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A Chinese Mega City Is On The Verge Of Bankruptcy
While most "developed world" people have heard of Hong Kong and Macau, far fewer have heard of China's province of Guangdong, which is somewhat surprising. With over 100 million people, a GDP of nearly $1 trillion - the biggest of all Chinese provinces, this South China Sea adjacent territory is perhaps China's most important economic dynamo. One of the key cities of Guangdong is Dongguan, which as the map below shows is a stone's throw from Hong Kong, has a population of nearly 10 million, and has long been considered Guangdong's boomtown and one of China's richest cities.
One notable feature about Dongguan is that it is home to the New South China Mall, which is the world's largest. It also happens to be mostly empty ever since it opened in 2005. Which perhaps is a good segue into this story. Because while for the most part the city of Dongguan has been a story of prosperity, a wrinkle has appeared. According to the South China Morning Post, which cites researchers at Sun Yat-sen University, this city is now on the brink of bankruptcy.
Make that a big wrinkle.
The irony, of course, is that as always happens, while everyone has been expecting the muni collapse to take place in the good old US of A, it may be about to strike with a great vengeance and furious anger none other than that credit black hole, in which nobody really knows who owes what to whom, China.
How is it possible that a city which as the SCMP describes was once a backwater farm town until the late 1980s, and then as China boomed was transformed into one of the most important hi-tech manufacturing centres in the world, and about which an IBM vice-president famously said a mere 15-minute jam on the expressway there would be enough to cause worldwide fluctuations in computer prices, could be facing bankruptcy?
The answer is an absolutely fascinating story, one which for the first time exposes what could be the most sordid underbelly of the broken Chinese shadow credit system, and which demonstrates very vividly just what the hard Chinese landing will look like. It also explains precisely what the real creditor-debtor relationships are like in a country in which the banks are the equivalent of government entities, and which do little if any retail crediting in a time when the government is set on contracting the money supply at the wholesale, if not at the bank level (recall the now daily reverse repos conducted by the PBOC).
Most importantly it reveals the monetary dynamic "on the ground" - one which is vastly different than the one in the "western world."
The question is whether the story of Dongguan is an isolated one. Alas, just like there is never one cockroach, we are confident that many more such provinical centers are currently undergoing the same challenges, which if unresolved would lead to a tsunami of municipal, county and city level defaults, that would leave China in ashes.
Ironically, Meredith Whitney may have had the municipal default theme right. She was just envisioning the wrong continent...
From SMCP:
Boom city Dongguan faces bankruptcy
Dongguan's derelict factories and huge deficits send chilling warning to a China in slowdown
After three decades of spectacular growth, Guangdong's boom town of Dongguan is on the brink of bankruptcy.
Up to 60 per cent of its villages are running up deficits and will soon need a bailout from the township, researchers at Sun Yat-sen University have discovered.
It is a dramatic turn of fortune for Dongguan - one of the richest cities in China - and could foreshadow a wider fiscal crisis as the country's economy cools.
Local government debt hit 10.7 trillion yuan (HK$13.16 trillion) nationwide at the end of 2010, equivalent to about 27 per cent of gross domestic product. Credit rating service Moody's estimates the actual figure could be about 14.2 trillion yuan.
Bai Jingming, a senior researcher at the Ministry of Finance, estimated in 2009 the total debt of village authorities could total 10 per cent of the country's GDP, but there is no official data.
Bai said many village chiefs he interviewed had no idea how much debt they had. Yet their failings could bring serious political and financial instability at higher level government right down to the grass roots.
Experts have found Dongguan's village debt woes stem from two factors: a tightly-bound landlord economy, plunged into crisis by failing factories in the global downturn, and political pressure on local village chiefs to pay generous "dividends" to voters under the immature rural election system.
"The financial problems of the villages are much more serious than expected," said Shao Gongjun, the owner of a printing company who blogs on Dongguan's economy. Shao attributed much of the crisis to the local authorities' dependence on rental incomes.
A backwater farm town until the late 1980s, as China boomed Dongguan was transformed into one of the most important hi-tech manufacturing centres in the world.
An IBM vice-president famously said a mere 15-minute jam on the expressway there would be enough to cause worldwide fluctuations in computer prices.
