Is China Growing Too Big?

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Op-Ed Commentary: Chris Devonshire-Ellis

Aug. 23 – For many years now, as I’ve traveled China on business, I’ve been skeptical of the GDP growth figures. From Shenzhen to Changchun and from Wuhan to Kashgar, via Chongqing, buildings have been going up, rather like mushrooms after a rain storm, as signs of the new prosperity and growth of China.

In fact, every single Chinese city, large and small, seems to have acres of new developments – but all lying empty. The giveaway is a quick evening tour of residential and business blocks. If no lights are on, why were they built? Entire development zones with no businesses. Blocks upon blocks of high rise apartments for tens of thousands of families – all unused, empty shells instead of the dream homes the advertising hoardings proclaim they are.

Local governments and real estate developers have been working together to “improve the value of the land,” and reap income and gain growth credits for doing so, but how is the land improved if no-one is using it? In fact, land in which money has been spent to build a block of high-rises may show an increase in value on paper, but until those units are sold or rented out they have been erected at a loss. Value of land is a key indicator in China’s GDP growth figures, yet if no one is utilizing it, obviously those figures are wrong. Traveling from the airport to downtown Chongqing for example, there are masses of expensive, premium apartments and villas for sale. Chongqing’s minimum wage level is US$1,221 per annum. But priced at US$1 million each, who is going to buy them? Adding value to land only works if you have a market for the property, otherwise the valuation is just a paper exercise representing no real financial asset or gain.

The central China cities of Changsha, Hefei, Nanchang, Taiyuan, Wuhan, and Zhengzhou for example, are all part of the governments “Go Inland” campaign – encompassing these cities specifically to encourage foreign investment and to jointly promote them as alternatives to the country’s coastal cities. Yet what has happened is that these cities have taken this mandate to actively compete – not just in growth figures to make their GDP look good, but also with each other. Accordingly, we have situations like those occurring in Zhengzhou, an inland city of five million. It’s a typical Chinese city, reasonably modern, yet somewhat quiet and unassuming. FDI is present, but the logistic costs of manufacturing in Zhengzhou and then shipping globally render it unsuitable for most international exports. For Chinese domestic sales, Zhengzhou is in a great location, but it will always remain a relatively small player when it comes to pan-Asian or global trade. The geographical positioning of the city dictates this. However, the city government has built Asia’s largest exhibition and conference site there, and the statistics are impressive:

Zhengzhou’s New Exhibition and Conference Center
69 hectares – twice the size of Vatican City
34,000 square meters – five times the size of Old Trafford, the home of Manchester United
Cost: RMB2.2 billion (US$324 million)

Zhengzhou is not content with that. It’s building an entirely new city – the Zhengdong New Area.

Zhengdong New Area
115 square kilometers – double that of Manhattan Island
60 new office skyscrapers
280 meter hotel and office tower, higher than the tallest building in Britain
Cost: RMB115 billion (US$16.94 billion)

Zhengdong New Area Residential Property
300,000 homes built
100 square meter house purchase price – RMB500,000 to RMB1 million (US$74,000 – US$147,000)
Minimum wage in Zhengzhou: RMB9,600 per annum (US$1,411)
Time required to save entire salary and buy property: 104 years

The race to develop as the preeminent central China hub is on it seems. Similar projects are underway in the other five central China cities, and the situation is repeated, over and over again in other second and third tier city groupings, all looking to become their respective regional center. Most of the development is funding by government borrowing. The vast majority of these will become white elephants, unused, expensive to maintain, while the construction debt will have to come back and be counted at some point. One wonders also about the transparency of the funding. Collusion between local government and local real estate developers is rumored to be rife. The developers buy the land and build while the government pockets the cash and can point to a job completed; yet the funds come from state and not local coffers. With state-backed loans estimated at some RMB11.4 trillion (US$1.68 trillion) for the provision of such loans, it’s the scale of the issue in China that causes serious concern. China may be getting too big for even the central government to afford, and with real national GDP growth rates (once property influences have been stripped out) of about 4 percent to 5 percent per annum, that may not be enough to keep China completely on the projected growth track until that debt can be absorbed.

While China looks a great investment play, and the developments look amazing, it is also time to be cautious and choosy about the extent of corporate investment exposure to China, especially in real estate. For business looking at inland locations for regional development and expansion, great care needs to be taken and proper operational due diligence conducted over the inherent logistics and transportation links. Geographical suitability, strategic locations and access to markets both real and promised need now, more than ever, to be taken into consideration.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates. The firm has 18 years of foreign investment experience throughout China and maintains 10 offices in the country. For assistance and advice over foreign investment laws, taxes and incentives and conditions throughout China please contact the firm at
Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion

Related Reading
China Briefing Magazine “The Go Inland Campaign”
Complimentary download featuring the costs of exporting from the Central Chinese cities of Changsha, Hefei, Nanchang, Taiyuan, Wuhan, Zhengzhou

2 thoughts on “Is China Growing Too Big?

    Chris says:


    Another interesting an entertaining article on business and development in China. Worth thinking about using a Blog format rather than an article format for this type of commentary.

    I recall travelling to a University in Zhengzhou 3 years ago with a magnificent brand new purpose built campus on 500 Mu of prime agricultural land. The campus is able to accommodate 55,000 students.

