Monday, October 22, 2007

What wouldn't you do for a billion bucks?

Working with Andrea as she investigates the destruction of Qianmen's historic neighborhoods has given me the opportunity to explore a number of related issues and try new research methods. Some are fun, like running around with a camera trying to get pictures over walls without being spotted by guards, and some are less fun... like good, old fashioned dot-connecting. Here's some of what's come up:

China's economy has been blowing up for the last ten years, averaging about 10% growth in the last 5 years, compared to a global average of less than half that. Production not consumption is king here, and rather than the high personal debt rates that we have in America, savings rates in China are particularly high. These savings have been increasingly flooding both the stock markets and real estate markets, which explain both the facts that a) you see construction projects every other block here and b) China now has more billionaires than any nation on earth other than the US of A. Real Estate companies in particular are getting Google-sized IPOs based on a situation which Associate Professor at Beijing University Michael Pettis might call "the double-bubble"
"In real estate you're getting overinflated profits from borrowing money to get cheap land and then selling at inflated prices; and then you've got a stock market that is valuing a dollar of earnings at about 40 or 50 times. So you've got a bubble on top of a bubble."
It's funny too, because the situation he's referring to specifically here is that of SOHO-China, a real estate company who's recent $1.6 billion Hong Kong IPO grew 15% on it's first day of trading in an otherwise down market... oh yeah, and it's also the company now behind the Qianmen development which Andrea and I are looking into. Not only that, but the the success of the IPO was basically dependent on the Qianmen project "working out" for SOHO, given that the offering was for a price premium more than 1.6 times it's net asset value without the Qianmen project, but as this story in Marketwatch puts it:
The IPO price range's premium to NAV narrows to a maximum of 30% when the value of the Qianmen project is included, analysts said.
"It's really a gamble on whether you think the Qianmen project will get regulatory approval or not. After all, it's heritage sites we are talking about here," said an analyst with a mainland Chinese asset management fund, who declined to be named.
But like any gamble, when the zeroes keep getting tacked on, the risk soon becomes impossible to pass up. SOHO's profit was 340 million Yuan in 2006, and this year it's set to be 1.62 billion Yuan. If the Qianmen project gets held up (hint: it won't) their profit will *only* climb to 1.86 billion, but if (when) it does, the 2008 profits are expected to come in at 2.63 billion Yuan. Given the fact that SOHO's IPO lit up the Hong Kong market with 15% growth on it's first day, it seems pretty clear that investors (including Saudi Prince Alwaleed Bin Talal) have more faith in the power of projected profits than China's heritage protection laws.

And that's where the rubber hits the road. The Qianmen development is taking place in a parcel of land that is clearly marked in the Beijing Conservation Plan as a protected area, and from what little we can see between the huge barriers in place to prevent nosy parkers from getting a good look, most of the area is either leveled or just now being built. This is bad for a number of reasons which Andrea is far more qualified to explain, but there are numerous other reasons for why this situation is about more than jealousy of those who make it big during market bubbles. For one thing, it's hard to have too much respect for people who make lots of money in a real estate boom in a country where private property is a relatively new phenomenon. The rights and responsibilities of property ownership, the ability of local and central governments to abridge those rights at the behest of developers, and the recourse for property owners facing illegal evictions are all cutting edge issues here. It was a bit mind-blowing to talk to people working in NGO's, who would explained that the policies of the earlier communist eras created a historical context in which ownership is often impossible to determine, let alone verify, and eviction notices can be posted within a few days of the arrival of the wrecking ball.

But, this is not just a case for shaking ones head sadly and saying "that's just China." The 17th CPC Congress is just wrapping up in Beijing, and when the apparatchiks get done with the self-congratulations, they recognize that they have a lot of work to do. The general term "scientific development" is becoming a guiding principle for the party under Hu Jintao, and it points a course in which economic numbers are no longer the only measures of success, and the "harmonious society" is the ultimate goal. Now to a westerner this all sounds very "dear leader-ish" but even on state-run TV the debates over the environment, economic stratification and heritage protection are very real and surprisingly honest. Hell, the Vice-Minister for Construction has even compared the recent destruction of historic architecture to the excesses of the Great Leap Forward and the Cultural Revolution. From how I saw this issue just a month ago, that would be like hearing George Bush comparing Guantanamo Bay to a Soviet Gulag: unthinkable. Now it seems more like George Bush comparing Iraq to Vietnam: an admission that good intentions created a situation that is now entirely out of control.


Ben said...

i might finish reading this whole blog post for a billion bucks

Kamenka said...

Niedermeyer, I wonder whether you'll see this comment. I was just catching up on Qianmen news and saw this post (via Google). I was in Beijing in January and saw the site at night, complete with heavy steel beams on Dazhalan road and an inadvertent 'interview' with a fifth-generation resident. Does your friend Andrea have a blog? I'm interested in the arguments against doing this that people raise... See my very out-of-date blog at

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