Mao College Town Booms Signaling Offset to Slowdown in China

Mao College Town Booms Signaling Offset to Slowing China Growth
Pedestrians walk through a night market in Changsha. Photographer: Nelson Ching/Bloomberg

In a hard hat and muddy boots, Ren Jinbo sits below a half-finished railway bridge, happy to be back mixing cement in the central Chinese city of Changsha.

“It’s certainly better than plowing the field back home,” said Ren, 41, who was laid off and returned to rural Shaoyang in January as national efforts to cool construction spending and house prices slowed building. “My boss phoned me in early May that the work must be accelerated, so here I am again.”

The boom in Changsha and other inland cities is cushioning China and the world at a time when global growth is slowing, and may help relieve the damping effects of the debt crisis in Europe, China’s largest export market. First-quarter growth in Changsha was 10.8 percent, compared with 8.1 percent nationally.

“The key target of government spending is in central and western Chinese places like Changsha,” said Zhu Haibin, Hong Kong-based chief China economist at JPMorgan Chase & Co. “Economic growth in inland provinces has been stronger than coastal areas and the trend is expected to continue for another five to 10 years.”

Whole neighborhoods in the city 650 kilometers (400 miles) north of Hong Kong, where the late leader Mao Zedong went to college, are being cleared for offices, highways, apartments and subway lines. By attracting rural folk like Ren and factory workers fleeing higher living costs in seaboard cities, the transformation of central China is keeping a slowdown in the world’s second-largest economy from becoming a slump.

Changsha is still benefiting from stimulus China unleashed in 2008, as well as investment from companies lured by wage levels as much as a third lower than on the coast.

Gathering Pace

The annual growth rate of fixed-asset investment in Changsha accelerated to 15.5 percent in the first five months of 2012, from 1.7 percent in the first quarter, government data show. Changsha’s 222 key urban development projects for 2012 have an annual budget of 40 billion yuan, according to the city. Two subway lines are under construction and work will begin on another two this year, the local government says.

The home of China’s biggest machinery maker, Sany Heavy Equipment International Holdings Co., and a new car plant for Fiat SA, is doing better than the nation’s coastal export centers, such as Wenzhou. A manufacturing report released today by HSBC Holdings Plc and Markit indicated the biggest decline in overseas orders since the global financial crisis.

Changsha’s building boom is still rolling from the 4 trillion yuan fiscal stimulus Premier Wen Jiabao announced in 2008. Much of that was aimed at spreading wealth away from the coast through building programs in central and western China, including the rail line that will run over Ren’s bridge.

Global Support

The two-year spending binge, and an accompanying 17.6 trillion yuan credit surge, helped prop up the global economy at the time. In 2012, the government’s stimulus is more muted, targeting clean energy and western provinces like Sichuan and Yunnan. That’s little help for Europe’s debt-ridden economies and the export-based industrial areas like Wenzhou that have seen orders decline.

China is targeting support to prevent a slump and sustain overall growth at about 8 percent rather than “a major stimulus that would ‘save’ the world economy as in 2009,” said Wang Tao, an economist at UBS AG in Hong Kong.

With the central cities leading the nation’s recovery, local machinery makers Sany and Zoomlion Heavy Industry Science & Technology Co., also based in Changsha, are set to benefit, said Zhang Wenxian, a Hong Kong-based analyst with Haitong International Research Ltd., an arm of Haitong Securities.

“Strong investment pickup in central and western Chinese places like Hunan will give these companies a big boost,” Zhang, who has a 12-month-target of HK$12.80 for Zoomlion, 31 percent above the closing price on June 29.

Airport Lounge

Pictures of Zoomlion’s logo and machines line the walls of the arrivals lounge at Changsha’s airport. Sales of concrete mixers and equipment, key product lines for both Sany and Zoomlion, are expected to grow 30 percent in 2012, Zhang said.

