Chapter 48: Chapter 48

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

A

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.