China's Building Bubble

[KhorTose]

A poster on another message board just posted this news report on China's construction of empty cities and empty Condos that the average Chinese can't buy. Talk about a government with no clue, heading for a giant disaster. Your input would be appreciated, since I know you travel there often.

 

[Guest fountainhall]

Wow! This is a huge topic and I am obviously not qualified to answer it. All I can do is give my opinions, which are perhaps more suited to a blog than a message Board. However, you asked - so here they are!

 

My travels mostly take me to Beijing and Shanghai where the development in both cities has been nothing short of miraculous and there always seems to be construction virtually everywhere. From what I have seen - and from discussions with friends in both cities, there is no sign of any major degree of oversupply or slackening demand. I imagine the same is true in most of the coastal cities and the major ones inland, like Chengdu, Chongqing or Wuhan.

 

The same is probably not nearly as true for the vast number of secondary cities which are vying to attract more businesses, as well as - importantly - national attention. It’s no secret that there remains a lot of corruption amongst local government officials and developers. China has made attempts to weed out the worst examples, but in a command economy with little accountability, corruption will always be there, especially away from the centre. That’s certainly an issue in the development of a bubble, but it’s too big to consider here. So having mentioned it, let’s just accept it as a fact of life in China that isn’t going to go away any time soon.

 

Whilst most experts seem to agree there is a bubble, let’s remember this is not something that has suddenly appeared, or suddenly been created. It has been widely anticipated for at least a couple of years. It has also been known that the central government has to ensure a “soft landing” if it is to avoid social unrest and all that goes with it. After all, there have been bubbles before, and China has always managed to slow the economy down without a crash.

 

As has been said in some other threads, the Chinese government’s No. 1 priority – above all else – is the avoidance of civil unrest. This may sound strange to western ears. But you only have to look at the turmoil that has wracked China all the way from the end of the 18th century right through to the end of the Cultural Revolution in the early 1970s – 200 years of almost non-stop chaos that destroyed hundreds of millions of lives. The Chinese government will do all in its power to maintain stability.

 

Having looked at the video, some is clearly true. But frankly, I find much of it unbalanced!

 

Malls

 

Let’s look first at that South China Mall – the Great Mall of China in Dongguan. First off, this was not a government project. It was a private sector development. So to imply that it was a government or local government project is just plain wrong.

 

Secondly, it was conceived and built quite a few years ago at a time when getting investment capital from state banks was a great deal easier than it is now, partly due to the tightening of lending requirements.

 

Thirdly, the developers apparently toured the world looking at malls before they came up with their model. There is zero doubt, however, that their business model was unrealistic - in every possible way.

 

The main problem was the inexperienced developers failed to take into account that vital ingredient - LOCATION. I have been to Dongguan. It is a huge area in Guangdong province nestling between Hong Kong and Guangzhou. It is a place for factories, workshops and other manufacturing. It is almost exclusively populated with vast numbers of blue-collar workers, few of whom would have any spare cash to splash out on the prices in a shopping mall. It's the wrong development in totally the wrong area. Put that in Shanghai, or roughly anywhere within a 200 km radius of Shanghai, and it would be packed with tenants and shoppers, in my view! Look also at the city of Guangzhou not far away. It has many malls, one of which, according to the New York Times 5 years ago, attracts about 600,000 shoppers on busy days! For the TV programme to use the Dongguan Mall as its only illustration of over-development and under-utilisation in the retail sector in a country as vast as China is, I suggest, quite irresponsible.

 

Here’s a more balanced view from one of the UK newspapers –

 

Dick Groves, a retail consultant based in Hong Kong, said the failure of the New South China Mall was down to inexperience in leasing business and an undisciplined financial system.

 

'When it's easy to get financing without having to convince someone of the project's feasability, and without having to show pre-leasing commitment, you can start to get into trouble . . . "

http://www.dailymail.co.uk/news/worldnews/article-1223747/Ghost-mall-The-worlds-largest-loneliest-shopping-centre.html#ixzz1Jxv2wbDd

 

New Towns – Daya Bay

 

Daya Bay is also relatively close to Hong Kong (about 50 kms). From Daya Bay, you can see Shenzen, the first of the Special Economic Zones pioneered by Deng Xiaoping. A small insignificant town in 1980, Shenzen has since seen US$30 billion ploughed into it by investors and now boasts a population well in excess of 10 million. I have a Hong Kong friend who bought an apartment there about 8 years ago. He visits for a few days maybe every couple of months, but he bought it primarily as an investment. And a very good investment it has turned out to be!

