I spent the past three days in Chengdu and so was unable to keep up my blog. I have to say that Chengdu, which is one of my favorite cities in China, was bustling and all the shops (and shopping malls) were packed, although I am not sure whether or not people were actually buying anything -- I purchased a small component for my camera (RMB 180) and I managed to attract the help of at least five attendants. Nonetheless the article excerpted below, which comes from the Christian Science Monitor, certainlyringstrueforBeijing.
Needless to say Simon Montlake hits on one of the things that most concerns people like me. There is a huge amount of direct and indirect lending to shopping malls, among other commercial developments, and it is not clear to me that most of these are profitable eough to service loans indefitely, let alone repay principle.
The missing factor in mainland malls: shoppers
Developers keep building but thrifty consumers are not biting
Simon Montlake Sep 02, 2007
...As investors continue to pour money into malls, analysts say the signs of a real estate bubble are growing, as are predictions that some retailers may be heading for trouble. Empty malls are just one indicator of an overheating economy - growing at its fastest clip in over a decade.
To curb rising inflation, led by food prices, the central bank raised interest rates recently for the fourth time this year. Property companies were also ordered in June not to borrow offshore. But the race to build goes on.
"The problems of overheating are already apparent," says Wang Yao, director of the information department at the China General Chamber of Commerce. "The commercial real estate industry is facing problems. After some buildings are finished, nobody wants to rent space."
Since 2002, the mainland has built hundreds of malls, each trying to get a slice of a retail pie worth US$800 billion last year. Captivated by the promise of a vast consumer class itching to spend, foreign brands have jostled for space at the table, only to find a scarcity of customers. Now, retail occupancy rates in Beijing are 8 per cent and rising as more malls enter a crowded market.
Mr Xu, who pulls in US$266 a month - below Beijing's US$400 average - is typical. He socks away a quarter of his pay packet, as does Chen Ping, his girlfriend, who earns a similar wage as a store assistant. Asked if he isn't tempted to save less and spend more, he shakes his head. "If we enjoy life now, what about the future? We need to think of our future," he says.
The rising cost of living is one reason why many here are reluctant to splurge in fancy malls. Mainland workers opt to save, knowing that a feeble welfare system is unlikely to provide for them. As a result, consumption accounts for only 37 per cent of the mainland's economic output, about half the rate in the US. Such stinginess bodes ill for Beijing's mall developers.
Golden Resources Shopping Mall was the world's largest shopping centre, with 550,000 square metres of retail space, when it opened in 2004 (though a new mall in southern China has since taken this title). But it has struggled to generate enough sales to justify an investment of nearly US$500 million and is fast being overshadowed by newer, glitzier retailers. An additional 2 million square metres of retail space will be added this year, according to the Mall China Information Centre, an industry association.
"The question is not whether people can afford [luxury] products," says Mr Wang, "but how many big malls a city like Beijing should have. If there are too many malls, some will fail." It's a common problem that points to the inexperience of mall operators and the readiness of state-run banks to lend to prestige projects with political backing, say analysts and industry sources.
"I think that the issue is not that we've misjudged consumption," says Michael Pettis, a finance professor at Peking University. "It's just been too easy to borrow money and build these things." He warns that a real estate downturn on the mainland will saddle banks with dud loans to empty malls.
In recent years, policymakers have cautioned banks against excessive lending to malls, to little avail. As well, the authorities have long sought to lessen dependence on exports by stimulating domestic spending. But private consumption lags far behind investment in real estate and factories, fuelled by a horde of savings in state banks. New bank loans reached US$364 billion in the first seven months of this year, exceeding last year's total lending, state media reported. Property remains a favourite bet: housing in Beijing is fetching 10 per cent more than last year.
However, industry sources say many first-time mall operators aren't borrowing money but reinvesting profits from their other businesses. That's partly why they don't always make the smartest decisions, says Victor Guo, president of Mall China. "The developers aren't so professional in China; they don't know how to develop and market their product," he says...
Courtesy of the weekend's AsianWallStreetJournal, I found some interesting numbers on Chinese corporate fundraising. In 2003, 4.3% of corporate fundraising came from the equity markets. That figure went up to 5.8% in 2004, then dropped to 3.8% in 2005, during which year the market reached its bottom. In 2006, not surprisingly given the strength of the Shanghai and Shenzhen stock markets, the equity markets rose in importance to account for 6.0% of total corporate fund raising. I expect this share will be larger in 2007, even though loan growth has been rapid.
The figure for bond markets shows even more variability. In 2003 bond markets accounted for just 1.1% of total corporate fundraising. In 2004 this rose to 1.3%, and then shot up to 7.3% in 2005 before declining again to 6.1% in 2006. Over this time the importance of banks as a source of corporate financing declined steadily from 94.6% in 2003 to 87.9% in 2006.
In an earlier posting I had assumed that bond and equity markets together accounted for about 5% of total fundraising over the past several years (my figures included government fundraising, which has a far greater bond component). It is hard to get very good figures because there is some evidence that many smaller and family-run companies borrow largely from the informal banking sector, whose loans are not included in these figures. Nonetheless I suspect my estimate no longer applies.
As I have noted many times (although some of this blog's readers don't necessarily agree), in my opinion the growth of alternatives to banks is an unambiguously good thing for China. The more moving parts there are to the financial system -- i.e. the more independent ways companies can finance themsleves -- the less susceptible the economy is to a financial shock that closes down one or more major sources of funding.
Chris Keogh, a good friend who heads capital markets activities at Gaohua Securities, the Goldman Sachs joint venture in China, was recently very upbeat about the growth of the bond markets in China during a lecture to my class. He guesses that bond markets will grow by about 30% or more a year. If we assume that loan growth slows to 15% (from its current 20% or more), then bonds and stocks might each account for about 10% of total corporate fundraising in about five years. This is good, but still not enough to give the sufficiently flexibility to the Chinese markets.
As an aside, Chris also said that the growth of the bond markets was being fueled by the fact that top-rated companies in China can borrow in the markets at anywhere from 1.5% to 3.5% cheaper than they can from banks. The AWSJ article also discused the big spread -- 2.5-3.5% according to them.
This suggests one of the dangers of the bond market to the banking system. If bond markets are so much more generous to top-rated companies than banks (whose lending rates are constrained by a minimum benchmark set by the government), one of the consequences of the growing bond markets may be a migration of the better credits out of the banking system. This happened in the US in the 1970s and 1980s and in Europe in the 1990s. It was not a very easy process for the US and European banks to learn how to adapt to a loss of their prime credits and I do not expect the process will be much easier for Chinese banks.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
Subscribe to this Site
January, 2008
.