As industry thrived, the population swelled from 1.8 million in the '80s to more than eight million. Most of the peasants cashed in and built matchbox homes on their land, letting the flats to migrant workers. Village authorities leased community land to factories and collected rent as their main source of income.
This worked perfectly until the recent downturn. Shao said many factories had either closed or moved out over the past five years to inland provinces with lower costs.
The number of Hong Kong-backed factories has dropped by 15 per cent since 2007. As factories and migrant workers left Dongguan, rents nosedived.
"I'm so worried that before long I will lose my tenants and the flats would be left deserted," said a 61-year-old woman surnamed Luo. She put together two million yuan from her life savings 10 years ago and with bank loans built a six-storey apartment building in Luowucun in Zhangmutou county. Her family occupied the first floor and let the rest out to migrant workers.
Luo used to collect about 15,000 yuan a month in rent - nearly 10 times what an average worker earned. But rents have dropped by a third since 2007.
The fall in rental values forced 60 per cent of the 584 villages in Dongguan into budget deficits, the study by Professor Lin Jiang of the finance and taxation department of Lingnan College at Sun Yat-Sen University found.
Lin's estimate is based on a study of 30 villages in relatively well-off counties, such as Tangxia, Houjie and Humen, in May.
The figure may not reflect the whole picture, but it gives a good snapshot of the problems authorities face.
"They are in deficit because their incomes are shrinking while their expenses are going up," Lin said.
This is an unexpected sideeffect of China's fledgling grass-roots democracy.
While competitive elections are still absent at almost all levels of government, Beijing has started to let villages choose their leader through universal suffrage. These elections have been getting increasingly competitive, and candidates often promise to pay generous "dividends" to villagers to attract votes.
"In some rare cases, the leader-elect promised to give each household 10,000 yuan per month," Lin said. The money would come from the village community "investment" - effectively, the rent they collected from factories.
Lately, village chiefs have found it difficult to fulfil such election pledges. But instead of reneging on their promises and sparking the anger of villagers, they turn to the rural credit co-operatives - the de facto local banks - for short-term loans at interest rates as high as 30 percentage points.
Banks are willing to lend, because they know that the township government would have to bail villages out if things go wrong.
"Some village leaders are now really worried that the bank may come to call in the loans," Lin said. "If the villages default, the burden would be transferred to the county or the township government."
The Dongguan government is in poor shape to handle a crisis. Its GDP growth slowed to 2.5 per cent in the first half of the year. The average growth in the past eight years was about 11 per cent.
Xu Jianghua, Dongguan's party secretary, urged villages last month to stop raising money to pay dividends. Few took heed.
Village chiefs may argue paying dividends are not the sole cause of their debt. They also have to pay for local fire and police services - even though these are supposed to be the local government's responsibility.
For years, the township government underinvested in such services, knowing they would be taken care of by the cashed-up village authorities.
Eddy Li, president of the Hong Kong Economic and Trade Association, said in some counties police would refuse to investigate a crime unless it involved more than 20,000 yuan.
Shao estimated Zhangmutou county authorities alone have accumulated a total of 1.6 billion yuan in debt. Annual revenue is only 600 million yuan.
Shao said the Dongguan government needs structural reform to end its reliance on rental income. He proposed the township give residency to migrant workers so they can contribute more to the local economy.
"Without a radical change in the social structure, the economic transformation will never succeed," he said.
And some pictures from the city that may soon be the first cockroach observed once the light was truly shone:
A row of empty shops that have been idle for more than nine months – a common sight in what was once a hi-tech heartland. Photo: May Tse
Commercialism came storming into rustic residential areas. Photo: May Tse
Boarded up shops in the suburbs of Zhangmutou. Photo: May Tse
Many roads but few cars in the once desirable district of Zhangmutou, a favourite with expats and retirees. Photo: May Tse
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No, the Donnguan Abacus broke right after they pulled it out of the Happy Meal box from McDonald's.
And, it's not repairable because Mercury spilled out of it and the lead paint chipped off.
"Banks are willing to lend, because they know that the township government would have to bail villages out if things go wrong."....wait, that only happens in Amerika, right?