 

Daya Bay is also a Special Economic Zone. It is not uninhabited land, by the way, and has, for example, a Holiday Inn on its list of hotels and an Intercontinental not far away. If you check it on google earth, you will see that Shenzen is already spreading its tentacles eastwards close to Daya Bay. So 8 - 10 or so years ago, whenever the decision was made to add a new town, it would not be unreasonable for developers to assume that Daya Bay could be the next Shenzen.

 

That said, Daya Bay has a very big problem, one that has become much more acute only in the last few weeks. It has a nuclear power plant slap bang on it doorstep. I remember when this was first proposed in the mid-1980s. There were many demonstrations in Hong Kong by people very concerned that Daya Bay is situated to the north-east – smack in the direction of the winter monsoon. Any leakage of radiation in winter will likely hit Hong Kong within minutes.

 

If a decision to build a new town in one of the fastest developing parts of China seemed practical 8 years ago, it certainly now faces major obstacles, particularly related to the nuclear plant. All I can add is that much of the development in that new town seems private-sector driven, admittedly with cash from state-run banks. Developers no doubt expected a lot of cash to flow from people moving to the area, from Hong Kong residents wanting a second home and speculators on the mainland. So blaming it on the local government only tells part of the story.

 

In one other instance, I have come across a case of local government being entirely to blame – and I accept there almost certainly are others. Qingshuihe is closer to Delhi than it is to Beijing. Its remote local government clearly decided to jump on the bandwagon and build a new town. This is from a BBC report about a year ago -

 

According to media reports, the county did not run out of money - it seems it never had it in the first place.

 

It expected the regional and national government to help with the cost of the new town. But Beijing never approved the plan, according to an official with the Hohhot city government, which is responsible for Qingshuihe. County leaders appear to have gone ahead anyway.

 

Professor Joseph Cheng, of Hong Kong's City University, said China's county leaders often do what they like, unrestrained by either a powerless local population or a distant central government.

 

"The communist party secretary is normally in charge - and there is very little oversight or checks and balances on their power," said Prof Cheng.

http://news.bbc.co.uk/2/hi/8691083.stm

 

Prof. Cheng is a highly respected China analyst. I have found his comments over the years invariably to be very well-considered and accurate. He puts the whole thing into perspective in that BBC report by highlighting a couple of points which the Australian programme has conveniently omitted –

 

1. It points the finger at local officials.

 

2. The decisions to build these towns (and malls) were made long before the economic recession appeared out of almost nowhere.

 

It’s of course true that this would not happen in a more developed economy. But that again is a subject for a whole new thread.

 

Lastly, the Beijing resident’s comments

 

All that he said is true. But it is surely completely lop-sided of the programme to juxtapose the difficulties of high-end developers building apartments for high salary earners with the difficulties of just one low-income earner in one of the most expensive cities in the country. As I said, Beijing has masses of high-end developments and has never had any problem filling them.

 

It does highlight one point, though. What is China going to do about the hundreds of millions who still have not gained much from the massive economic reforms of the last 30 years?

 

The answer was rather nicely provided by the sociologist who talked about social divisions, hinting at the possibility of another revolution if the public’s expectations could not be met. I can only refer you back to the comment about the Chinese government’s overriding concern – the maintenance of stability. I think the central government is very aware of the concerns, to the extent that it has to do something – and soon. I suggest Premier Wen Jiabao was not just spouting PR words and phrases when he opened the National People’s Congress last month. This from The Guardian -

 

China's premier has promised to ensure social stability by curbing inflation and raising the incomes of those left behind by the spectacular growth of the world's second-largest economy.

 

In his address at the opening of the National People's Congress, Wen Jiabao pledged to place the country's have-nots at the heart of its development goals for the next five years.

 

Inequality has risen sharply in recent years despite government pledges to tackle it. The dangers of popular discontent are now higher on the agenda following the uprisings in the Middle East . . .

 

"They seem more serious about these issues than they have been previously, but it doesn't guarantee that any of this will get done," said Alistair Thornton, China analyst at IHS Global Insight.

 

"There's a growing consensus that this time it has to be different. There's more emphasis in this plan than the last one, specifically on income growth.... [but] they need a bigger shake-up to get the results that the rhetoric suggests they want.

http://www.guardian.co.uk/world/2011/mar/05/wen-jiabao-pledges-china-poor

 

So, is there a bubble? Yes. Will it burst? I don’t know. All I can assume based on what has happened in the past, is that the government will do everything in its power - and with its considerable reserves, to ensure that it does not.

[Guest]

I had already seen that report a couple of weeks ago. Didn't they estimate 64 million unoccupied flats?

The cynic in me suspects both the property market and that estimate would be inflated.

