Paris, France: 2.7%. 17.2x.

9. Shanghai, China: 3.0%. 26.7x.

10. Pattaya, Thailand: 3.3%. 27.9x.

11. Dalian, China: 3.4%. 28.8x.

Now where are the major global cities where there are no signs of bubble and therefore safe to invest in. I've left out the cities where most investors would not choose to live in for lifestyle reasons, and where the legal framework is not strong. E.g. Lagos Nigeria. Notice that all the cities are from OECD countries, and the US dominates 7 out of 11 cities:

1. Las Vegas, NV, US: 13.0%. 1.9x.

2. Houston, TX, US: 13.5%. 2.7x.

3. Boston, MA, US: 13.7%. 3.2x.

4. Chicago, IL, US: 10.5%. 3.6x.

5. Seattle, WA, US: 9.2%. 4.1x.

6. Miami, FL, US: 11%. 4.3x.

7. Birmingham, UK: 8.5%, 4.6x.

8. Wellington, NZ: 7.2%. 4.7x.

9. Los Angeles, CA, US: 8.5%. 5.2x.

10. Montreal, Canada: 5.5%. 5.5x.

11. Antwerp, Belgium: 7.5%. 4.7x.

2014-09-27

Chinese Construction Quality in Question

Headline: Shabby construction, many buildings won't last 30 years.

盘点近年楼歪歪等豆腐渣工程：很多建成不到30年

In recent years, construction quality problems around the endless personal and property safety of the people to bring a huge threat. Reporters combed found that due to the past system is not perfect, low-cost illegal, inadequate supervision and other reasons, construction quality "rubbish" family "flourishing population," "House back down," "House crunchy" "House YY" and other phenomena are frequent.

- "House back down."

In April 4th morning, Fenghua Jinping residential street Ju Jing, Zhejiang Province, the first 29 residential buildings collapsed. 7 people were buried under the rubble, including a man died. From built to collapse, just 20 years. Residents reflect on the day before the building collapsed, dilapidated detected after testing organization said "the house to dwell in the past few years, no problem."

June 27, 2009 around 5:30 in the morning, Lianhua Road, Minhang District, Shanghai, Luo Yang intersection west of the "Lotus Riverside" in the district, 13-story residential building in a building under construction collapsed, killing one construction workers died. Not yet built a house, it has collapsed.

- "House crunchy"

April 2014, Zhengzhou Zhongyuan District Mutual Road and flowers Road intersection southwest corner, there is a resident house actually became a "martial arts master": when touched, in the brick wall on the "crisp", and gently a breaking, broken bricks on their feet a kick, became a slag. Inspection reports of Henan Academy of Building Research confirms that not residents "martial arts" is too high, but the poor quality of construction: the building floor to five gangue sintered porous brick wall used in large area burst, wall tiles burst depth, part brick has lost strength, there is a serious safety hazard. So "rubbish" project, developers, the construction side, supervision units pass the buck to the brick. Zhengzhou Great Wall of real estate developers, general manager, said: The main problem is the quality of the brick house.

December 9, 2011, Hankou District, Wuhan City, the largest affordable housing projects Purple Run Ming Garden broke many ground subsidence, wall cracks, leaks and other building issues. Such a "House crunchy" problem project, not only passed inspection multiple layers of quality control department, fire, special equipment testing, environmental, planning, etc., also won the local government construction projects awarded medals, the head of the security room construction site model name first.

- "House YY"

Compared to "House back down," "House crunchy", "House YY" phenomenon is more widespread.

August 2014, Yingze District, Sky Tower, Building 1 home district residents began to move a lot, a lot of people find indoor wall appear multiple fractures, the whole building was tilted backward, fear crooked floor collapse hit, Residents across the residential buildings have also moved away from the residence. Taiyuan relevant departments to identify, this building belongs to dangerous buildings.

August 2013, the village house village groups Kunming Xishan District lujia community about 30 buildings in varying degrees of tilt, tilt maximum at about 20 degrees, the concrete floor is also different degrees of cracking.

