Saturday, December 17, 2011

Down and Out in the Middle Kingdom

Construction is 13 percent of China’s GDP. Roughly half of the world's steel and concrete are used in China. I mean, they have a lot of people, so they need a lot of buildings, right? Unfortunately, a lot of construction has nothing to do with “need”. I just have to include this entire article because it’s so indicative:
In the 1950s it was home to around 600 hardworking farmers. Today this figure stands closer to 35,000. We are of course talking of Huaxi, a so-called ‘village’ in China’s Jiangsu province sprawling outwards at breakneck speed which last week opened a breathtakingly lavish 328m tower costing 3bn Yuan (£301m).

An Internet storm followed as blogs and Twitter users picked up on reports from reliable news sources listing seemingly impossible statistics: a £31m solid gold statue of an ox weighing over a tonne; a large proportion of the Huaxi villagers each donating 10m Yuan in shares; genuine flakes of gold inlaid on the reception floor...

The 800-suite building which acts primarily as a hotel and conference centre under the title Longxi International Hotel has become a symbol of China’s construction industry but for many, this is a bridge too far. Jonathan Watts, respected contributor to The Guardian, penned an enlightening article on Thursday detailing the troubles that may arise on the back of this luxury tower.

He explains: “In making the transition from third-world village to first-world skyscraper, Huaxi is in many ways a microcosm of China. But the next step will be harder as it tries to cope with the declining competitiveness of its core industry [iron and steel], the inflated cost of land and worries about the environment. In this case, an even wider comparison can be drawn: like the global economy, Huaxi may be bumping up against limits to growth.”

This isn’t a new phenomenon in China. Many of the nation’s most industrious cities have expanded swiftly through diversification into new fields, turning from agriculture to the iron and steel markets in the pursuit of rapid riches. Hong Kong and Beijing both swallowed up handfuls of minor villages on their perimeters as additional square miles were needed for the influx of new residents attracted by the growing financial rewards of such industrious developments.

It is in Shanghai that we find the closest comparison however. Once a modest coastal town relying on the textile and fishing industries for income, Shanghai’s economy boomed in the nineteenth century as international trading began to increase. Slowing in the mid twentieth century, the community (now considered a city) has grown extensively in the last two decades in terms of commerce and architectural development and is now home to some of the world’s most impressive (and expensive) buildings.

So has Shanghai set a sustainable business model for Huaxi? Potentially, but many put the latter’s recent wealth down to one man as opposed to pre-existing geographical elements for economic development. Wu Renbao is Party Chief of Huaxi Village, has been a delegate to two Communist Party National Congresses and is an elected deputy to the National People’s Congress. His work in escalating the living situation of Huaxi’s original residents has also earned him a place on a list of ‘Top National Contributors to Poverty-Alleviation’.

Speaking to The Guardian, the 84 year old Renbao determined: “[Longxi International Hotel] is my idea. We learned from Dubai, but taking into account our domestic situation, we decided the height should be 328m. Why 328m? Because that is as tall as the highest building in Beijing ... We used to have a very difficult life. We lived in a thatched shed, ate bran and had nothing in our pockets. I think it will never be wrong to expand the economy and make ordinary people rich. In our opinion, that is the priority.”

So let’s build a 1076-foot skyscraper encrusted with gold in the middle of nowhere because we're rich now and want to be bigger than Beijing. I'm sure that's based on economic fundamentals, right? And how is building a massive conference center skyscraper "poverty alleviation"? The article paints a compelling portrait of the dysfunctional relationship between government officials and economic growth. Unlike fortunate Huaxi, sometimes other entire cities in China just get cancelled:
It’s usually extremists and dictator-like leaders who use the phrase “wiped off the map," and they usually mean it as a threat to some other nation they’d like to see destroyed. Not often is that phrase put into action, and especially not domestically. But officials in China have done just that: they’ve wiped one of their own cities off the map. The map, yes, but not the earth. Physically it’s still there; officially it no longer exists.

