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Angus Grigg
1573 words
20 Jul 2013
The Australian Financial Review
AFNR
English
Copyright 2013. Fairfax Media Management Pty Limited.
China Billed as a Manhattan of the East, Binhai is the exemplar of what is wrong with China where the economy is driven by government debt, writes Angus Grigg.

On the top floor of a riverside office tower a lone man stands smoking. It's late afternoon and the hallways should be filled with the chatter and footsteps of workers leaving for the day. Yet, despite its marble floors, this prime office building in China's newest financial district is silent.

The smoker is the only person to be seen in the building, which is one of 43 high-rise projects either completed or under ­construction in this district dubbed "mini-Manhattan". Officially it's known as the ­Binhai New Area CBD and it has the dubious distinction of being the country's latest ghost town.

It was supposed to be northern China's answer to financial districts in Shanghai and Shenzhen, but the early indications are not positive for this city centre, which was salt flats just three-and-a-half years ago. The smoker says he is one of only three tenants on the ninth floor of the Sino Trade Centre, which was completed eight months ago.

"There are a few more on the lower floors," he says.

A walk through the building proves him correct, but only just. Of the roughly 500 offices available for rent, just 20 appear to be in use, equating to an occupancy rate of 4 per cent.

Things at the adjoining 46-level tower are only marginally better. The doorman says 20 per cent of the apartments are filled, while its 13 floors of office space look as empty as next door.

"I won't even try to sell or lease a building in Binhai," says Gao Fei, an analyst and sales manager at Centaline Property in the neighbouring city of Tianjin.

"There is just no demand. Not even God knows what will happen next."

Such is the strange world of Chinese economics. In a market-based system, a higher power would not be required to predict the future. The answer would be simple: stop building.

But in China, such old-fashioned ideas as supply and demand often play no part in investment decisions, which are dictated by the government. So, despite a supply glut that is only going to get worse over the next two years, there is no lack of activity in the Binhai CBD.

Indeed, when AFR Weekend visited on Tuesday, a consistent theme emerged. Tradesmen, labourers, security guards and office workers said activity had slowed towards the end of last year, but had picked up this year.Construction against reason

China's GDP figures, released on Monday, show this trend is apparent right across the country. Figures compiled by Capital Research in London found that nearly 80 per cent of China's growth in the second quarter came from fixed asset investment. The proportion is more than double the first quarter of the year and the highest level since 2010.

"Building stuff is the only idea these guys have," says economist Anne Stevenson-Yang from J Capital Research in Beijing. "The program has not stopped; it's actually accelerated."

This is contrary to what leaders in Beijing have been saying for at least three years, after pledging to "rebalance" China's growth model away from investment and towards consumption. But this week's GDP figures and evidence from on the ground in Binhai show this transformation is yet to take hold. For Australia and its iron ore producers, China's obsession with vanity projects has been good news.

The continuation of the building boom has seen iron prices kick up to $US130 a tonne, despite record production volumes from Rio Tinto, BHP Billiton and Fortescue Metals Group.

But the price hardly looks sustainable as the party in China can't last for much longer.

"China needs a leadership courageous enough to say, just stop," says Stevenson Yang. "If they don't address the underlying problem then the crash will come very soon."

Debt is the issue. It's estimated that 1 trillion yuan ($177 billion) has been pumped into the Binhai area in recent years and its local government is the most indebted in China. "Somebody would be shot if the real figure was ever released," says Gao from Cetraline.

Whatever the exact number, it's clear no expense has been spared. The CBD will soon boast China's largest high-speed train ­station, a subway network, tunnel under the river and scores of architecturally significant buildings.

There are wide boulevards, acres of ornamental trees, perfectly clipped hedgerows and manicured lawns. Even the dirt here is expensive – it was trucked in from nearby Shandong province to overcome salinity problems. But the really scary thing is that Binhai's problems have only just begun.

Only five of the 43 projects in the first phase of development have been completed, but over the next 18 months to two years, property group DTZ estimates 1.57 million square metres of office space will be available for lease. If all the projects now under construction are completed, then double this amount will come onto the market. That's equivalent to 60 per cent of Sydney's CBD office space.

Yet Crystal Hao, an analyst from DTZ, estimates annual demand in Binhai is only 60,000 square metres. "That's why we are not very confident about its prospects," she says drily. At current rates of growth it will therefore take 53 years to fill all the available space. But that is just a fraction of what has been planned. The grand vision is to build a CBD with more than 10 million square metres of office space – double the Sydney CBD. As part of this vanity project there will be three landmark towers taller than 500 metres or 100 storeys, including Binhai's very own Rockefeller Centre.

"There is a massive oversupply," says Gao. "It's totally irrational."Government-led development

But it's not an isolated example, according to Stevenson Yang.

"Zones like these are not aberrations but the rule," she says. "When I visited these zones recently, officials were in the process of accelerating infrastructure construction."

She says private property developers have pulled back, so to pick up the slack government infrastructure projects have been accelerated. The result is China's "ghost towns".

The most famous of these, among at least a dozen contenders, is Erdos in Inner Mongolia, but Binhai must be challenging for the title, as it is far more symbolic of China's ­current predicament than the obscure desert city. For, unlike Erdos, Binhai is at the very centre of China's northern power base – it sits within the municipality of Tianjin which borders Beijing. It also epitomises the government-led development model that has seen China grow faster than any other major economy over the last three decades.

But this model of so-called state sponsored capitalism looks to have run its course, as the ambitions of local government ­officials pursue increasingly marginal projects to keep the economy growing.

In the case of Binhai, its sponsor was the former party secretary of Tianjin, Zhang Gaoli. Last November he was promoted to the Politburo Standing Committee, China's top decision-making body, and is now ­second in charge of the economy.

On the surface Zhang's credentials look amazing. During his years running Tianjin, it was China's fasting-growing region, with average annual growth of 16.1 per cent. But this was largely a mirage.

"Behind these beautiful sets of numbers was massive government investment," says Gao from Cetraline. The way he tells it, ­Tianjin grew rapidly from the mid-1980s through to the middle of the last decade, as global manufacturers poured in to take advantage of tax breaks, cheap labour and its giant port on Bohai Bay.

But when the yuan and labour costs began to rise, growth in the manufacturing sector slowed. "The government didn't have another plan," says Gao.

And so when the global financial crisis hit in 2008 the only way to maintain growth was to start borrowing and get building.

Tianjin, with a population of 12 million, took out more loans than any other Chinese city in 2009 and appears to have kept ­borrowing in the years since.

Binhai, which is 40km from downtown Tianjin, is the ultimate extension of this policy of construction inspired growth. It is a case study of how things happen in China.

The government spent billions on the basic infrastructure and then, amazingly, gave the land away free to property developers. Some of those who took it up and began construction were private sector operators, but the majority were state-owned enterprises or other provincial governments.

"They flooded in like speculators then realised it was a trap as they couldn't rent the building," says Goa.

The government of Inner Mongolia, which has its own ghost city of Erdos, has a building under construction in Binhai, as does mining giant Minmetals, which has an extensive property division.

These players and others would have borrowed the money from state-owned banks, who were encouraged to lend to the project by government officials. As a result the state, not the market, was the dominant player at every stage of the process.

10 million square metres office space planned for Binhai New Area CBD


Fairfax Media Management Pty Limited

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