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SOVEREIGN MAN

Chongqing: The largest construction site in the world

July 12, 2011
Chongqing, China

[Editor's note: Tim Staermose is filling in for Simon today with another boots on the ground report from China.]

By some accounts, Chongqing is the largest metro area in the world with a population of some 32 million. They ought to call it the largest construction site in the world.

This is a place that, if you believe the official numbers, posted 17% GDP growth in 2010. It doesn’t take too long to figure out how that happened. Driving around town, I found that Chongqing is in such a building frenzy, they’re actually tearing down perfectly good (and reasonably new) buildings and infrastructure, and rebuilding them.

To give you an example, next to my 45-story downtown hotel was a building site where the constant drone of jackhammers signaled to me that there was some breaking of concrete going on. The new tower under construction had reached the 11th floor, but then they decided to tear it down and start all over again with something even bigger (102-stories).

[There are a half-dozen other such towers in Chongqing. Most of them are officially "on hold," signaling to me that China is getting ever closer to facing its bubble reality-- that demand simply cannot support such investment.]

Then there are the pavement workers… half of them digging up the road, Untitled1 225x300 Chongqing: The largest construction site in the worldhalf of them putting it back together.
Untitled21 225x300 Chongqing: The largest construction site in the world
It is the literal equivalent of digging ditches only to fill them back up, all in order to create employment.

The government certainly hopes that actual businesses will come to Chongqing to mop up all the excess productive capacity that they’re building (and then tearing down and rebuilding).

Chongqing is, in fact, at the epicenter of the “Go West” drive in China, whereby manufacturers along China’s coast are being encouraged to move their production facilities inland to take advantage of the untapped labor pool and cheaper all-around costs of doing business.

Curiously, Ford Motor Company is one of the region’s cornerstone investors. The company’s biggest concentration of production plants outside of Detroit is in Chongqing. Ford aims to use the city as its beachhead in China where its market share currently languishes at a paltry 2.6%.

Perhaps in the years and decades to come, dozens, even hundreds of businesses will relocate to Chongqing. Maybe the Chinese have it all figured out and are thinking 25 years in advance. But today, it’s hard to see how ripping down buildings and roadways (and replacing them with ghost towers and the exact same roadways) could prove to be a worthwhile investment.

A half-built building is a liability. A completed building sitting empty is an even bigger liability. These aren’t signs of clever planning, but of wasteful misallocations that are starting to crack the facade of the Chinese economy.

So much superfluous construction did create temporary economic growth… but now you can see the visible signs of unemployment rising. The sheer volume of downtrodden and destitute Chinese on the streets, coupled with rising consumer prices and declining output, all suggest that deep instability is looming.

The Chinese have an old proverb: “Keep your broken arm inside your sleeve.” They have been telling lies to the world and masquerading as an economic miracle for years, but the signs of stress are showing.

Yes, China does have the right kind of potential with over a billion people, substantial productive capacity, and a high savings rate. But these dizzying growth rates have been a total illusion. With so much of the world’s economic hopes pinned on the continued fantasy of 10% growth, it’s going to be a hard landing for everyone once China’s reality sets in.

About the author: Born to a Danish father and British mother, in Dar Es Salaam, Tanzania, Tim Staermose has led an international life since the day he was born. Growing up, he also lived in Egypt, Denmark, and Singapore, before eventually settling in Australia, where he completed his education and took out citizenship. Since then he has also lived and worked in Hong Kong, and Manila, Philippines, in the field of equity research — both for a bulge-bracket Wall Street investment bank, and for an independent investment research firm. Today, when not traveling the globe looking for investment and business opportunities for the Sovereign Man community and catching up with his diverse, multinational group of friends, he divides his time between Hong Kong, and the Philippines.

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  • http://www.facebook.com/frank.dobner Frank Dobner

    Don’t be fooled by the Chinese. This is one of the few countries in the world that has a comprehensive 5 year plan in every sector of business and government. Things are not done in knee-jerk fashion in China. I read recently that China spends 70% of GDP on infrastructure. Up to this point in history the only other country to come close to this is Japan’s run-up 3 decades ago at 35% of GDP. Infrastructure can be a leading indicator of anticipated growth. It is not only a way of employing 100′s of millions of people but a way of paving for growth. They will need to watch debt levels though, because I do not see the growth happening anytime very soon.