The city of Chaohu has officially been eliminated, as NPR reports. It’s a city of about 4 million people, a Phoenix metro area-sized population that’s been suddenly stripped of its cityhood. Located about 200 miles west of Shanghai, the city is still trying to figure out exactly what that means, and why. The land of the former Chaohu has been divided and distributed to three neighboring cities. It’s a municipal shakeup that surprised many residents, who hadn’t been advised or consulted about the plans. NPR reports that rumors had been circling, but most found out about the city’s dissolution on the news the day it happened in August. The move, it seems, is driven by a desire for growth. Economics professor Jiang Sanliang from Anhui University explains the thinking behind the decision:

"Chaohu's development hasn't been good, but Hefei is industrializing and urbanizing. It needs land, so absorbing Chaohu will benefit Hefei. The government hopes that redistributing the land will improve the entire province's GDP," he says.

In recent years, Hefei's GDP growth has been an average of 17 percent. So this move serves the long-term aim of boosting Hefei's competitive advantage by giving it land to expand, so it can challenge the more prominent cities of Nanjing and Wuhan.

If you think that's bad, apparently entire buildings are built just to be demolished, so more buildings can be built in the same place:
Ever wonder how China can endlessly generate goal-seeked GDP of precisely 8.00001% year after year? Or how it can constantly find use for the massive and ever-larger surplus of warehoused commodities? Simple - never stop building. Which, apparently means blowing up empty building before they are even finished and rebuilding them. Rinse. Repeat. After all gotta keep all those construction workers from rioting, and all those USD reserves redirected into Brazilian and OZ commodities, now that China is not really buying US debt anymore. China Hush has some stunning pictures confirming that in its search of the great home bubble perpetual engine, the politbureau comrades may have stumbled onto the bricks and mortar equivalent of Shangri La. In the meantime, more on the whole "controlled demolition thing" from China Hush.

Earlier this year, World Architecture News took time off from just featuring the endless spectacular projects flowing out of China each and every week, and asked some pointed questions:
On 6th July, the New York Times published an article on vast debts allegedly being shrouded by the Chinese Government following several years of intense construction projects, largely concentrated in the infrastructure sector. The lengthy feature detailed the many loopholes and escape routes utilised by the powers-that-be, enabling them to sidestep financial legislation and continue the building splurges. It is no secret that China has become the new Middle East; Shanghai and Beijing stepping into the void left by Dubai and Abu Dhabi in terms of extravagant architecture. Dozens of super-tall buildings are springing up within Tier One and Tier Two cities, amongst hundreds of ambitious commercial towers, leafy mixed-use projects and rejuvenating waterfront schemes. Linking all of these new developments is a series of infrastructure projects that are thought to be costing the Chinese Government hundreds of billions of dollars (the redevelopment of the city of Wuhan alone is thought to reach $120bn). But where does this money come from?

The New York Times posed that financing for large-scale infrastructure projects has been sourced from state-run banks, with specialist investment companies set up by each city borrowing the money to prevent any debt reaching official balance sheets. However, a report by the Urban Land Institute and professional services firm Ernst & Young entitled ‘Infrastructure 2011: A Strategic Priority’ suggests that China’s monetary position is stable enough, stating: “Flush with cash from its role as an export-driven manufacturing powerhouse, China is moving ahead with wide-ranging infrastructure programs…Newly constructed airports, ports, and subway systems in China’s major centers facilitate the country’s growth into the world’s second-largest economy and help it deal with mounting congestion from burgeoning urban populations.”

Now questions have begun to circulate on the internet, ignited by the Times’ feature and fueled by the lack of available information on China’s seemingly limitless funds. Infrastructure projects in the country currently centre on a Five-Year Plan (launched in 2011) which allocates $1trillion to building new infrastructure links over the next five years, with large volumes of money concentrated on a high-speed rail network and smaller amounts on water supply, electricity and road maintenance. Many have begun to question the longevity of China’s architectural growth, as the country shows no sign of stopping or indeed slowing its urban development. Rural areas have also been positively affected despite vast quantities of rural dwellers relocating to the major cities, as last July the Chinese Government pledged $100bn to rural infrastructure projects.

And with all this construction, it’s pretty obvious that corners are going to be cut:
One trillion. This is the number of American dollars allocated for infrastructure projects in China over the next five years. Zhengzhou. This is the location of the latest ‘stretching’ factory in China pulling steel reinforcement rods to illegal diameters and threatening the lives of countless citizens who will use the infrastructure projects constructed using these substandard materials.

