Cities think big - but can they all really win?

PUBLISHED : Monday, 23 August, 2010, 12:00am
UPDATED : Monday, 23 August, 2010, 12:00am

As she opens the doors to a new exhibition and conference centre, Sun Sihan, a smartly dressed public-relations official for the city of Zhengzhou, is flushed with pride.

'We have the largest conference hall in Asia,' she beams, displaying a cavernous room that at 34,000 square metres is nearly five times the size of Old Trafford, the world famous Manchester United football ground in Britain. The exhibition centre and the walkways, gardens, lake and car parks that are part of its development area cover 69 hectares, making it larger than Vatican City.

Built at a cost of 2.2 billion yuan (HK$2.52 billion) four years ago, its vast lobby boasts imported Italian stone walls, while the hallways are filled with fresh-cut flowers.

The last time the conference centre, which was entirely empty on a recent hot weekday morning, was filled with people was last year when Zhengzhou hosted a national pharmaceutical industry event.

The conference centre is one of many attractions on show at Zhengdong New Area, a recently created district within Zhengzhou, the capital of the relatively poor inland province of Henan. Still under construction, the new town eventually will cover 115 square kilometres, almost twice the size of New York's Manhattan Island, and cost 150 billion yuan, funded by the local government and property developers involved in the project.

Here in central China, Zhengzhou is racing against neighbouring cities to become this region's economic hub. Similar contests are being played out across China in second- and third-tier cities.

In the short term, such big projects boost employment and burnish the reputation of local authorities. But in the long term, the flurry of construction - much of it funded by local government borrowings - could leave the cities lumbered with white elephant projects for years to come and Chinese banks stuck with sour loans.

The provinces of Hunan, Henan and Hubei 'are all pushing ahead with competing and perhaps redundant city cluster development strategies, designed in part to court investment' from much wealthier coastal areas, which some manufacturers may quit because of rising wages, says William Hess, managing director of Beijing-based economic consultancy China Analytics, who has lived in Zhengzhou.

Such 'clustering' of real estate and infrastructure projects is common throughout the mainland, says Patrick Chovanec, an economics professor at Beijing's Tsinghua University. 'Everywhere you go in China, you see projects that seem 10 to 15 years ahead of their time. If you only viewed each one singly, you could come up with a rational explanation of why they make sense, but there are just too many.'

Wuhan, the Hubei capital about 500 kilometres south of Zhengzhou, appears to be winning the race to dominate central China's economy. Wuhan, like Zhengzhou, is now linked to the mainland's fast growing high-speed rail network. That could potentially attract multinational manufacturers to move inland to either city, because it makes it quicker to transport goods out of China's interior. But Wuhan got an earlier start, attracting investment from overseas companies including Coca-Cola and France Telecom.

Zhengzhou lacks a large crowd of foreign-owned manufacturers so far, but hopes they will flock to the city to build factories, and also set up headquarters offices in Zhengdong New Area.

But geography works against Zhengzhou. While the Yellow River skims the city's northwestern point, it lacks easy access to waterways. Wuhan, by contrast, sits on both the Yangtze and Han rivers and has several ports.

Even farther to the south is Changsha in Hunan province, which embarked on a construction and infrastructure drive a decade ago. Today it has a surfeit of unsold homes. Apartment prices in Changsha fell 20 per cent, month on month, between June and July, according to DTZ, an international property agency. Changsha also is linked to the national high-speed railway.

The biggest industries in Zhengzhou currently are construction - which is unsurprising given all the new property development - and textile manufacturing.

In downtown Zhengzhou, outside the new district, the scene is one of ageing tower blocks, roadside stalls and noodle shops. Farmers wheel carts of fruits and vegetables down the streets. On the highways outside the city centre, traffic is sparse.

Coming to the end of an 80-kilometre drive from Zhengzhou to Henan's Shaolin temple, whose monks are famous for their kung fu skills, the quiet road is lined with car dealerships. But most people are driving goods trucks, or riding electric bicycles. Cows plod contentedly down the middle of the freeway. Nevertheless, Zhengdong New Area is also being planned as a financial centre. A short walk from the vast, new exhibition centre, the government has built the 'central business district'. This area contains 60 new office skyscrapers. Construction is under way on a 280-metre-tall hotel and office tower, which is the same height as Hong Kong's Cheung Kong Center, and taller than Britain's highest building, One Canada Square.

