China: Buildings to Nowhere Looking Increasingly Shaky

We’ve been told that one of the reasons China is allegedly faring less badly than might be expected, given than big creditors tend to take it on the chin worse in global crises than debtors, who can simply default, is that its economy was actually more reliant on domestic capital spending than exports as a source of growth.

Yet we have also heard reports of shiny new see-through office buildings. Not having been there, we can’t tell how pervasive this is, but some reports say there is a lot of the real estate equivalent of bridges to nowhere that have been built.

This article from China Stakes (hat tip reader Michael) discusses how developers of residential property are engaging in ruses to keep credit coming from banks:

While the real estate market appears to be is in the midst of a boom, defaults among developers are also beginning to rise. Small and medium developers are resorting to faking sales to get bank loans to relieve their funding pressure.

Statistics show that from May 1 to July 24, which seemed to be good days for Shanghai’s real estate market, many housing projects were seeing over 30% cancellations, and the cancellation rate of some projects was as high as 125%. Behind the “boom” of the housing market are irregular behaviors such as getting bank loans by cheating and making fake housing purchasing contracts.

Among the top ten housing projects with the highest cancellation rates, 60% are developments by small and medium real estate companies. “In fact, it is still difficult for small and medium developer to get credit support from banks,” said a sales manager of a medium real estate company.

Now it is common for developers to sell an apartment to an employee as a “reward” and then secure a loan from a bank with the housing purchasing contract signed by the employee. “There’s a window between the sale and the issuance of housing ownership certificate, during which employees can decide whether to keep or cancel the contract,” the sales manager added.

In 2008, when credit was tight, many small and medium developers sought to gather money in this way. “Every developer is doing this. The only differences are scale and method,” said the sales manager.

The high housing contract cancellation rate has also occurred in Nanjing. July statistics show,…

According to figures from Centaline China Property Research, between January and June new residential housing sales in six key cities totaled 55 million square meters, up 88% over the second half of 2008. However…in June, housing sales in Guangzhou, Shenzhen, and Tianjin all saw a decline, but Beijng and Shanghai were still seeing month-on-month growth. Housing sales in Shanghai in June reached 2.84 million square meters, up 6%, month on month, the highest among all the six cities.

Yin Bocheng, director of the Real Estate Research Center of Fudan University, thinks the boom is a mirage. “This is only fake prosperity.” This ploy has been used before to simulate growth in the real estate market. Developers getting bank loans with fake deals will add to credit risk in a long run

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  1. But What do I Know?

    Why doesn't anyone ever do anything productive with this "bridge to nowhere" money? Instead of pissing it away on housing and office buildings, we (or China) could be building solar energy plants. . .

    If we're going to waste money, let's do something useful with it :>)

  2. mxq

    Grantham on China:

    "My colleague, Edward Chancellor,
    strongly suspects that the Chinese economy is dangerously unbalanced and very likely to come unhinged in the next few quarters, surprising the pants off investors."

    Grantham has been bullish on EM for some time, so its interesting that he makes the exception with China.

  3. Teacher

    Take a trip to the outskirts of any major Chinese city and you'll see bloc after bloc of empty apartment buildings. Go a bit farther, to the exurbs, and take a gander at the empty upscale condos, empty from the years 2007-8 when they were completed. Too expensive for Chinese to buy, not yet in demand by foreigners or expats. During those years at least there was a price bubble in the stuff, as demand was anticipated. What's the point of blowing this particular bubble if there's already a surplus of real estate construction? It's more fun and more democratic to play the Shanghai markets, and I imagine that in any good sized town you can see the little old ladies in the local brokerage watching their fortunes go up and down – mostly up at present.

    That's China. Demand for consumer staples is almost unlimited as are, theoretically, profit opportunities. But these always seem to be built on fluff. The fluff spills over into basics like food and then everything hits the fan. But what's the time frame? Based on the last bubble, my guess is they've got another 6 months of this madness.

  4. Anonymous

    I'm still waiting to see who steps up to replace the American consumers.

    Internal consumption is great but doesn't do much for growth, at least not on an emerging market basis.

  5. skippy

    With all respect, 3/5 of the population is more in line with Nigeria. Sales of durable goods in the burgeoning new markets further away from the epicenters of commerce have gone poof and the more concentrated population centers fare little better.

    With out strong central government intervention-invention, well it would be bad.

    Skippy…in the quiet night you can hear sobs and cry's for ci mu.

  6. Bob Goodwin

    I am currently in Taichung, Taiwan, and just took a tour of the new development. Block after block of gorgeous high rise apartments with price tags over $1M US overlooking gardened boulevards.

    And mostly vacant.

  7. Anonymous

    In the first post But what do I know? makes a good point:
    "Instead of pissing it away on housing and office buildings, we (or China) could be building solar energy plants. . .

    If we're going to waste money, let's do something useful with it."

    Has privatization gone so far in China that it's hard for the state to direct investment in this way? Are they trying to prop up existing construction capacity (or engaging in cronyism) such that new lines of production aren't/can't be developed?

  8. Anonymous

    Why not solar?

    Read between the lines(since what is on the lines eludes most people)

    Solar is uneconomic. People have been pitching solar since I was in engineering school during the 1973 energy crisis.

    35 years on and still nobody uses solar except as window dressing.

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