Chapter 48 THE FRAGRANT HARBOUR
after boarding the Cathay Pacific 747, Barton settled into his first class seat,
it was almost like a miniature cabin. He checked out the route map and
noted they would overfly Russia; a much shorter distance to Hong Kong
than via the Gulf.
As he scanned the map his eyes paused over the Middle East, it was a reminder of
how his life had changed in the two years since his first visit to Dubai. He
remembered how he had been amazed at Emirate’s incredible skyline and how he
had tried to reconcile its extraordinary ambitions with economic realism. Just a few
days before his departure for Hong Kong, a report told of how The World, one of
Dubai’s artificial archipelagos of islands, designed to resemble the globe, was
sinking back into the sea. Surely a warning of the dangers of over-ambitious
projects, something that he should bear in mind during the fact finding trip to
China; his first for Fitzwilliams, under the auspices of and financed by the banker’s
Dublin think tank.
The owner of ‘Ireland’ had committed suicide, while the man who bought
‘Britain’ was serving a seven years jail sentence in Dubai after being found guilty
of fraud. As for the rest of the project it was reported as being comatose. In total,
over two hundred real estate projects had been cancelled and many others been put
on hold, including Tiger Woods’ residential golf course project and Nakheel’s
kilometre-high tower, after the spectacular fall of property prices.
It was not his problem he gratefully thought as he prepared for the night ahead in
his first class sleeper. Arrival at Hong Kong’s Chek Lap Kok airport was scheduled
for seven the next morning, where he would be met and driven to the Peninsula
Hotel in Kowloon.
As he put his head down the newspaper reports he had just read ran through his
mind. His task was to assess the appetite of Chinese investors for overseas prime
property. After expanding at a yearly average of just over ten percent since 1978,
the Chinese economy was thriving. However, the burning question was not if, but
when China’s growth would slow down, or even stall, as inevitably happened after
such expansive economic cycles. On the surface things looked extraordinarily
good, but after thirty years of phenomenal growth, China reminded Barton of the
US housing market before the sub-prime crisis broke.
Such economic cycles had taken place in Germany, Japan, Italy and more
recently Spain. The trouble was events happened on an ever accelerating scale and
already predictions of a hard landing for the overheated Chinese economy were
being voiced by observers.
It was the old story of markets being blind to the obvious. In China’s case the
economy was essentially a command economy, where government objectives were
set regardless of real need, in an environment where investors were protected from
market vagaries and short sellers. For the moment, money continued to pour into
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the country, with investors blissfully ignoring the question of sustainability.
The Nederlandsche Nassau Bank was represented in Hong Kong by a Dutch
expatriate, Felix Roosegaarde, whose principal task was to maintain relations with
the Chinese importers of Indonesian timber, and the suppliers of Indonesian
importers of Chinese manufactured goods. The banking commissions earned on
such trade had long assured Amsterdam of steady but not very exciting revenues.
Roosegaarde was caught between two stools as Barton's visit coincided with the
Canton Fair, which suited Barton fine as he wanted to form his own opinions
without the Dutchman tagging along. Roosegaarde, however, arranged a series of
meetings for his visitor with various bankers and businessmen, amongst them
Angus MacPherson of HBOS, whom Barton found particularly interesting, without
the arrogance of certain bankers he met. Both men had experienced changes of
fortune. In the case of MacPherson, he had suddenly found himself confronted with
a life changing situation following the bank’s bailout, with the prospect of
returning to an uncertain situation in the UK. A come dramatic down after ten
exhilarating years in the adrenalin driven atmosphere of Hong Kong and China.
MacPherson’s offer of his experience to help Barton with his fact finding mission
to China was warmly welcomed; Barton found no threat in accepting the Scot’s
assistance. His task was not to invest in China, nor attract conventional Chinese
investment in the UK. His goal was to offer a refuge to the rich, a place where their
money would be safe, where they could find a home for their families if things ever
turned sour, because if China ever got into serious difficulties it would be like that
of Dubai’s on a scale of tectonic magnitude.