 

As I see it, China has little in the way of planning restrictions and theoretically the supply of high rise flats could rise to meet any foreseeable demand.

So with the exception of specific premium areas, surely property prices should have some sensible relationship to salaries?

Also, if the report is accurate it seems the man in the street has no access to western style mortgages to purchase flats.

That must be corrected eventually, although sensible deposits and income multiples should be required.

A modest annual tax on properties that are empty for more than 6 months would discourage speculation (first property exempt).

 

I have some money invested in Hong Kong & China, but would be wary of putting it in anything directly exposed to property or banking. Any further advice on how to play China would be welcome.

Of course if there is a major crash, I shall be looking to put more money into Hong Kong.

[Rogie]

A quite remarkable glimpse into modern China. Quite sobering really. Should we be saddened to know China, previously assumed to be an unstoppable juggernaut, is making so many mistakes or should we take heart that it makes the shortcomings in many western countries look a little less awful.

 

It makes me think that these analysts who decide what countries have the largest economy. who has the second highest and so on are all barking up the wrong tree. Yes, maybe in money terms China is the second largest economy but what price responsibility? A large economy being run by incompetents isn't any honour is it? As that rather smug analyst said in the Australian You Tube clip (something along these lines): "Central government sets a GDP target, and the best way to realise that target is to build". There presumably are many instances in China where they got it right, but that makes it all the more astonishing they cocked up here.

 

Are they going to put a moratorium on any more projects like the ones seen in that clip? If so, and they learn from those mistakes, they'll be forgotten as China powers forward. But if they keep speculatively building the wrong sort of tower blocks (cities in the sky for the rich? **) in the wrong places just to keep to some GDP target then China had better have plenty more aces up its sleeve if it's going to continue to fool us.

 

** (sorry couldn't resist - that remark paraphrases the 'streets in the sky' that hark back to the days in Britain when architects and builders tried to convince families cleared from their back-to-back slums they were going to a better life - in many cases they weren't and the tower blocks as a panacea for the housing crisis has been discredited).

[Guest]

A large economy being run by incompetents isn't any honour is it?

China hardly have an exclusive on this.

The US, the UK & Japan all either fit that description currently, or at least within the last 3 years.

At least the Chinese act in their own national interest & they seem more competent than the Bush or Brown regimes.

[KhorTose]

China..... seem more competent than the Bush or Brown regimes.

 

Who isn't more competent then those two. Great replies and thanks for that excellent guardian article FH. Definitely food for thought, but I think I am with Z909 on this and would be very reluctant to invest right now in China despite its unparalleled track record.

[Guest fountainhall]

I had already seen that report a couple of weeks ago. Didn't they estimate 64 million unoccupied flats?

The cynic in me suspects both the property market and that estimate would be inflated.

They did indeed give that estimate. And I agree with your assumption.

 

if the report is accurate it seems the man in the street has no access to western style mortgages to purchase flats.

Definitely not true. China introduced mortgages in the late 1990s.

 

A large economy being run by incompetents isn't any honour is it?

I really must take issue with you when you talk about “incompetents”. I suggest you fall into the trap of many in the west by (i) believing what one journalist/politician/pressure group tells you; and ii) looking at China with western eyes and western thinking. You also conveniently forget what China has achieved in not much more than 30 years. Remember this? China has lifted hundreds of millions out of poverty – the largest number in the shortest time ever in world history? Incompetent? I hardly think so. Think of its achievements in housing many hundreds of millions in that time. Think of its advances in education, in space exploration, in sport – in so many fields. If the government is run by incompetents, then those which head the US and UK governments must, in my view, be mentally retarded – or worse!

 

I happen to think the Chinese government – in the context of the country’s history and the state it was in post-Cultural Revolution – has shown that it has some very shrewd and sharp minds at the top. Sure it has made mistakes and faces lots of problems. But as z909 says, so have other governments.

 

Here’s an interesting US blog site that highlights some pros and cons about China and the bubble.

 

http://www.ritholtz.com/blog/2011/01/dongguan-ghost-mall-haunts-chinas-property-boom/

 

The cons were well aired in that biased – in my view - TV programme. Here are some more balanced ones. I have underlined comments that I consider particularly relevant -

 

“Construction industry in both countries account for around 5-6% of GDP this is officially reported by both the US and the Chinese government. Of course you could chose not to believe either number. First we are told exports to USA dominate 50% of China’s economy (wrong all round and the EU is China’s #1 export market); now Real Estate. The problem with China critics is the reliance on urban myths. And that’s why we don’t understand China in this country.”

