Hotel California, China

Just last fortnight, a spanking $2.4 billion airport that can accommodate 25 million passengers a year was inaugurated in Guangzhou—it has the world’s third-largest cargo-handling capacity and, once the second phase is over in 2010, it will be able to handle 80 million passengers a year!

Wow. Compare this with our international airports in Delhi and Mumbai, and that’s another reason, I guess, for an awestruck former colleague who’s just come back from China to go around asking everyone he meets if India’s democracy’s really worth it, given our snail-like relative growth.

While that’s a powerful point of view, you do wonder a bit about the safety of such grand investments when you see, in the case of the Guangzhou airport for instance, it’s basically competing for virtually the same traffic as the Hong Kong airport, which is just a two-hour drive away.

Both really cater for the industrial Pearl River Delta, which produces more than a third of China’s exports. Clearly, unless there’s a really huge surge in traffic, either Hong Kong’s airport or the Guangzhou one’s going to go bust pretty soon. Hong Kong’s Chek Lap Kok airport, meanwhile, has begun direct ferry services to Chinese cities and is even considering opening a check-in centre in the Pearl River Delta.

What happens to investors if their investments turn sour? The edition of the International Herald Tribune (August 3) that had the Guangzhou story on page one had a story on the business page that gave some indication of this, a story on how a local Chinese court had ruled against private creditors (like the Bank of America and ABN Amro) who were trying to get their money back from one of the various local governments in the country.

Since I’d first written about this very case last December (see “Chinese Checkers,” December 8, 2003), the headline got my immediate attention. But first, a little background to the case.

The city of Zhuhai, like many others in China, set up a new company, in this case the Zhu Kuan Group, to be able to borrow money from banks to set up huge infrastructure. Zhu Kuan borrowed more than a billion dollars, and built projects like a $833-million airport, which never received Beijing’s permission to land international flights, and so has fewer passengers in a year than Hong Kong has in a week.

A Formula One race track was also built but, since the approvals for this were never forthcoming, the entire investment went waste. Anyway, when the lenders began asking for their money, the government transferred land owned by Zhu Kuan out of the company and into other companies controlled by the city, leaving the creditors with no real collateral that they could seize.

The case eventually wound its way into a Hong Kong court (since the company was listed in Hong Kong), which appointed RSM Nelson Wheeler as the provisional liquidator, except that the Zhuhai authorities never allowed Wheeler to examine the records.

Indeed, when Wheeler petitioned the Zhuhai court to be able to see the land records, the court demanded a $1.2-million fee for something they usually charge $12 for!

To cut back to the latest on the case, the Zhuhai court refused to allow Wheeler to search the records since the liquidators had “failed to give evidence confirming that it has any legal interest in the property”!

Cute, isn’t it? The land in question no longer belongs to Zhu Kuan since the government has transferred the ownership to another company, and Wheeler cannot possibly prove it has a “legal interest” in that company.

In another case (Financial Times, August 14/15), private investors are planning to sue the government for taking over oil wells they owned last year—the government took over the wells and offered a compensation less than a fifth of what the wells were worth.

Investor activists have been detained by the police on various charges (www.sbmysy.com has details of the case, but the website’s in Chinese) and some were forced to sign their wells away at the existing compensation levels.

What makes things a lot more frightening for investors who’ve lent billions of dollars to local government-promoted companies is that large parts of Chinese infrastructure projects are in danger of going the same way as Zhu Kuan.

Last Monday’s Herald Tribune has a front page story on how one-sixth of the luxury residential real estate is vacant in Shanghai, a quarter in Beijing, and a third in Shenzhen. And with banks lending money for construction at government-mandated rates, which are much lower than the inflation rate, the real estate bubble is only getting bigger with each passing day.

Experts predict the supply of office space will rise 50 per cent over the next couple of years, and the residential space even faster. With most builders appearing to prefer using glass from rose-tinged brick to even magenta, Chinese cities look like a sea of pink, though the same clearly cannot be said about their health.

Investors in China would do well to remember the lines from that lovely Eagles number, Hotel California—you can check out any time you like, but you can never leave!