I donno...their salvation may be the lifeboats of richer companies [still] escaping the clutches of legalized thieves in the USA. I think there are still a few companies here that will scram.
Yes, but only if US policy changes will give bacon to low hanging fruit companies willing to lose the risk of US Government Account Receivables nonpayment invoices.
Why is the entire planet going to shit all at once? Maybe globalism wasn't such a great idea afterall. Unless you're the CEO of one of the mega-assholes. You realize we're gona get screwed really well over this? Just wait till the Iran war starts which I have no doubt is going to happen. These assholes have an agenda and our needs are of absolute zero importance. You can't trust any of these deuchbags. They are all evil I am convinced.
Just the Satanic Tribe following the plan. Notice how you see LOTS of "tribe" names on all sides of this economic downturn. It is contrived and according to plan, just like the Great Depression and World War I & II were.
Now we are looking at a possible WWIII, and guess which country/tribe is the primary sabre rattler!?!
They didn't build that
When the people aren't working, the people aren't buying,,,duh.
As I predicted. Massive flows back into the Australian Dollar. Now I execute my trade!
Already purchased, (Cheap +AAA credit default swaps) against Australias BIG4 Banks!
What frims provide credit default swaps thats the small investor can buy?
Jiangmen, Guangzhou are both key mnufacturing centers nearby. Signs of contagion to come?
HAHA!! He said Guang Dong.
Oh by the way, I was short aud/jpy. Trading the $ is a suckers bet!
Now the fun starts, in about 7.35 hours, when European traders realize that they are " FUCKING FIRED"! Then the bullshit N/Y traders will try to sell the market, and MOUA, will be there to fill their orders!
No HFT, just good old skool trading!
From Webb’s introductory remarks before Obama’s Virginia Beach appearance:
Governor Romney and I are about the same age. Like millions of others in our generation, we came to adulthood facing the harsh realities of the Vietnam War. 2.7 million in our age group went to Vietnam, a war which eventually took the lives of 58,000 young Americans and cost another 300,000 wounded. The Marine Corps lost 100,000 killed or wounded in that war. During the year I was in Vietnam, 1969, our country lost twice as many dead as we have lost in Iraq and Afghanistan combined over the past 10 years of war. 1968 was worse. 1967 was about the same. Not a day goes by when I do not think about the young Marines I was privileged to lead.
This was a time of conscription, where every American male was eligible to be drafted. People made choices about how to deal with the draft, and about military service. I have never envied or resented any of the choices that were made as long as they were done within the law. But those among us who stepped forward to face the harsh unknowns and the lifelong changes that can come from combat did so with the belief that their service would be honored, and that our leaders would, in the words of President Abraham Lincoln, care for those who had borne the battle, and for their widows and their children.
Those young Marines that I led have grown older now. They’ve lived lives of courage, both in combat and after their return, where many of them were derided by their own peers for having served. That was a long time ago. They are not bitter. They know what they did. But in receiving veterans’ benefits, they are not takers. They were givers, in the ultimate sense of that word. There is a saying among war veterans: “All gave some, some gave all.” This is not a culture of dependency. It is a part of a long tradition that gave this country its freedom and independence. They paid, some with their lives, some through wounds and disabilities, some through their emotional scars, some through the lost opportunities and delayed entry into civilian careers which had already begun for many of their peers who did not serve.
And not only did they pay. They will not say this, so I will say it for them. They are owed, if nothing else, at least a mention, some word of thanks and respect, when a presidential candidate who is their generational peer makes a speech accepting his party’s nomination to be commander-in-chief. And they are owed much more than that — a guarantee that we will never betray the commitment that we made to them and to their loved ones.
gag-patriotism-the last refuge of the scoundrel.
Did Webb mention anywhere in his pretty little bullshit speech that Obama has been slashing vet bennies & services just as hard and fast as every presidential administration has been doing since....I dunno....the '70's, if not earlier? Thought not. You'd have thought a guy who (says he's) vitally concerned about vets getting their bennies; and the USG making "a guarantee that we will never betray the commitment we made to them blah blah blah" would have brought that up. You know, since the guy spearheading all those cuts was standing right there next to him on stage. Fuck Webb.