This week a surprisingly small article in British newspaper The Times detailed the discovery of illicit practices at a Zhengzhou ‘stretching’ factory where steel reinforcement rods used in a number of construction projects had been pulled to a thickness below regulatory standards.

The reasons for this are simple - 10mm wide rods can be easily stretched to a thickness of 8.5mm, creating many additional metres of metal then sold on for profit - but the resolution is not. Despite countless assertions from experts that pulling these essential building components to inadequate diameters will weaken a structure and endanger the lives of its users, construction companies in China are still being found operating under such measures.

Thinning reinforcement rods is not illegal but when practiced to excess can lead to a reduction in the effectiveness of the metal. Fan Zhong from the China Architecture Design and Research Group clarifies: “Over-stretching the steel bars will cause them to become brittle and weak, and less resistant to earthquakes,” a point confirmed by Wu Chengcai, General Engineer at the Shaanxi Provincial Building Research Institute, who comments: “When a building suffers great external force such as an earthquake, the stronger, standard steel bars will ‘stretch’ as the building suffers the damage, thus slowing the process of its collapse for people to escape. However, the buildings with the substandard, thin steel bars will collapse very quickly.”

Wait until those quickly-built under-engineered structures start colapsing in an earthquake. Is this China's method of solving overpopulation? From gold-plated towers in fishing villages to empty cities in the desert, the signs of China's folly are everywhere:

Though the sustainability of building large planned cities out in the middle of the desert is rather questionable, it doesn't seem to stop anyone from doing it. Case in point: Ordos, one of China's latest planned developments, is located in the desert of Inner Mongolia and modelled after Dubai. It is also a city that was built overnight on the coal and natural gas fortunes of the region, boasting a "hot" property market and newly constructed houses and beautiful civic buildings, like this passive solar museum by MAD Architects.

There's only one problem though: according to a number of reports, this new development area of Ordos, dubbed "Kangbashi" -- is intended for 1 million residents, but lies mainly empty, despite the local government's efforts to convince people to move from the older, established city center of 1.5 million inhabitants, 15 miles away.

We have previously written on the issue -- with 64 million vacant houses, enough for 200 million people, the result is extraordinary waste, "all predicated on an infinite supply of funny money and cheap energy." The New York Times points to several newly constructed "ghost towns" standing empty in China, fuelled by a booming economy, rampant real estate speculation and a lack of actual residents.

But determining whether the Ordos-style expansion and re-engineering of old cities is being driven by smart planning or propelled by speculative madness is a prime challenge for Beijing policy makers. Fearing inequality and social unrest, China’s national government has struggled to rein in soaring property prices and stem the threat of inflation, even as ambitious local officials continue to draw up blueprints for new megacities.

Patrick Chovanec, who teaches business at Tsinghua University in Beijing, says the building boom is driven by frenzied investors — not the housing needs of millions of migrating workers. “People are using real estate as an investment, as a place to store cash — they treat it like gold,” Professor Chovanec said. “They’re stockpiling empty units. This is going on in cities of virtually every size.”

According to a recent Financial Times article, construction accounts for "13 per cent of gross domestic product, and for more than one-quarter of all investment in what is the most investment-dependent economy in history." If it does happen, a bursting of China's real estate bubble will have serious repercussions on the wider world economy.

It's already a precarious situation: according to Reuters, because of a clogged housing supply, property prices in Ordos and other cities like Beijing and Shanghai have dropped since the summer, prompting a wave of protests from buyers who previously paid the full price on their homes.

Nevertheless, with large numbers of rural Chinese projected to move into cities, it remains to be seen whether these new towns will slowly become inhabited, or if they are bubble-like mirages destined to burst as they did for Dubai. Perhaps it could be said then that Ordos' new museum is symbolic of many of these unsustainable new developments: deceptively shiny outside, but hollow within.

The Financial Times covers what the article above referred to - China's property bubble appears to be bursting, and social unrest is on the rise:
There are many, many more bits of data and reportage on China’s real estate downturn wrapped up in this lengthy post from Tsinghua professor Patrick Chovanec, which is worth reading in full. In addition to the dramatic stories and numbers, Chovanec raises three key questions about the property price downturn.

