Tuesday, August 9, 2011

China's Ghost Cities and Malls - Excellent Video

Here is a great video documentary ("China's Ghost Cities and Malls") I came across as I continue to dig into the housing and real estate bubble infecting China. Having carefully studied the market for the last 2+ years and documented many of my most salient findings on this blog, it’s painfully obvious to me that China’s housing market is a classic bubble. Nonetheless, the opposition to this view remains fierce, with many noted investors and economists downplaying the potential fallout from a correction (even if they concede that the real estate market is stretch) and so it behooves me as an investor to continue to dig for information that supports my thesis.

The video, which was put together by SBS Dateline (Australian TV) in March 2011, is about 14 minutes long so it requires some investment of your time, but definitely worth listening to. There are at least 3 major cities profiled in the documentary that are virtually unoccupied, but have the capacity to support millions of people. It’s kind of eerie to see the camera pan across these cities and show high rise building after high rise building with virtually no tenants.

Perhaps the most telling statistic in the video is that there are approximately 64 million empty apartments in China. Despite this overcapacity, the government recently mandated that 36 million affordable homes be built over the next five years, including 10 million in 2011 and another 10 million in 2012.

I also found the story on The South China Mall in Dongguan, China to be particularly fascinating. The mall, which was completed five years ago, is nearly three times the size of the Mall of America in Minnesota. As detailed in this May 2005 New York Times article ("China, New Land of Shoppers, Builds Malls on Gigantic Scale"), the mall has 150 acres of palm-tree-lined shopping plazas, theme parks, hotels, water fountains, pyramids, bridges and giant windmills. The mall also has a 1.3-mile artificial river circling the complex, which includes districts modeled on the world's seven "famous water cities," and an 85-foot replica of the Arc de Triomphe. Despite the mall’s world class architecture and its relatively close location to Shenzhen and Guangzhou (two major Chinese metropolises), the video vividly details how the mall is a virtual ghost town, with a large chunk of the mall unleased and seemingly no customers to be found on its premises.

While I will readily concede that I have never been to China and my thesis rests squarely on third party research and information, the multitude of articles written and videos produced over the last few years, provides compelling evidence that the growth in China’s real estate market remains unsustainable and enormously damaging to the global economy when it inevitably corrects.

Over the last few weeks, investors have faced unsettling news from all corners of the world. Whether it is the debate over the debt ceiling in the US, the potential contagion fears from a sovereign default in Europe, the dangerous consumer bubbles forming in Brazil and India, or the overall slowing economic growth throughout most of the developed world, investors have a lot to be concerned about. However, in my opinion, nothing is as dangerous or potentially destabilizing as the real estate bubble forming in China. So many companies, from equipment manufacturers to commodity producers to Chinese state-owned banks will be severely impacted by a slowdown in Chinese fixed investment.

While it is difficult to predict when the correction will occur, and history suggests that the Chinese government will do everything in its power to keep the charade going, the fissures seem to be developing by the day.

Already, we have learned that traditional banks have severely curtailed their lending to the real estate sector ("Chinese Property Firms Getting Squeezed"). As such, lending has moved to the “shadow banking system” in the form of trust companies, which have more than doubled their lending to real estate developers over the last quarter vs. traditional banks, which reduced their loans for property development by 75% in 2Q (see chart below).

As we saw in the US during our own housing bubble, the migration of lending from traditional banks to an unregulated and unaccountable shadow market, represents the last leg in what we all know will end badly for these unsuspecting trust company investors.