  • AlexMoen

    I think China will have a rough transition, but not nearly as rough as
    lots of people are letting on.  They do have to worry about a real
    estate bubble, and about upgrading from a manufacturing nation, but they’re handling both much better than others have in the past, in my opinion. 

    Their real estate bubble is based on excess profits (rather than, say,
    nobody paying for the real estate, as in the US), and could serve future
    needs (although, one thing I noticed in China, is that they’re good at
    making buildings, but fairly bad at maintaining them).  Between that,
    and already having the world’s fastest super computer and world’s best
    railway systems (despite an education system that leaves something to be
    desired), I don’t think they’re going to get derailed here.

    While there is poverty, honestly, I see far more beggars in downtown San
    Diego, CA on a regular basis than I ever did in any Chinese city.

    Of course they’re not going to continue at 10%+ GDP growth each year
    and, really, most of their issues will probably come from hitting that
    reality (and investors counting on this continued growth), and not these hyped up issues regarding their infrastructure.

    Oh, and as for tearing up the street, only to lay a street down- they’re upgrading the streets.  I guarantee they’re not destroying those bricked streets to lay down more bricks.  Some streets are of poorer quality, and the bricked streets are not only more aesthetically pleasing, but would be easier to fix and maintain.

    • Zonghai56

      Fact – There are no beggars in North Korea.

      So conclusion: North Korea is better than the USA. Right?

      How much do you really know about China?

    • http://www.animalsdinosaursandbugs.com/The-Future.htm Peter Legrove

       In Guangzhou they repaved all the sidewalks, with little bricks very similar to your picture but they are red, for the Asia games. The city looks really good now.

  • clickoff

    A few days ago, there were pictures of an area of Chongqing, showing thousands of people lined up to get water.  Their area has been without water for some 10 days.  (So much for infrastructure.)  

  • http://www.animalsdinosaursandbugs.com/The-Future.htm Peter Legrove

    With all the upsets in the Middle East there have been
    suggestions that the Middle Kingdom could following in their footsteps. But not so. China doesn’t fit the profile of a country ready to collapse into chaos.
    The main difference between China and the rest of the world is their “One Child Policy” No other country has it and most of the countries that are having problems have had population explosions over the past 50 odd years. Case in point Egypt has had 100% population increase in the past 50 years. No wonder
    they are having problems and the problems are just not going to go away. To be honest they will get worse and most of Africa will follow the Middle East into chaos as the food starts to run out or get very expensive. In China because of the “One Child Policy” the cost of maintaining control is very low. There is
    not a bulging class of teenagers and young people and that is where the trouble starts. In the cities drugs and drunken teenagers are not a problem. There are no street gangs, graffiti or vandalism therefore the crime rate is a lot lower than in western cities. There are no teenage drivers so the roads are
    reasonable safe. With all these things that plague the west the cost of maintaining the cities is a lot lower than in the west. Also most of the people are happy. The 30 to 40 year-olds would never have dreamed in any of their wildest dreams what has actually happened. They are making more money in a year
    than their parents made in a lifetime. And they have no reason to stop the gravy train. Also their political system is not the same as overseas. They are not a democracy so they don’t have to keep giving to their citizens so they will vote for them. They change their political leaders every 10 years and they
    have 5-year plans and 10-year plans that are separate from the new leaders. The new leaders can’t come in and change the plans. I think China will be the last big country standing. Democracy has run its course. It can only survive as long as countries keep growing but now in the west countries are not growing. The only thing that is growing is debt and big government and that is a catalyst for collapse.

    • Alex

      A lot of 30-40 year-olds are worrying, and their parents are worrying too, at least those still have sharp eyes and a thinking mind. Signs of unsustainability and cracking are appearing everywhere and honest citizens can see that. But government control and propaganda are tight. Only the most brainwashed Chinese would tell you that not all government information and statistics are lies.