Other companies are moving production inland to cut wage bills. Terry Gou, chairman of Foxconn Technology Group, maker of Apple Inc.’s iPad, is shifting plants from southern China to cities such as Chengdu, Wuhan, and Chongqing. To help pay for the move, Foxconn flagship Hon Hai Precision Industry Co. in April announced its lowest annual dividend in at least 15 years.

Unilever, the world’s second-biggest consumer-products maker, said it moved seven factories 400 kilometers inland from Shanghai to Hefei to cut costs, and plans to make the capital of Anhui province its largest global manufacturing center.

Coastal Migrants

The migration of manufacturing has spawned a new migration of workers. Those from the villages, like Ren, can double the salary they’d get on a farm.

“The building site provides my food and shelter and I can make 3,000 to 4,000 yuan a month here,” he said.

Others, such as 23-year-old Fan Xuebin, are escaping the higher rent and living costs along the coast.

At Changsha’s government-backed labor exchange downtown, Fan said he’s just resigned from his jade sales job in Shenzhen, the free-trade city that sprang up next to Hong Kong at the birth of China’s industrial boom.

“The living cost is too high in Shenzhen and my friends told me Changsha would be an easier place to live,” he said, surrounded by screens hanging from the ceiling that list job openings. “I’m willing to take a bit of a salary cut.”

While the six central provinces and the municipality of Chongqing account for less than 12 percent of China’s total area, they contributed 23.3 percent of the country’s gross domestic product in 2010, up from 22 percent in 2006. The six are expected to raise per capita GDP to 36,000 yuan by 2015, according to the economic planning agency in Beijing. That’s about 40 percent more than Hunan’s level last year.

Urban Shift

“A strong rebound in economic activity is taking place,” said Shen Jianguang, a Mizuho Securities Asia Ltd. economist in Hong Kong who previously worked for the International Monetary Fund. “Urbanization will offer long-term support for growth in China. A lot of rural residents will become urban dwellers in the coming years, and many will settle in second- or third-tier cities like Changsha.”

At Changsha Ferrari Winery Trading Co. in the city center, sales are expected to rise 10 percent this year, said Executive Manager Amy Huang, who added the Italian sports-car brand to boost the drink’s image. “I don’t feel any economic slowdown.”

Lai Li, owner of Changsha Weili Jade shop, agrees.

“Business is good as usual,” said Lai, who offers thumbnail-sized carvings of the green stone for 3,000 yuan each, almost a month’s average salary in the city. “I’ve been in this business for 20 years.”

Stinky Tofu

The city of 7 million, once a center of literature and rice trading, is known in China for its spicy food and nightlife. On a recent weekday evening, streets of bars and restaurants around Taipingjie Lane were crowded. As staff set up outdoor screens to show a European soccer championship match at midnight, tourists and locals drank beer and bought bowls of the city’s famous fried stinky tofu.

“It’s always like this, it’s Changsha,” said Yu Zheng, one of the countless unlicensed electric-bike drivers who ferry people around the streets for 10 yuan a ride. Traffic jams caused by the city’s ubiquitous construction sites have helped make the bikes a popular form of public transport.

On Juzizhou islet in the Xiang River, which joins the Yangtze and brought commerce to the city more than 1,000 years ago, the young Mao wrote a poem describing blue waters, deep woods and crimson hills.

Changing Vista

Construction workers now sweat at the location, building a subway station, another product of the 2009 largesse. From Mao’s halcyon vista, the view north across the river has become a skyline of cranes looming over residential blocks, with billboards advertising river views and sales hotlines.

Risks to the recovery remain, particularly from outside the country. Citigroup Inc. cut China’s 2012 GDP estimate to 7.8 percent, from 8.1 percent last month, citing “anemic” domestic activity in the second quarter and further weakening of European demand.

An escalation of Europe’s debt crisis may cause a hard landing: Weaker external demand erodes China’s growth by nearly 1 percentage point, Citigroup analysts Ding Shuang and Shen Minggao wrote in a report dated June 22. Europe buys about 18 percent of the nation’s overseas shipments, according to Shenyin & Wanguo Securities Co.