August 2013, Chengdu Pi waterfront Cannes two, submitted less than six months, it appeared the House of tilt became a "floor YY", where a unit was also found beams cracking. The local government response, crooked landlord if the building due to continuous rains lead to foundation settlement ......

President of the South China Institute of City Planning, Jinan University School of Management Professor Hu Gang, compared to other developed countries, the British virtues of hundreds of years of building the average life expectancy, built in China after the reform and opening up a lot of "80" "90" buildings have problems, thought-provoking.

In recent years, many cities set off a construction boom, and some places in order to GDP, the demolition of the building, built in the demolition, too fast at the expense of pursuing big project quality, and now all over the frequency is the "tofu" construction, both for the quality of the original neglect retaliation reflect, it is a warning to future generations ruins monument.

Some netizens suggested that construction quality and accountability mechanisms of the State Council to establish lifelong traceability is very important, only strengthen the sense of responsibility, a responsibility to let people have a problem, "Zhaimao child", "penalty tickets" and even "squatting chant" punishment intensity and legal deterrence in order to avoid the "House back down," "House crunchy" and "House YY" re frequent trouble.

On Poor Quality: Corruption and Construction in China

As someone who works in the building industry in China, I am often asked why the quality of construction of most new buildings is so poor. The people who usually ask are expatriates from places like Europe or America; rarely does someone native to China who hasn’t spent time overseas pose the same question.

This perhaps has to do with the fact that building quality in China is relative. Most Chinese first-time home buyers moving into brand new housing tower blocks do not have the frame of reference to evaluate finish material quality. This is exacerbated by the fact most housing developers sell units as empty concrete shells, leaving it up to the owners to fit them out with finishes and fixtures.

This is not to suggest that the thousands of recently built high-rise towers  across Chinese cities are on the verge of collapse. On the contrary, structural engineers in China tend to err on the side of caution when designing structural systems and from what I’ve seen on construction sites, they do not skimp on steel rebar reinforcing (especially here in Chengdu where the destruction from the 2008 Wenchuan Earthquake is still very fresh in memory).

The quality disconnect comes at the level of finish materials; both on the building’s exterior and interior. Unfortunately, architects and designers have very little say in the final finish materials used in their projects in China. In the U.S., quality control is managed through the process of construction administration, where there is ongoing communication between the owner, general contractor, and architect during the construction process.

Architects practicing in the U.S. typically create what is known as a specifications (‘spec’) book to go along with a working drawing set, together which serve as instructions for the general contractor on how to construct the building. The level of detail in spec books varies, and final material selection is ultimately up to the general contractor and owner through bidding processes with building material suppliers. Yet architects maintain a say throughout the process through submittals (of material samples and shop drawings to the architect) and change orders. This creates a system of checks and balances between the owner, general contractor, and architect throughout the construction process leading to better quality control.

The process described above is virtually nonexistent for most new projects in China. One reason has to do with the fact that architects in China are still seen as ‘big idea’ guys rather than technical experts. During the construction phase, the representatives from architecture firms who go out to construction sites to check up on work are typically trained engineers, checking mostly for structural integrity. Designers looking for finish quality are usually not welcome.

The second, more widespread reason that construction projects do not follow strict communication protocols between interested parties is due to corruption. Construction projects require huge budgets and bank loans- by cutting corners here and there, developers and contractors can pocket large sums of money. This means skimping on things like wall insulation, substituting quality exterior and interior cladding materials for inferior ones, and even using cheaper plumbing and electrical equipment.

So in a sense, the complexity and lack of communication is by design. This observation is confirmed in a World Bank report about the construction industry in China, with one of the key challenges facing the industry being:

“The respective roles of the “employer”, the “engineer”, and the “contractor” need to be defined and separated. Current overlapping in the roles of owner, contractor, and engineer in government hampers the development of competitive bidding and effective contract management. The required separation in roles will require extensive training programmes.“

Unfortunately it does not appear that this will change anytime soon. The real estate development business in China is still like the wild west, and developers who have long-term vision are not easy to come by. Most are still looking to make a buck as fast as possible before the frenzy slows down.

By the time this happens, this may be be a good thing for building integrity as upwardly-mobile Chinese families start demanding higher quality out of their living and working spaces.