      As a Chinese, I am amazed at the willingness of some westerners to bow to the superficially massaged growth miracle. Chinese culture is different, mindset is different, political and economic reality and system are different. I doubt anyone without in-depth knowledge of China and the Chinese can have any realistic grasp of the situation.

      As for all the buildings etc. just one tiny piece of fact to boot: in residential markets, no properties are or can be sold as freehold. They’re all leasehold (in western terminology) only with 70 years expiration. And most buildings would not last more than 30-50 years. So there is not even much hope of passing down properties as inheritance over generations, many flip properties as frequently as they stir a stir-fry to try to get some quick profit while it still lasts.

      • http://www.animalsdinosaursandbugs.com/The-Future.htm Peter Legrove

        You are right about not being able to figure out how they think in China. I’ve been going to the Trade Fair in Guangzhou China since 1994 I think. Anyway I have been going to the fair either once or twice a year since
        then and I’ve seen this city change from a back water city with two MacDonald’s to this amazing city it is nowadays. Before when you came through the border
        from Hong Kong you could see the difference. You were going to a backward country. Now when you come through the border you are entering a place that has modernized and left Hong Kong behind. When you get on the high-speed train to Guangzhou you know you are in the next superpower. Hong Kong used to be the Pearl of the Orient now I don’t know what it is. Anyway back to the way people think in China, even that has changed. In the 1990s it used to go something
        like this. If I rip you off it is your fault because you let me rip your off. You never checked something or you got the wrong LC or whatever. That was the attitude so you had to be careful. That attitude still prevails in Hong Kong, somethings never change. Hong Kong is still the city of misled. But China has changed, now they know how difficult it is to get customers and there is very little of this rip off stuff unless you screw the deal down too tight. Then they will cut corners. As the city has modernized so has the mentality and now
        they have adopted the western business mentality for during business.

      • Alex

        You might have been attending the Trade Fair since 1994, but I don’t think your view of GZ and HK is even close to any reasonable ‘understanding’.

        As it so happened, I grew up in both GZ and HK and still go back these two places at least once a year. Before the great transformation you apparently so admire, GZ – if you know where to go and see, not the two McDonalds’ – was a genteel historic city with great historic sites, culture and traditions, and HK was a buzzling metropolis with great confidence in its stride. Then HK started to lose its ‘zing’ after the deal to return it to mainland China and people from all walks with a bit of resources emigrated, and now all it feels is a sense of hopeless and helpless, in thrall of BJ government, opportunitistic pro-BJ politicians and the influx of northern Mandarin-speaking mainlanders. Later on, GZ was destroyed to a great extend in an attempt of the central government to wipe off local history and culture so to achieve homegenization and also better cultural/mentality control by BJ. Guangzhou is now such a miserable place for the locals with all sorts of kitsch and garish displays.

        Many local Cantonese people lamented private such regrettable transformation for both GZ and HK. I can only wonder which part of the West you are from and that you would prefer a vulgar city to a genteel historic town. But this is getting a bit too much for comments on a public board/forum.

        In China, the “cost of maintaining control” is not “very low” as you put it. It is very high, but also highly efficient because the government can and dare to be ruthless, without the hassle of having to go through any democratic process and no worry for any repercussion. This alone is an immense advantage that any so-called democratic counties do not have. But as Churchill famously said: Democracy is the worst form of government, except for all those other forms that have been tried. Unfortunately, it would seem like that you would prefer a totalitarian iron grip of governments of the sort in China to a form of governance that grants people a free albeit at times chaotic way of life.

      • Chao

        As a developing country, nothing suits China better than the current tight government control. Just compare China and India you will see the differences. Also, the rising China is the Mandrin speaking Northern China, not the southern China, Southern China has reached its peak. JiangSu was on the edge to overtake Guangdong in last year. I think Guangdong had half of the country’s GDP 15 years ago.
        The rising China is the Beijing centred Northern China, not the Cantonese southern China anymore.

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