There was little doubt as to the extraordinary success of China’s great cities:
Beijing, Canton, Shanghai, Tianjin, but what would happen if and when the
property bubble burst. Already reports echoed newly built cities, empty, with vast
vacant shopping malls and unused infrastructure. Australian TV had reported sixty
four million unsold apartments. It all sounded like the Spanish property bubble.
Home construction consumed the greater part of the China’s cement and steel
production; the manufacture of household appliances and furnishings was equally
dependent on the sector’s continued prosperity. And last but not least was
property-linked infrastructure: roads, railways, airports, utilities and so on. When
the bubble burst the whole economy would stall.
In China’s case there were however complicating factors. Amongst Barton’s
‘must read’ information was the story of a Chinese billionaire, a certain Jin Libin.
It recalled, in a certain manner of speaking, his own flight from impending disaster,
though Jin Libin’s solution was much more dramatic: the luckless businessman set
himself on fire to escape his predicament. Jin Libin’s heavily indebted business,
unlike Western businesses, in hock to banks, owed money to private lenders, in
fact ten times more than it owed to the banks.
The importance of the story lay in the fact that a large part of China’s domestic
credit sources, lay outside of the country’s conventional government controlled
banking system. The central bank’s tightening of credit and raising of interest rates
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had little effect on cash rich individuals, who recycled their reserves into higher
yield investments, more precisely to businesses that were willing to pay double or
even triple digit rates for short-term, uncollateralized loans.
This underground banking system offered depositors rates of twenty or thirty
percent. Money was lent to cash strapped firms hit by the governments tight credit
policies, with wealthy families pouring an estimated one trillion renminbi into
businesses and underground banks. Deposits and loans were unsecured, that is in
the conventional sense, and often agreed by a simple handshake between two
individuals.
John Francis had described the functioning of traditional Chinese, and more
broadly speaking Asian capitalism, where luckless defaulters ended up armless and
legless in a barrel. Gambling and speculation were part of China’s long history, the
difference was modern technology and communications amplified what would
have been the risk incurred by one or two families, transforming it into a
nationwide risk.
To those who wondered what the end game was, the answer was simple: greed,
speculation and the Chinese love of gambling. The biggest question was what kind
of business was capable of generating the kinds of profit necessary to repay such
usurious rates of interest. If it was a bubble waiting to burst, then a disaster was in
the offing, and when the inevitable came tens of millions would be ruined and
countless businesses would collapse.
The Pearl River Delta was China’s main economic centre and its two principal
cities, Guangzhou and Shenzhen, amongst its richest cities. A mere thirty years
earlier, Shenzhen had been a small unimportant fishing village across the border
from the British colony of Hong Kong, three decades later it was a huge twenty
first century city, home to many of China’s leading high-tech companies.
Shenzhen was China’s very first Special Economic Zone, created by Deng
Xiaoping in 1978, as part of his Open Door policy. The choice had been a wise
one, the Pearl River Delta, which linked Guangzhou to the South China Sea, had
for centuries been one of China’s most important economic centres with its huge
industrial cities, such as Dongguan with its grimy factory-filled suburbs.
With the addition of Shenzhen, the Delta became one of the world’s
manufacturing powerhouses. In the forefront was the electronics giant, Foxconn,
which as well as assembling Apple’s iPhones, produced a vast range of personal
computers and electrical components. In addition was a host of other
manufacturing businesses, producing everything from toys to textiles; a mountain
of goods ‘Made in China’ that were shipped to every corner of the globe, creating
an immense source of wealth for the province; the greatest manufacturing centre
the world had ever known.
Barton made it clear from the start that his goal was to discover China for
himself. He was not an expert, but in the previous eighteen months he had seen
more of the world than many others would see in a lifetime and more especially
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had acquired a perception of how it worked.
China, according to one observer, had built the equivalent of a new Rome every
two months over the previous decade. With seven to eight million people entering
China’s workforce each year, Barton wondered if the incredible machine was
outstripping demand. It would not be surprising with endless stories making the
rounds of futile infrastructure projects. Roosegaarde was certainly not far off the
mark when he had warned him China was Ireland on steroids. However, it seemed
impossible for the central or regional governments to restrain the construction
industry without putting millions of building workers onto the streets.
