China’s Manhattan Project Marred by Ghost Buildings

China’s project to build a replica Manhattan is taking shape against a backdrop of vacant office towers and unfinished hotels, underscoring the risks to a slowing economy from the nation’s unprecedented investment boom.

The skyscraper-filled skyline of the Conch Bay district in the northern port city of Tianjin has none of a metropolis’s bustle up close, with dirt-covered glass doors and construction on some edifices halted. The area’s failure to attract tenants since the first building was finished in 2010 bodes ill across the Hai River for the separate Yujiapu development, which is modeled on New York’s Manhattan and remains in progress.

“Investing here won’t be better than throwing money into the water,” Zhang Zhihe, 60, said during a visit to the area last week from neighboring Hebei province to look at potential commercial-property investments. “There will be no way out -- it will be very difficult to find the next buyer.”

The deserted area underscores the challenge facing China’s leaders in dealing with the fallout from a record credit-fueled investment spree while sustaining growth and jobs in the world’s second-biggest economy. A Tianjin local-government financing vehicle connected to the developments said revenue fell 68 percent in 2013 to an amount that’s less than one-third of debt due this year.

“There will have to be a reckoning,” said Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong. Sales of bonds by local-government vehicles to repay bank loans are just “buying time,” he said. “The people will pay” for it through bank bailouts, recapitalization with public money or inflation.

Soured Assets

While a debt crisis is unlikely and major cities like Tianjin can fill vacancies, some credit and assets will go sour, leading to a drag on growth, Green said.

Tianjin, a city of 14.7 million people whose center is about 125 kilometers (78 miles) southeast of Beijing’s, saw its economic growth cool to 10.6 percent in the first quarter of 2014 from a year earlier, from 17.4 percent in full-year 2010, compared with a moderation in national expansion over the same period to 7.4 percent from 10.4 percent. An annual pace of 10.6 percent would be the weakest for Tianjin since 1999.

The government financing vehicle, Tianjin Binhai New Area Construction & Investment Group Co., reported revenue fell to 5.9 billion yuan ($950 million) in 2013, and profit dropped about 37 percent to 246.6 million yuan, according to its annual report.

Repay Loans

The company has 20.7 billion yuan of debt due in 2014, including loans, corporate bonds and commercial paper, almost triple 2013’s amount. Another 13.9 billion yuan is due next year. It sold 2.5 billion yuan of seven-year notes in May at a 6.5 percent coupon to repay bank loans and interest, according to a prospectus.

The Tianjin government didn’t respond to faxed questions yesterday.

“Both the central and local governments clearly know that a big slump in the property market will significantly magnify financial system risks, and they know it’s a delicate balance,” said Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. The government will try to do everything to ensure an “orderly de-leveraging,” Liu said.

China’s leaders have pledged to control risks in local-government debt, with the central bank saying in May that it would strengthen monitoring of credit extended to the financing vehicles. The nation’s chief auditor said this week that growth in regional authorities’ debt has slowed.

Hotel Shell

Conch Bay showed few signs of life during a June 19 visit by Bloomberg reporters. Work on Glorious Oriental, a two-tower residential and office complex, had stopped, and at the north end of Conch Bay, the main building of the Country Garden Phoenix Hotel, billed as Asia’s largest hotel, was a deserted shell with no signs of any work under way.

Developer Country Garden Holdings Co. is “steadily building the walls and roofing” and working on mechanical and electronic systems after completing the main construction of the hotel, Lin Weiying, a deputy general manager of Country Garden’s strategic development department, said in an e-mail.

Calls to Glorious Oriental’s Beijing and Tianjin offices went unanswered.

Tianjin isn’t the only place in China where property strains are showing. New-building construction dropped 18.6 percent in the first five months of 2014 from a year earlier, according to government data. A closely held Shanghai developer suspended construction at a property project this month due to a lack of funds, Bloomberg News reported today, citing two government officials familiar with the matter.

Pudong Thriving

Conch Bay’s ghost-town appearance isn’t necessarily an indication the area will fail. Shanghai’s Pudong district overcame struggles in the mid-1990s to thrive as the nation’s financial center. Zhengzhou, capital of central Henan province, now suffers from traffic jams in its new-city district instead of the vacancies from a few years ago, said Nicole Wong, Hong Kong-based head of property research at CLSA Ltd.

Michael Hart, managing director at real-estate brokerage Jones Lang LaSalle Inc. in Tianjin, said the hope is that the local government will help fill buildings, possibly with anchor tenants such as state-owned enterprises. “Yujiapu is too iconic and too well-known in association for Tianjin for the government not to do their best to make it successful,” he said.

Government Offices

In fact, the government is already occupying some office space in Conch Bay, where shipping-company employee Chen Wenjie, 31, came to renew a license at the Hai River transportation administration bureau. “The construction now is nothing compared to the days in 2008 and 2009,” Chen said.

Wang Wei, a 34-year-old Tianjin resident, was driving through the area to check out property prices, finding them six times higher than what he’d be willing to pay. “I’ve seen a lot of reports about the area, but apparently it’s not a place fit for home -- at least for now,” said Wang. “No shops, no schools, no hospitals and no neighbors.”

— With assistance by Xin Zhou

Before it's here, it's on the Bloomberg Terminal.