In China, a red-hot economy is showing signs of the blues

Some fear speculators are creating artificial demand

April 25, 2004|By Gady A. Epstein | Gady A. Epstein,SUN FOREIGN STAFF

HANGZHOU, China - Shou Shanyin should have her hands full as manager of guest services at the Yuanhua apartment complex. The 125 luxury units, across the street from a scenic lake, sold out even before the development opened 18 months ago.

But at least 60 percent of the apartments are unoccupied. They have been purchased by speculators who have no intention of living there but are hoping to turn a quick profit by reselling their property.

Their hopes will probably be realized, because of the sudden euphoria about money in China, a boom that may be creating an unsustainable bubble in the country's hot economy.

So for now Shou has little to do.

"We have tried to do some things to make this place feel warmer, but we cannot change the fact that there are very few people going in and out every day," she said. "We feel this place is pretty cold, but still the property prices are going up.

"The whole real estate industry in Hangzhou is like this."

The story is the same along China's booming east coast, and Chinese leaders are worried about it.

In the real estate market and the industries that feed off it, private speculators, developers and state-owned companies have rushed in with cash and borrowed funds and created a real estate and construction boom.

Demand is outstripping the supply of almost everything related to the building boom - suitable sites and buildings for speculators and developers, affordable homes for low- and middle-income families, and electricity for just about everybody.

To meet the economy's needs, China is consuming a growing share of the world's energy supplies, and more iron, steel and cement than any other nation, driving up world commodity prices and fueling breakneck expansion in those domestic industries.

Hangzhou and other large coastal cities have had to ration electricity, forcing factories and some residents to go without power as often as three days a week. The shortages are almost certain to worsen with the arrival of summer.

Among the few kinds of factories guaranteed electricity seven days a week are those considered vital to the construction boom, such as Hangzhou Iron and Steel.

The state-owned factory operates around the clock, consuming about 5 percent of the electricity in this city of more than 6 million people. Its consumption of electricity and its steel production have increased 20 percent in the past year, the company says.

Meanwhile, Hangzhou government buildings have shut off their air conditioning, and officials ordered half of the street lights turned off at night.

"The government has proposed that we fight the electricity shortage just like we fought SARS," said Chen Bin, general manager of Hangzhou Banshan Power Generation Co., which supplies two-thirds of urban Hangzhou's electricity. "This is the worst we've faced in history."

These developments add to worries that China's economy is growing too fast and that the euphoria will lead to higher inflation and end with a crash.

Economists are divided on the seriousness of the problem, because the size and unevenness of China's economy can lead both to unwarranted optimism in good times and overly dire predictions in bad. But there is general agreement that the borrowing, spending and building bonanza of the past two years must slow down.

The government has tightened bank lending in recent months, but it may not be enough to avoid a crash in property-related industries and in state-run banks already saddled with bad debts.

A year or two from now, in the most dire predictions, new apartment and office buildings could stand mostly empty. The loans that banks eagerly made to the builders might never be repaid. Developers and contractors could go bankrupt. The industries borrowing money to expand, such as iron mining and steel mills, might then have to shrink.

Unbridled confidence

For now, developers are enjoying the boom. There is, for example, the developer Gao Jisheng, a former soldier and factory worker who joined local government and then, like many others with good connections, entered the real estate business a decade ago.

Sitting in his spacious Hangzhou office, decorated with a large framed photograph of himself on the wall, Gao is clearly one of the winners in the investment boom, and he is eager to tell you as much.

He lives in a 3,200-square-foot house and drives a Mercedes S600; his last vacation was a 10-day jaunt to New Zealand. His company, Lander Group, developed more than 5 million square feet of residential space last year, much of it in the Hangzhou area. He is building 9 million more square feet this year, with plans for more in the years to come.

He appears sure that his success, and his company's, will only grow.

"Our company has no plans to shrink our projects or cut back," Gao said. "I look optimistically on the Chinese real estate market. I think it has 25 to 30 years of growth to go."

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