With the knowledge that China’s investment in infrastructure accounted for a
significant percentage of its economy, Barton set out to explore the New South
China Mall on the outskirts of Dongguan, a city of ten million, a few miles to the
north of Shenzhen.
It was described as the world’s largest shopping mall. Something had however
gone wrong, it was a ghost mall, its five levels with their endless corridors
designed to house one thousand five hundred stores, were to all intents empty. A
mere handful of units had been leased since its completion in 2005. Most were now
abandoned, all that remained was a Spar supermarket, a McDonald’s and a
drugstore.
It was a powerful reminder of Spain, where ill planned investments ended up in
bankruptcy for lack of buyers. An economy could not prosper indefinitely without
a return on the capital invested. If the same errors were repeated on a national
scale, China’s economy would sooner or later end up as indebted those of the
West, in the best case the US or the UK, and more seriously that of Ireland or even
Spain.
The paradox was the millions of poor workers who had and continued to pour
into China’s cities had not the slightest hope of ever owning an apartment with the
kind of wages they earned: a couple of hundred or less euros a month.
Providing adequate housing for poor workers was a hopeless task and the fine
apartments built in Beijing, Shanghai, and overlooking Hainan’s beaches, seemed
to be built for the sake of building, or for pure speculation. The planning model
was outdated. There was little or no economic justification for yet another high
speed train link, highway, airport or steelworks.
Before heading for Beijing, Barton made a detour to the picturesque province of
Yunnan, in the south-west of China, and its capital Kunming, a city of more than
six million inhabitants. Nearby city planners had built an entire new town to
accommodate the overflow of the Kunming’s growing population. Unfortunately
for them the planned demand was not forthcoming. More than one hundred
thousand new apartments stood unoccupied in the suburb of Chenggong, unable to
attract new residents.
Apart from a few construction workers and security guards, the new town was
almost empty. The malls and office buildings stood forlornly waiting for shoppers
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and office workers. The stadium was a home to pigeons. There was an air of
abandonment, the new town, built in the middle of nowhere, was conceived
without the least attention to its transport needs.
In Beijing, not too far from his resplendent five star hotel and the hustle and
bustle of the capital, was another example of wasteful planning. The Wonderland
Amusement Park, built in the early nineties, was falling into a state of decay. The
theme park resembled a ghost town with its Disney-like castle and medieval
ramparts besieged by encroaching vegetation and crops grown by local farmers.
The park’s promoters had foreseen everything, all the ingredients for success
were present: canals, windmills, even an Arc de Triomphe and a Plazza del san
Marco. It was to be the largest amusement park in Asia, but then a clash over land
rights brought the dream to an end; nothing remained but deserted buildings,
motionless escalators, dark corridors and empty shops. Barton wondered who had
paid for it, as surely someone must have. Thousands of workers had been
employed to build the park by construction firms and suppliers. Where were the
promoters? Who carried the burden of debt? The banks? What other financial
disasters were hidden from view?
Barton discovered the curious English village at Songjiang, near Shanghai, an
enigma with its mock-Tudor buildings and red telephone boxes? The incongruity
of it all was astonishing, Thames Town, an English village built in the heart of
China. Barton realized the vast country was full of amazing surprises. Thames
Town was complete with a market square, a church, cobbled streets, a pub, a fish
and chip shop, Georgian-style houses and even a castle. A statue of Winston
Churchill smiled benignly at the rare visitors, but even stranger were statues of
James Bond and Harry Potter.
Apart from the newlyweds, who chose the backdrop of the village for their
wedding photos, it was deserted, another ghost town, no townsfolk, empty shops
and no traffic.
A one hundred kilometre train ride away, in the huge port city of Tianjin,
planners had their eyes on another ambitious project; to build an international
finance centre to compete with Shanghai. Tianjin boasted of being the centre of
Chinese private equity, attracting investors with generous tax breaks, but any
visitor could see a massive glut of office space, the evidence was everywhere,
supply was outstripping demand at a punishing pace.
Barton could not avoid the damning conclusion that China, in spite of its
spectacular growth rate and marvels, would need years to fill its empty cities and
the millions of square metres of office space standing vacant. If a crash was
coming, in one, two or three years, those at the top already knew and would be
planning a safe haven for the hard times to come.
