The Plan

by John Francis Kinsella

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 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 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 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 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.

  Chapter 49 ELECTION YEAR 2010