Firstly, how long will property investors hold on in the face of falling prices? Chinese savers have limited options for places to put their money, so those investing in apartments — who often pay cash — can afford to be fairly stubborn in holding onto their apartments. But at some point, even the negative real returns of a Chinese bank deposit might be less scary than property investment.

Second, how many apartment owners are in a similar situation to a ‘desperate apartment seller in Beijing‘ who Chovanec mentions — the unfortunate person owned the apartment outright but needed to raise Rmb20m for his business?

The third question, of course, relates to local governments:

According to a central government study, local governments in China depend on land sales for approximately 40% of their revenues. The all-purpose answer, whenever doubts are raised about the ability of local governments to repay the loans or bonds that funded various stimulus projects, is that they can always sell more land. But when developers stop building, because they are too busy desperately trying to liquidate their existing inventories, they stop buying land.

This is all pretty bearish for Chinese growth because construction accounts for about 13 per cent of the country’s GDP. At the same time, internal frictions are rising over the government’s real estate regulations, the FT says, with a People’s Bank of China adviser writing on Tuesday that more should be done to support housing transactions after 18 months of tightening measures on the property market. There are reports of prices for new apartments falling as much as 30 per cent even in Beijing.

The article cites this unhappy bloke:
Danny Deng and his bride-to-be dreamed of their lives together as they walked through the showroom for a Shanghai housing project almost three months ago. Pooling his own and his parents’ savings, a loan from his boss and a 1.1 million yuan ($172,000) mortgage, he bought an apartment and secured his fiancee’s hand.

On Nov. 19, Deng faced off a ring of security guards three rows deep wearing camouflage and carrying shields as he joined more than 100 homeowners rallying in front of the development’s sales office. His transformation from newlywed to street protester came after China Vanke Co. slashed prices for future buyers at the Qinglinjing complex, erasing about 20 percent of the value of his three-bedroom unit overnight.
If it’s street protesting he's into, he’ll have lots of company in China. In order to sell all that land to developers to raise money, the government has to seize it from the peasants who live there. Sometimes they're not too happy about it:
A stand-off between villagers and the authorities is continuing in southern China's Guangdong province. Police have blocked roads leading to the village of Wukan. Local people are trying to keep them out. The row - over village land taken by the local government - has been simmering for some time. A new wave of protests broke out several days ago after the death of a villager while in police custody.

It is not easy to get information about what is going on in the area. One local official denied there was a problem. But it appears that villagers have held a series of protest rallies over recent days involving hundreds of people. A video of one demonstration, posted online, shows angry protesters shouting slogans such as "Down with corrupt officials".

"We will continue our fight until the end," one man told the BBC.
And this is hardly an isolated incident. While protesters in New York and Moscow get more attention, civil unrest actually commonplace in China. There are 500 “mass incidents” a day in China. A “mass incident” being a strike, a riot, a protest, or whatever:
Every year, China is plagued by tens of thousands of "mass incidents" - a catch-all phrase that the government uses to describe riots, protests and strikes. Many are about land rights. Villagers often accuse local officials of taking their land without offering proper compensation. But corruption in local government - an issue China's top leaders readily admit to - is only one part of the problem.

China's property laws also seem to create conflict because they largely deprive farmers of the right to control the land they work. And if there are disagreements, they can easily result in angry demonstrations, organised by villagers who often feel they have no other option. The stand-off between local people and the authorities in the village of Wukan over land rights is a common dispute. Some believe the central problem is that there is no private land ownership in China - it is all, in effect, owned by the government. Farmers are simply allocated land for a set period of time.

Eva Pils, an associate professor at the Chinese University of Hong Kong, said this puts too much power in the hands of local governments. "This can lead to corruption and abuse of power," said Ms Pils, who has studied the issue.

Remember, China’s wealth disparities are even worse than the United States:
Market reforms that began under Deng Xiaoping in the late ’70s sparked spectacular economic growth — and widened the divisions between rich and poor, city dwellers and farmers. The share of income collected by the top 1 percent of China’s earners more than doubled between 1986 and 2003, to 5.87 percent, according to the incomes database of Facundo Alvaredo, Tony Atkinson, Thomas Piketty and Emmanuel Saez. (That was still lower than the share held at the time by their U.S. counterparts, 14.87 percent.) China ranked 53rd on the CIA’s list of countries with the most unequal incomes — lower than the U.S. (40) — based on 2007 data.

