One of the distinguishing characteristics of China's economic growth, across sectors, has been the willingness to encourage development on a global-scale, even at the risk of generating substantial excesses.
Accordingly, in core-infrastructure sectors like railways, power generation - thermal, nuclear, solar, and wind - telecommunications and green technology automobiles, it encouraged the development of massive domestic manufacturing capacities. Originally intended to meet its own huge demand, these manufacturers were simultaneously encouraged to explore and capture the global markets. Since the demand - both domestic and external - was spectacularly humunguous and apparently without any bounds for the foreseeable future, anybody willing to set up facilities were encouraged with attractive incentives - tax breaks, cheap loans, subsidized utility tariffs, linkage infrastructure, and often cheap/free land.
Much the same has characterized real estate development. Mirroring the spectacular growth of cities like Shanghai, massive satellite townships were developed in many areas across the country. These developments, supported with cheap loans, far from being constrained by any bureaucratic speed-breakers, were positively encouraged by policymakers intent on developing cities that can help achieve their rural-to-urban population transfer ambitions.
The incentives of all stakeholders were aligned in the direction of such unrestrained development. Since land auctions were the major share of local government revenues, they had a vested interest in encouraging these development which would in turn boost land values in the surrounding areas. Further, these developments and the economic activity and revenues that came with it, signalled favorably about the local party and government officials to the authorities in Beijing and paved the way for their rise up the party ladder. Finally, these developments, most of which involved partnership with the local establishment, either directly or indirectly, provided ample opportunities for rent-seeking and enriched those belonging to the ruling establishment.
In the absence of a social safety net, the common citizens were forced into saving a larger share of their increased incomes. And without alternative sources of investment for these savings, they flowed into the tightly regulated banking system despite the very low interest rates offered.
Since alternative financial investment opportunities were scarce and given the apparent commercial attractiveness and large returns promised by real estate investments, banks loaned out massive sums to real estate developers. These state-controlled banks were also encouraged to lend at lower rates and seek a share in returns from the developments.
This arrangement, common in most parts of Japan and East Asia, offered considerable attractions to real estate developers. Lured by the attraction of rising real estate prices and the possibility of making windfall returns, coupled with the absence of similarly attractive investment avenues, buyers flocked into the market. These large numbers of potential buyers provided the demand-side thrust. With incentives of all important stakeholders aligned, the real estate bubble frothed, got inflated and continues to grow.
I have already blogged about one such development - the Tianjin Eco City. Now the NYT has an excellent account of one such city, Kangbashi New Area, in north China’s sparsely populated Inner Mongolia region, which it describes as a "ghost town", replete with completed residential and commercial accommodation and all other community assets and infrastructure which are used by only a handful of people. This 12 square mile township has been built from scratch on a huge plot of empty land 15 miles south of the old city of Ordos which has a population of 1.5 million.
Apart from its mostly unoccupied residential and commercial areas, it also contains a 500000 sq ft convention center and a $450 million financial district. Projected to have 300000 residents by now, even official estimates put the current occupancy at 28,000, though the real figures would be much smaller.
Kangbashi is no exception and is reminiscent of dozens of similar townships across the country. As the Times report says, in the southern city of Kunming, a nearly 40-square-mile area called Chenggong has raised alarms because of similarly deserted roads, high-rises and government offices. And in Tianjin, in the northeast, the city spent lavishly on a huge district festooned with golf courses, hot springs and thousands of villas that are still empty five years after completion.
The aforementioned account of scale-driven sectoral growth explains why, unlike India, China is able to construct massive projects, well within time. The sizes and numbers of the projects being planned and the perception of firm commitment from the government towards the almost un-restrained development of the sector, provide the depth and security required for markets to develop around them.
Accordingly, developers have the flexibility to think about procurements on massive scale, manufacturers can plan and set up facilities that will cater to the huge anticipated demand, governments and private institutions have the incentive to train large numbers of skilled manpower to provide workforce for these sectors, and potential employees/labor in turn respond to these industry signals when they make their career choices. And the inevitable by-product of all this are the excesses at the margins (and resultant wastages), which get amplified at the first signs of any slow-down.
In India, such real estate development can take place only after the proposal passes a long-list of due-diligence screenings - demand survey, land acquisition, open competitive bidding, departmental clearances, and financial closure. At each-level there would have been questions raised, by multiple stakeholders (who are not always the government or developers), about the commercial or socio-economic rationale for the development. High-profile investments in any sector, which are in any case far and few in between, would attract close scrutiny and this serves as systemic inhibitors on inflating bubbles.
More fundamentally, the uncertainties associated with all these processes and multiplicity of sources from which they can emerge means that private participants cannot plan ahead without any ambiguity and carry considerable risks with their investment decisions. Further, the prevarications of governments, state and central, with the implementation of stated policy, creates apprehensions about their commitment itself. In simple terms, the environment does not generate the level of confidence required for investors to take the plunge.
Unlike China's bubble, India appears to be stuck in a low-equilibrium trap, which prevents the swift and unrestrained development of various infrastructure sectors.