[I took a new-ish book for company on this visit; Ghost Cities of China by Mr. Wade Shepard and it’s the best, most informed and sensible work that I’ve seen on this issue. It’s an easy read and if you care about the subject I commend it to you highly. More at http://www.amazon.com/Ghost-Cities-China-Populated-Arguments/dp/178360218X]
Introduction
I visited the provincial capital of Jiangxi province, Nanchang, last week. The Nanchang trip was followed by a one-day trip to the ‘porcelain capital of China’ Jingdezhen, a 185-kilometer hop up the road. I flagged, in a heads-up at the weekend, I had both inspiring and disturbing feedback and in this note will elaborate.
Inspiring
I arrived in Nanchang in the evening and my hotel was located in the ‘old town’ on the east bank of the Ganjiang River. With a room on the fifty-ninth floor I was able to see both sides of the river and was immediately struck by the skyline on the west bank, part of the Honggutan new district. It seems the government have lifted the Pudong model straight out of the Shanghai play-book, the only difference being maybe Honggutan is c. 20-years behind?
At 8:30pm the most impressive light show began with every large river facing building, on both banks, displaying images somehow stitched together that moved from building to building. I’ll never take visitors again to see our own show in Hong Kong’s Victoria harbor now I know what a low-tech shabby affair we put on compared to what I saw around the Ganjiang River last week. The show ended with a fireworks display and I went to bed on my first night thinking I had truly arrived in a 21st century metropolis.
The next day however a different picture emerged. A report from a traveling companion who had dined with a friend the prior evening in the new district and a brief tour the next morning revealed the full similarity with early Pudong; not many people. The government have moved their offices to this side of the river and clearly the city’s future is about making this initiative work. The university, the high speed rail station, civil service dedicated residential accommodation and all manner of new buildings are clustered together here now but a critical mass of people is still lacking. No matter, in China it’s not a question of if you build it they will come. When the government controls so much it’s more a question of build it; they’re coming.
The old town isn’t being neglected. Nanchang’s first subway line (to be opened soon) runs along one of the largest shopping streets, Zhongshan Road, before crossing the river and pushing deep into the heart of the new town. Zhongshan Road is getting a sprucing up and has been, where possible, widened and is currently in the process of being resurfaced.
An aside here about how fast China moves. As I was walking along this road enjoying the jolly chaos that no street markings and temporarily disabled traffic lights were causing two men rushed past me. One then stopped while his colleague ran on with a piece of string. The string was covered in chalk and when stretched out and plucked thwacked a neat straight chalk line on the road. Then the purpose of this activity became clear. A third man pushing a small carriage with a boiling cauldron of white paint then appeared and was creating a line on the road for traffic regulation. I wondered how this was going to work as the road was neither closed for this nor was there any attempt to clear cars or pedestrians around boiling cauldron man (BCM) so I assumed an ugly splodge behind was going to be the product of this frantic activity. Then the stroke of genius appeared. A small cortege of a boiling cauldron topping up truck and dismounted help mates created a splodge free zone behind BCM just big enough to allow the quick drying paint to set. No waiting for 4am on a Sunday, no need to close off even a portion of the road. Just chaos replaced by order in a flash. Magically cars that’d been weaving along the road began following the new line. The string men were now 150-meters ahead and BCM was, without interruption, trundling resolutely forward. That’s Chinese efficiency.
The old town though really is old in parts and a couple of blocks away from the glitzy shopping area takes you to residential accommodation that needs not refurbishing but razing. I have no doubt the city burghers are on the case but it’ll be many years before large parts of the population are living in accommodation that isn’t depressingly grody.
To wrap up on impressive. New towns, new subway lines*, Blade-Runner shaming building light shows all create a feeling of momentum and progress you just don’t (I don’t at least) get anymore from the richer and more established metropolises like Beijing, Shanghai, Guangzhou and Shenzhen. The infrastructure development hard-yards are now being knocked out in the provinces. The issue of how far they are behind the more established centers or whether or not they’re ever going to catch up (not all can) will remain moot for years to come. What’s not in doubt though is the resolution to push forward with models that have been so effective for the early pioneers. Sure, there are a lot of empty offices in Honggutan today. Come back in five years though and I wouldn’t be surprised if there was a shortage.
