Hugh Hendry walks the streets of China

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This home-made clip features Hugh Hendry, founder of Eclectica Asset Management, walking around the streets of  China (presumably Beijing or Shanghai) and pointing out numerous empty buildings. Huge debt must have been incurred in erecting these buildings and without tenants there is no prospect of servicing the debt. What’s more, the workmanship also seems shoddy as a nearly-completed 13-story building in Shanghai collapsed last month.

Who will pick up the tab for creating all the overcapacity in the Chinese economy?

Hendry has perhaps looked at only a limited sample, but the video provides food for though in the greater economic scheme of things.

Source: YouTube, March 27, 2009 (hat tip: Edward Harrison, Credit Writedowns).

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8 comments to Hugh Hendry walks the streets of China

  • PF

    Interesting. But how do we know these buildings are empty? Hendry standing in front of them saying there are no tenants doesn’t really prove anything, does it?

  • PF: True, but I have no reason to doubt Hugh’s bona vides. Additionally, this is not the first evidence of overcapacity in the real estate and other sectors in China.

  • J

    Big fan of Hugh. This video was done 5-6 months
    ago. I remember watching it then. funny how many people are noticing this now…
    If anyone have any newer updated videos from China for those of us who cannot travel it would be great…
    Overcapacity– Build it they will come? we will see
    Thanks for the post

  • J: The video was posted on YouTube in March, but I thought is was as relevant todat as four months ago.

  • Brian H

    It would be interesting to get some % occupancy numbers for the commercial properties there.

    But this videographer needs some serious instruction in miking his narration. The sound is feeble and wobbly.

  • Resident In China

    Having lived in one of the five economic engines of China for 3+ years among the Chinese, I can give you some insights into the empty building situation there. It is very common for many new buildings to remain empty after “completion”. The first reason is the Chinese way of buying a home. The buyer only purchases the shell of the apartment and then must finish everything themselves — including interior walls, wiring and plumbing so every piece of property starts out looking unoccupied. The second reason is that many average people have borrowed, either from the bank if they have connections or from family if they don’t, to buy 2nd, 3rd or even 4th home as a speculative investment. As we in the west know well, the price of real estate ALWAYS goes up, right. For these two reasons there is quite often as little as 10-20% owner occupancy rates in the new buildings with many of the unoccupied tenants neglecting to pay their monthly fees so there is little or usually NO mainainence of the finished hulk of a building. Elevators in these building are often fare-based so you have to pay to ride the elevator home, but this is far superior to what others must do — climb to and from their place on The 11th floor until enough people actually move in. (Try getting a contractor to finish an apartment on the 20th floor without an elevator if you are into serious challenges.)   

    Another major reason for the over capacity, hense empty buildings, is loan situation in China. Many, and I mean MANY, “C”onnected people throughout the country borrow money and build some behemoth, pocket a large percentage of the loan money and employ their connections to build it (with the requisite returned “favors” expected) only to have none of the space rented. For them building rental property is not the point. The point is how much money is borrowed and disappears in the process, not viable business models. Note the hundreds billions of dollars dollars in such unsecured never-to-be-repaid loans are on the books of the banks in China, hense the government must bailout ALL the major banks every few years when their capital repeatedly becomes inadequate. I witnessed 2 such bailouts amounting to hundreds of billions of dollars. Talk about a ticking time bomb — a massive over capacity of real estate built with no regard to business models funded by bad loans and sold, if it is even sold, at bubble prices. Tick, tick, tick!!!  

  • Joe

    China’s investment in empty office buildings is still vastly better than the hundreds of billions of dollars the U.S. spent on the invasion of Iraq. Zero return on that investment, and the maintenance cost for disabled veterans and a shattered military will be much higher than repainting and pipe replacements for these Chinese buildings.

  • srm

    Joe – speaking of China (not sure how Iraq came into the discussion of overcapacity and real estate fraud in China), who was a big part, at the margin of course, in financing the Iraq War?

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