 

“China has something we don’t have: 1) some 300 million people ready to move into the cities from their miserable plots of land as soon as the next Nike shoes plant opens up and moreover 2) China has PATIENCE, they can wait and wait and wait, it is in their genes….”

 

“All I can say is that when I visited China, and spent time only with Chinese people, they lived in large apartment blocks, very well built, and attractive. Thousands of other Chinese lived there too. The neighborhood shopping street was fully rented, busy and prosperous looking. The restaurants – excellent food, no Westerners – were booked solid. Americans should be extremely cautious about reading situations abroad, especially in Asia, through an overly American filter.”

. . . 'streets in the sky' that hark back to the days in Britain when architects and builders tried to convince families cleared from their back-to-back slums they were going to a better life - in many cases they weren't and the tower blocks as a panacea for the housing crisis has been discredited

Sorry Rogie, but once again you seem to take what you know and what I suspect you don’t know – and draw an incorrect conclusion. You make a direct link with those ghastly tower blocks in the UK (have you seen those in Easterhouse in Glasgow? I have – probably the worst high-rise slums ever created) and those in Hong Kong and China? And I regret that you are so wrong. There is zero comparison.

 

China generally plans its tower blocks on the Hong Kong model because that is how their architects and planners were trained. In the UK, the planners completely forgot that moving people out of slum areas into high-rises was not just a case of providing better living accommodation. It is about moving integrated communities. So in high-rise developments, Hong Kong planners deliberately aimed to create real communities, with plenty of shopping within the development, restaurants of all types, plenty of recreational facilities, cultural centres, bus and subway stations etc. Almost none of that exists in the UK. The residents are for the most part isolated in these blocks which quickly 'die' because they lack any sort of community feeling. So please don’t fall into the trap, as outlined above, which I will slightly alter -

 

“Britons should be extremely cautious about reading situations abroad, especially in Asia, through an overly British filter”

 

To all those who take what was reported in the Australian TV programme as gospel, dare I remind them of the conclusions being drawn in the CIA's Secret War thread - that it occurred because of lack of experience, lack of knowledge of the region - and western logic assumptions which turned out to be hopelessly wrong?

[Guest fountainhall]

. . . if there is a major crash, I shall be looking to put more money into Hong Kong.

Please remember, though, if there is a major crash in China, Hong Kong will also be heavily affected. Increasingly the 2 economies are becoming integrated. Taiwan and Singapore will also be hard hit as they have massive investments in China.

[pong]

just to add my 2 fen worth of opinion, for what its worth. Mainly based on reading newspprs and listening to special radio, and after some 4-5 trips all across China, on my own.

- any economic bubble will sooner or later burst-or flatten out, or hiss out. But you never know when-did any of those multi-million $$ earning economists predict the current crisis?

- SOUTH of Sjanghai-for some 30-40 kms, another of those enormous, HKG-style high-rise blocks suburban sprawls is emerging, which I only happen to know as a 50 km long extension of the city-metro has just been opened to serve it. Well thats forward planning-except that reports (from a special and not biased that much economic reporter) tell, that at most 5% of those flats/apartmts are occupied. About ay of the dozens of multi-million cities is currently building or rapidly expanding their metro-systems-quite often to the same hardly occupied housing estates. But the very same happaned in HKG toward the the new developed west-inclduing a tramway-by now it is mostly taken up. At least the Chinese have some effective ways in bulldozing away the old decrepit housing of those intended to take up that new housing.

- indeedd, FH is quite right in stating that avoiding civil unrest is one of, if not the main, priority for a Chinese govmt. But that as such does not mean that there will be no economic downturn or crisis- they also can do what here in the west is hardly possible-hard suppression. Or nationalise property, or whatever. Or put ''spies'in main westrn companies to silently take them over. Indeed, FH is right that if there will be losers-it will be mainly investors from other Chinese countries-Sin, Taiwan, etc. heck-their unrest will not matter in the middle kingdom-Zong Ghuo, mainland China.

[Guest fountainhall]

just to add my 2 fen worth

Nice one!

 

Pong makes a very valid point about many cities in China bulldozing the old decrepit housing and putting up huge developments, usually before these buildings have tenants. They sort out the infrastructure first and then people it - and they have a gazillion plus waiting for housing. It really is totally wrong to compare it with the west.

 

It's also important I think to remember that the present bubble is largely a result of the stimulus measures which China took to ward off the effect of the world recession. The effects of the government's 4 trillion yuan (U.S. $602 billion) stimulus program in 2009 are still working their way through the market. In China, that resulted in soaring demand. The far larger stimulus measures in the US by comparison had almost zero immediate effect in spurring growth.