[*Nanchang is about to open its first subway line. To put this into perspective Beijing has eighteen, Shanghai fourteen, Guangzhou nine and Shenzhen five.]
Disturbing
The main purpose of my visit was to due-diligence an asset held by a Hong Kong listed company which is located in the new development area. The scale of the project is vast with a planned GFA of over seven million square meters (roughly 1,000 full-size soccer pitches if you prefer). The company believe they’re the largest single developer at work in the city and when progressing a project of this scale regular dialogue with government on issues like drainage, power and access is a must. Recently however their dialogue has broken down and, as they put it, ‘If they’re not talking to us, given the scale of our project, they’re almost certainly not talking to anyone else either’.
So what’s going on? The project manager, Mr. Chan, is a Nanchang native but claimed to be as baffled as the next person. I sensed he felt, as I often do, there was little point in guessing what’s up because when it comes to government policy formation in China it’s usually a case of ‘Thems’ll tell don’t know, and thems that know ain’t telling’; but we can speculate.
That the administration in China is undergoing a period of deep reflection has been widely anecdotally referenced. Many listcos have reported Nanchang-style inertia elsewhere and a large part of this we have surmised to date is likely the product of the anti-graft and anti-extravagance programs. Is there though something else going on that’s keeping cadres in closed sessions up and down the country?
Deng Xiao Ping noted at one point ‘our old methods will no longer work’ and we know the development model for China is undergoing a hard re-think; because the old methods are no longer working (as effectively as in the past). We know the government have been trying to pivot from construction to consumption. Wages have been jammed up to make low value added activities harder to operate within China and robotics, automation and e-commerce activities are all being encouraged. To date though there doesn’t seem to have been a unified nationwide campaign to directly foster the transfer to the brave new world in which service and consumption are seen as replacement activities to track laying and hill blasting.
Perhaps China can’t take that kind of wrench? There are still a lot of tracks to be laid and hills to be blasted (Nanchang has barely completed subway line #1 after all) but planners are now on notice the number of skyscrapers, the length of new highways or the number of trees planted in their locales will no longer be the most important determinants of how Beijing calculates their contributions to the greater good.
This must surely be a positive long-term development. In the meantime though business people like Mr. Chan in Nanchang will have to fumble around their projects until these issues are resolved. This is a disturbing near-term state of affairs for we investors to find ourselves in.
Jingdezhen
I went hoping that if I made it to one of the most famous ceramic manufacturing complexes in a country that takes its name from this product perhaps I would find some unique and rare pieces (at wholesale prices, natch)?
I was taken first to a faux factory attached to the main event, a large showroom of some very meh work. I felt I could find better. I then located what I was looking for. In the town there’s a ten block district of wholesale showroom after wholesale showroom. Here I was sure I would find those unique and rare pieces I’d endured the three hour car ride from Nanchang to prospect for.
As I started to trawl it became quickly obvious that I had found inventory, sure enough; but so similar was one vendors’ products to the next after an hour of fruitless rummaging I had to throw in the towel. Here volume-added was on proud display. The vendors of Jingdezhen have yet though to begin to explore much of the value-added possibilities of their business.
In Conclusion
The old game of infrastructure development is far from played out in the provinces and considerable gains in terms of improving the lot of their citizenry can be achieved via this route in the smaller cities. The need to transition from this model though is widely accepted and a balancing act has to now be performed. On the one hand Nanchang needs its second (and third and fourth) subway line and artisans in Jingdezhen can’t be retrained quickly from stack-it-high-sell-it-cheap habits. On the other hand to not now begin the move up the value chain and find smarter solutions to maintain the momentum of progress will surely doom China to a middle income trap.
In China many of the smartest folk are in government and I’ve no doubt they’re going to work it all out in time. In the meantime though investors can be forgiven for feeling somewhat rudderless in the absence of the clear manifesto we’ve been familiar with for most of our careers.
Anybody who believes though China is somehow running out of puff is mistaken. Building the new cities, shifting the economic center of gravity, managing millions more off the land, spreading the Eastern seaboard success inland; China may be pausing for breath right now, but there remains still so, so much more to do.