State-owned banks and enterprises have purchased 80 per cent of the business area's office space, says Wei Zhigang, the head of the new city's investment promotion committee, a 30-something man who sports a fashionable Polo shirt and a wide smile. Wei says he has read extensively on the history of urban planning.

It is unclear how much of that space is actually occupied. Sun, the government's public-relations officer, would not disclose the CBD's occupancy rate.

Whatever the level of success so far, enthusiasm is high. Zhengzhou's local authority plans at the end of next year to start building a second business district, identical to the first. The twin financial centres will be linked by a new road and surrounded by more than six kilometres of artificial lakes.

The local authority has spent around 30 billion yuan of its own cash building Zhengdong New Area. Now it must find another 16 billion yuan to complete the city. For a government that collected 40 billion yuan revenue last year, that seems a big requirement. Yang Dongfang, a senior planning official, said in an interview that the government will find the money from a mixture of bank loans, tax income and land sales. He did not elaborate.

Property developers, who are building the residences, will shoulder the rest of the 150 billion yuan total tab for Zhengdong New Area. More than 300,000 new homes have been built, and they are all sold, says Sun, the public relations official. However, she concedes that many have been snapped up by investors from wealthier areas, such as Wenzhou, the southern city that is the mainland's biggest manufacturer of light-scale goods, including cigarette lighters and buttons, and Shaanxi province, China's coal mining heartland.

At prices ranging from 500,000 yuan to 1 million yuan for a 100 square metre home, the Zhengdong New Area's real estate seems pricey for Zhengzhou's urban residents. Zhengzhou already has a university, but Zhengdong New Area will be home to 15 more, with capacity for 90,000 students.

The obvious question about the Zhengdong New Area is: 'Why is it there?'

By all appearances the city is not a likely home for skyscrapers and exhibition centres. But Wei, the investment promotion official, has his own vision of the Henan capital's future. 'We want to make Zhengzhou a business city and transport hub for central China,' he says.

He concedes he is 'concerned' that Zhengdong New Area's real estate is being snapped up by investors who do not live in Zhengzhou, but adds that, someday soon, the city's residents' lives will improve so they can all afford better homes.

Because wages are rising fast in China's coastal export hubs, manufacturers are going to move inland to Henan, Wei argues. He points to Foxconn as an early example of Zhengzhou's success. The Taiwanese iPhone maker, whose Shenzhen base was hit by a spate of suicides and riots by workers who remain unhappy with their wages and living conditions, opened a factory in Zhengzhou this month. Meanwhile, a high-speed rail line between Zhengzhou and Xian, 500 kilometres away in the northeast of China that opened in February, could help bring the Henan capital closer to the national economy.

Like Zhengzhou city authorities, many local governments in China see such projects as Zhengdong New Area as a way of growing their economies. After all, property development creates construction jobs.

'It is a short-term fix,' says Victor Shih, a professor at Chicago's Northwestern University who specialises in studying mainland local governments. 'There are thousands of these new economic development zones all competing with each other. They have all borrowed heavily from banks to fund themselves. How can they all work?'

After studying 8,000 local government projects, Shih believes mainland municipalities have borrowed a massive 11.4 trillion yuan from the nation's banks to fund new developments.

Meanwhile, local authorities are largely relying on land sales to repay their bank loans, Shih and other economists say. Any collapse in property prices could leave the banks saddled with bad loans.

China Banking Regulator Commission, which governs the country's banks, already is concerned about the financial health of local governments and has ordered mainland lenders to urgently curtail lending to municipal authorities.

Capital Economics, a London consultancy, says this could lead to construction halts on real estate and infrastructure projects all over China before they are completed.

But Zhengzhou's Wei is confident. 'The regulator is concerned about wealthier parts of China, where there is more of a property bubble,' he says. Land in Henan remains cheap compared with wealthier coastal cities, Wei adds. 'This does not apply to us.'

Will they come?

Zhengzhou's exhibition centre covers 69ha, bigger than Vatican City

Zhengzhou new area now under construction will cost, in yuan, 150b yuan

 

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