As the above article points out, populism has been replaced with an incestuous relationship between the government and well-connected elites (sound familiar?):
Mao Zedong won the hearts of the masses by redistributing land from rich landlords to penniless peasants. Now, powerful local officials are snatching it back, sometimes violently, to make way for luxury apartment blocks, malls and sports complexes in a debt-fueled building binge. City governments rely on land sales for much of their revenue because they have few sources of income such as property taxes. They’re increasingly seeking to cash in on real estate prices that have risen 140 percent since 1998 by appropriating land and flipping it to developers for huge profits.
Sometimes, the elites even run down peasants for sport:
Land disputes and growing numbers of “mass incidents” (the Chinese term for any large public protest) aren’t the most spectacular manifestation of China’s class tensions. In two separate cases this year, sons of powerful officials were found guilty of running down peasants with their cars. One of the men was executed after admitting he stabbed to death a young woman whom he feared would seek payment for her injuries.
With the real estate bubble finally bursting, maybe all those architects can return home now (and be unemployed):
The economy is badly out of kilter. Consumption has fallen from 48pc to 36pc of GDP since the late 1990s. Investment has risen to 50pc of GDP. This is off the charts, even by the standards of Japan, Korea or Tawian during their catch-up spurts. Nothing like it has been seen before in modern times.

Fitch Ratings said China is hooked on credit, but deriving ever less punch from each dose. An extra dollar in loans increased GDP by $0.77 in 2007. It is $0.44 in 2011. "The reality is that China's economy today requires significantly more financing to achieve the same level of growth as in the past," said China analyst Charlene Chu.

Ms Chu warned that there had been a "massive build-up in leverage" and fears a "fundamental, structural erosion" in the banking system that differs from past downturns. "For the first time, a large number of Chinese banks are beginning to face cash pressures. The forthcoming wave of asset quality issues has the potential to become uglier than in previous episodes". Investors had thought China was immune to a property crash because mortgage finance is just 19pc of GDP. Wealthy Chinese often buy two, three or more flats with cash to park money because they cannot invest overseas and bank deposit rates have been minus 3pc in real terms this year.

But with price to income levels reaching nosebleed levels of 18 in East coast cities, it is clear that appartments – often left empty – have themselves become a momentum trade. Professor Patrick Chovanec from Beijing's Tsinghua School of Economics said China's property downturn began in earnest in August when construction firms reported that unsold inventories had reached $50bn. It has now turned into "a spiral of downward expectations".

A fire-sale is under way in coastal cities, with Shanghai developers slashing prices 25pc in November – much to the fury of earlier buyers, who expect refunds. This is spreading. Property sales have fallen 70pc in the inland city of Changsa. Prices have reportedly dropped 70pc in the "ghost city" of Ordos in Inner Mongolia. China Real Estate Index reports that prices dropped by just 0.3pc in the top 100 cities last month, but this looks like a lagging indicator. Meanwhile, the slowdown is creeping into core industries. Steel output has buckled.

Beijing was able to counter the global crunch in 2008-2009 by unleashing credit, acting as a shock absorber for the whole world. It is doubtful that Beijing can pull off this trick a second time. "If investors go for growth at all costs again they are likely to find that it works even less than before and inflation returns quickly with a vengeance," said Diana Choyleva from Lombard Street Research.

The International Monetary Fund's Zhu Min says loans have doubled to almost 200pc of GDP over the last five years, including off-books lending. This is roughly twice the intensity of credit growth in the five years preceeding Japan's Nikkei bubble in the late 1980s or the US housing bubble from 2002 to 2007. Each of these booms saw loan growth of near 50 percentage points of GDP. The IMF said in November that lenders face a "steady build-up of financial sector vulnerabilities", warning if hit with multiple shocks, "the banking system could be severely impacted".

Which could be particularly bad, since the world’s three largest banks are now Chinese:

Face it, China’s experiment with capitalism is turning into the biggest clusterfuck of all time. China's not going to save the "global economy." In fact, it's probably going to be it's death blow. Global capitalism is failing in China just as surely as it is failing everywhere else in the world.

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