    In discussions with University leaders I asked where the funding came from as I doubted that the Central Govt would fund, Henan Provincial Govt had no funds and Universities are not a municipal responsibility. I enquired as to whether the University had borrowed ALL the money to which the Party Secretary replied that yes indeed all the capital to build the campus was borrowed. Asked how the University planned to pay it back, the Secretary simply commented with a smile, what would the bank do with a University campus?


    No doubt, interest payments are barely being met and there would be no real prospect of the University financing the repayment of the capital.

    The same issues applies to many of the housing and infrastructure developments you indicate above.

    China may grow into using this infrastructure and assets and generating an actual return on investment. I moved into a greenfields development district in Shanghai 4 years ago that was largely empty and is now a vibrant part of the city. In other cases, some of these will need to be discounted heavily or taken over by the Govt and used as community housing before the affordability gap between cost and incomes is closed.

    Some of this infrastructure will never generate sufficient return, particularly when far too much of the capital was borrowed. In business and life, interest and finance are cruel and hard masters and interest has a nasty way of accumulating in a way that grows beyond the capacity of the borrower to pay. This logic applies to most infrastructure projects under development. I saw recently the Beijing – Tianjin Express train system now losing a significant amount each year and requiring a lot of Govt subsidies. The losses are not operational (they are profitable on operations), but simply profits being insufficient to pay finance costs on the large debt required to finance such a large and expensive project.

    At least, China banks are guaranteed a margin between legally mandated maximum interest rates payable on deposits and legal minimums of loan interest that guarantee them a margin that would be the envy of the banking world! This will assist to cover some of the inevitable losses.

    Nonetheless, when we look at the last 10 years and how incredible debt has been created in Western economies to finance the transfer and leveraging of existing assets it provides a context and a useful comparison. The West has accumulated truly extraordinary debt at all levels, Govt, business and consumer. In that time, very little new infrastructure has been built, there have been marginal increases in housing stock etc. The vast bulk of new debt has been used to fund transfers of existing assets and to fund leverage on these.

    At the very least, China has developed an extraordinary and world class infrastructure. There is no doubt that Zhengzhou requires a world class University, schools, industrial parks, railways, hospitals etc. There is also no doubt that now is the best time to undertake these projects: land remains affordable for Govt projects, compensation is managable (though no longer cheap), and the labour required to undertake the development is cheap and plentiful. There is no doubt that this infrastructure will be used (apart from a few foolish vanity projects) and is genuinely socially necessary.

    In the case of the Zhengdong New Area Office / industrial developments and associated real estate developments, you need to distinguish between costs that will be picked up by the Municipal Govt and any local financing platform and those that will be picked up by private capital. No doubt, such a large area cost a significant amount in compensation to acquire (Henan farms tend to be 2/3 of a mu so that’s a LOT of farming families to pay) and a large amount to provide infrastructure (power, roads, gas, services). Much will be immediately onsold to private developers or direct to firms who will use the land at a 10x markup, reducing the loan burden on the local Govt. In the case of housing developments, the developers have already paid the local Govt at least 10x the compensation costs paid for the land and a high percentage of apartments will have been sold already. They may look empty, but over the next 2-3 years, families will begin moving in as local services emerge and improve. Fiscal exposures are probably not as bad as a trip past empty developments indicate.

    I’d take a balanced view on this. From a foreign investor perspective, good value will emerge in Central China for firms with a clear business vision of building capacity to deliver into the PRC market. No doubt, Zhengzhou Govt will offer generous incentives for business to move into the new industrial parks. Foxconn has just set up there. They will actively seek new investors and industries. Leasehold costs on the land will be on very attractive terms. Office rental will be a bargain. The flipside is that once operating, investors will find themselves squeezed on taxes. The State Administration of Taxation is merciless!

    Chris Devonshire-Ellis says:

    Hi Chris (great name btw) yeah, we’re sort of bloggish but different. Most China blogs are rather poor in our opinion, and we need to differentiate between them and us, although thats not to take away from the good ones, those actually written in China. (See “Beyond China Blogging” here for a list of those)

    Back on topic, I agree the issues over especially the Central regions are difficult to fathom. I can’t see how Zhengzhou, the example I gave, is able to build or expects to fully utilize the largest conference hall in Asia, it doesn’t make sense. Housing also lies empty in many cities, much of it expensive. I guess the recourse is that when the Chinese economy starts to slide (as it shows signs of doing) it can rehouse angry locals into prime property to pacify them.

    Concerning standard tax incentives, and employment costs, these have both (a) largely disappeared and (b) largely increased. For China to provide generous incentives, as you say to attract investment into these areas is however going to represent a massive U-turn in recent policy. Not that that won’t happen, because I hope it will, however I think the foreign investor will get squeezed until the pips pop far before Chinese companies will give up their current status as same tax payers for foreign investors. There’s only so many investment dollars to go around, and other countries such as Singapore (competing with Shanghai), India, Vietnam and others are now switched on and are monitoring China’s moves. Its certainly not as easy as it was, and I still feel a lot of white elephants are being erected throughout China. The rest of Asia, however, will be the beneficiary of such wasteful expenditure. The wastefulness is not in all Chinese cities though. The opportunities especially in border locations are far better and infrastructure dollars being spent more wisely. Guangxi is a good example of better investment infrastructure spending. Thanks for your comments – Chris

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