 

Pong is correct about Hong Kong, except that the tramway has been there for more than 100 years. Most of the tram fleet was imported in the 1930s! But the subway and the surface train service which runs from Kowloon station to the border have been constantly developed to service vast new communities of high rises.

 

Anyone who doubts the viability of high rise communities really should spend some time in Hong Kong. In the 1970s, government planners decided to construct a series of new towns in population centres in the New Territories which were then barely more than large villages. The first batch of 3 now houses around 3 million; the second batch of 6, almost 4 million. They are all thriving communities. It is all quite staggering.

[Rogie]

Sorry Rogie, but once again you seem to take what you know and what I suspect you don’t know – and draw an incorrect conclusion. You make a direct link with those ghastly tower blocks in the UK (have you seen those in Easterhouse in Glasgow? I have – probably the worst high-rise slums ever created) and those in Hong Kong and China? And I regret that you are so wrong. There is zero comparison.

 

China generally plans its tower blocks on the Hong Kong model because that is how their architects and planners were trained. In the UK, the planners completely forgot that moving people out of slum areas into high-rises was not just a case of providing better living accommodation. It is about moving integrated communities. So in high-rise developments, Hong Kong planners deliberately aimed to create real communities, with plenty of shopping within the development, restaurants of all types, plenty of recreational facilities, cultural centres, bus and subway stations etc. Almost none of that exists in the UK. The residents are for the most part isolated in these blocks which quickly 'die' because they lack any sort of community feeling. So please don’t fall into the trap, as outlined above, which I will slightly alter -

 

“Britons should be extremely cautious about reading situations abroad, especially in Asia, through an overly British filter”

 

Anyone who doubts the viability of high rise communities really should spend some time in Hong Kong. In the 1970s, government planners decided to construct a series of new towns in population centres in the New Territories which were then barely more than large villages. The first batch of 3 now houses around 3 million; the second batch of 6, almost 4 million. They are all thriving communities. It is all quite staggering.

 

It is always a pleasure to be 'put right' by Fountainhall. In my feeble defence I must point out I used the term cities in the sky, rather than streets, to refer to those featuring in the Aussie programme. I fully admit to a large element of sarcasm, quite expecting that even if the cities were as you write above (here quoted again) "So in high-rise developments, Hong Kong planners deliberately aimed to create real communities, with plenty of shopping within the development, restaurants of all types, plenty of recreational facilities, cultural centres, bus and subway stations etc." that they would be awful places to live. Your second quote based on the Hong Kong experience shows my cynicism to have been entirely misplaced.

 

Perhaps I may conclude by agreeing that I fell into the trap (quoted above and here again) “Britons should be extremely cautious about reading situations abroad, especially in Asia, through an overly British filter”

Notwithstanding my admission, nothing would convince me that living in a 'city in the sky' along with a million other people would be remotely appealing. It all sound rather space-age to me, like you might imagine a long time in the future when Earth is doomed and mankind has to establish a new life on a hostile planet millions of miles away with no oxygen so to survive we have to adapt. Maybe that's the key word: adapt. From my vantage point that's what these millions in Hong Kong's housing developments have had to do - adapt in order to survive.

[Guest fountainhall]

Your second quote based on the Hong Kong experience shows my cynicism to have been entirely misplaced.

Perfectly understandable, and I am sure I felt the same as you when when I first moved to Hong Kong. So let me give you just one example of living in one of Hong Kong's high-rises.

 

The last apartment I lived in before moving to Bangkok was in a development called South Horizons. This is a huge residential complex made up of 34 tower blocks from 30 to 42 stories high situated on the small island of Ap Lei Chau just to the south of Hong Kong island, and linked to it by a bridge. You will no doubt be horrified to learn that, according to wikipedia, Ap Lei Chau has a population density of 66,755 per sq. km - making it the most densely populated island in the world!

 

Reading that, it must sound ghastly! Yet, in addition to the usual shopping and dining facilities, it had landscaped gardens, children's playgrounds, many open spaces and a seafront promenade. It also had a large Residents' Club with two outdoor pools, flood-lit tennis courts, golf practice ranges, children's playgrounds, indoor pool and jacuzzi, gym and fitness centre, squash, badminton and basketball courts, golf practice rooms . . . Enough of the commercial!

 

This was not a complex for foreigners. My guess is that 95%+ of the owners were Chinese with roughly the same percentage being actual residents.

 

My smallish flat was on the 35th floor. All my windows faced across the sea with a stunning view to the islands to the south west. I once woke up to see one of the US fleets steaming up the channel complete with a couple of nuclear submarines and an aircraft carrier!

 

I can honestly say the design of my flat felt as though I was living nowhere near anyone except my immediate neighbours. I loved living there!