As elsewhere in China, construction has displaced thousands and raised allegations of corruption. In the Changdao Hotel on the eight-lane Wuyi Avenue that bisects the city, Huang Rong and other employee-owners of the 1970s landmark were staging a sit-in, claiming they hadn’t been compensated for its demolition.

Plastic Bags

Half of the building has already gone. Huang and her former colleagues sleep on desks in the remaining half, eating food from plastic bags bought from local vendors. Around the wreck, with missing walls, broken windows and doors leading to vanished bedrooms, a steel fence says “Danger. Please Keep Out.”

“Sometimes I miss the days of Chairman Mao,” said Huang. “He would give people justice and kill all the corrupt officials.” The government office for the hotel’s district didn’t respond to phone calls seeking comment.

The razing of residential blocks is helping 45-year-old property speculator Peng Canhui weather the national real-estate downturn. He’s sold 15 units so far in 2012 at an average of about 6,000 yuan per square meter.

“Most of the buyers are in urgent need of a new home as their old one is being destroyed,” he said, sipping green tea at his friend’s real estate office. Peng, who started six years ago, said his “happiest days” were in 2009.

Reselling Apartments

“In those days, I could buy an apartment and resell it for 10-15 percent more within a week,” Peng said. “Now I have four flats in hand -- the longest for three months -- and I will definitely sell if I can make 5 percent.”

Changsha’s housing market is doing better than many, with a 1.6 percent drop in values in May from a year before, compared with a 14 percent slide in Wenzhou. Prices declined in a record 54 of 70 cities tracked by the government in May as developers sought to boost sales. Property accounted for one-fifth of the nation’s fixed asset spending in the first five months of this year, data from the state statistics agency show.

Peng says the market is close to bottom as the government is relaxing lending restrictions. China’s policy makers released funds for 2.3 million low-cost houses, eased curbs on banks and expanded loans for first-time buyers to try to support the market without reviving the soaring prices of 2009.

China’s Commerce Minister Chen Deming said on June 19 that the country’s economy “is turning for the better.”

“The wind is changing,” said Peng. “I call my friends at banks every day and they are becoming more generous.”

Vegetable Fields

The epitome of optimism in the city’s real-estate market is a field of vegetables and chickens at the end of a suburban dirt track by Tan Jingchun’s two-floor brick home.

Near where 78-year-old Tan is serving tea to six elderly friends over a game of mahjong, a unit of air-conditioner maker Broad Group says it plans to build the world’s tallest building, an 838-meter (2,750-feet) tower called Sky City. The target for completing the skyscraper, using prefabricated panels, is January, according to a statement from the company, which earlier this year built a 30-story hotel in 15 days.

“I don’t believe it,” said farmer Chen Jinliang, 50, tending his cows on the site. “They’ve been talking about building a new road near the village for years. How can the world’s tallest building be built so quickly?”

Across town at the Central-South China Automobile World, the city’s biggest car market, the property dip has had little effect on the local dealership for Emgrand, the most expensive sedan brand for Hong Kong-listed Geely Automobile Holdings.

‘Biggest Problem’

“An economic slowdown, for me, is a property market thing,” said Zhou Qingfeng, a manager in the showroom who predicts his sales will rise 20 percent this year. “My biggest problem now is not that we don’t have enough orders; we don’t have enough cars.”

Behind him, among potential buyers studying brochures on islands of sofas or inspecting the 80,000 yuan vehicles, a middle-aged customer was chastising an employee for repeated delivery delays on an order he’d placed more than two weeks ago.

At the Renault SA dealer, Hunan Tianhe Car Sales & Service Co., Manager Xun Xiaoqiang said the economic slowdown has changed the way customers pay.

“In 2010, maybe one in 10 customers would apply for a bank loan to buy a car; in 2012 three or four out of 10 would,” said Xun, 30. “They don’t have as much cash as before.”

He still estimates sales will rise 20 percent this year. “People want to have their own automobile,” he said.

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