The reality is Beijing kicked out most of the dirty industries in places like Dongguan years ago. Especially petrochemical related industries like shoes. Most went to Vietnam or inland.
The whole Zhangmouto thing is old news it was one of the first paces for Hong Kong people to live when they set up in Dongguan. Times change and people move on. There are about 32 plus such places like Zhangmoutou its probably about 3% of dongguans land mass.
The flipside is Dongguan is becoming livable. I have a retail business there, it just doubled in size. Five star hotels are being opened like they are going out of fashion and are instantly profitable. A friend just set one up, a prestigious brand. Dongguan will do fine its just reconfiguring from primarily dirty factories to livable city and factories. Smack bang in the heart of the PRD is location, location, loacation.
ref the South China Mall there are five of them from memory and the Guilin one is subsidizing the others. All that Asean trade. Build it and they will come is how it works over here. The west China one is expected to do well also. I visited the Dongguan one recently and it looks like its starting to get some traction. They are doing deals ref rent and that is always attractive. I am still engotiating ref the best deal I can get.
Problem with China is that it is one incident away from chaos.
IMHO the risk of unknown unknowns is way too high. Just look at this BS around the dispute w Japan (right after they barely ended the previous one with the Philippines!) - neighbors to China are what the Middle East is to the United States... One day they'll overplay their hand.
Really? Feel people have ever heard of Canton? Like Cantonese...?
Really? Feel people have ever heard of Canton? Like Cantonese...?
What a sh*thole.
D.C.?
Detroit?
It's now becoming liveable? WTF? Some fucking "prairie grass" and some "chirping birds" do not a liveable place make!
P.S Chump that was a great analogy!
Sad though.
Central banks/governments are creating global slums. China will explode, not implode once the people start revolting against the stimulus/money print madness, as will the world. It will be a nasty global riot. You see the SSEC? Even skeptical old school traders that thought the PPT don't exist, well China (and Japan) are perfect examples.
anyways...Yen, you see the volatility/volumes picking up?
Hopefully October will have those nice fat swings.
You always get ^ from me Chump! ( I was in the money aud/jpy 80.50), and reloaded, and hedged gbp/aud.
Food for thought,Chump. Just imagine the chaos when this thin veneer of society gets burnt?
No amount of bullets will stop 320 million " Hungry People"!
thanks i try.
yeah, that would be the same everywhere. austerity riots? jeez, ask the spanish/greeks. 'hows those energy prices going', or the chinese. 'so you are hedged in usds?' nice. inflation sh*tstorm is gathering...even equities will get burnt.
oct will be hell for the markets imo
looks like a retrace correction, this time starting on the dow and s&p, rather than asia. cause asia is in lala land at the moment thank to the pboc/boj joining the central bank insane in the membrane brigade
Yer over thinking it chump, just relax and stay on the sidelines until Asia on Sunday. I'm going flat, irregardless @the NY cut !
or you can buy some calls above the market? I'm, a currency guy on the fly, 24/7.
If you have the option to sell on a follow thru spike," It might work"?
Hollywood can copy Little House on the Prairie and rebrand it as Big China Investments in a Ghost town.
The story will end at each episode, Goodnight Wang, Chen, Wu, Tang, and Deng.
A more intelligent article would inform the mindless masses that in the Pearl River delta there are about 25 cities with a population pretty dam close to 100,000,000 people in an area about 200km by 200km. This makes it the largest super city on the planet.
Instead of focussing on one mall in one of 32 counties in one of 25 cities of the world largest super city.
Just saying.....
peak humanity? when will mother nature revert to the mean?
Look at Silver go 34.72, fly little bird.
Don't worry about bankruptcy, Chinese communist leaders can stimulate that. The more manipulation the earlier this will fall apart the more irreversible is the damage. So please stimulate.
The Keynesian sh*thole initiative.
Build slums of the future.
Yen Cross,
Have you been to Dongguan? I am assuming you haven't. The livable bits are growing at an incredible rate and replacing the shitty old dirty factory bits. Check it out.
The article was written by a three year old.
Some old maggot slumlord complaining about business being down. WTF? Why not explore her debt to equity ratio on the property? My money is on under 20% debt to equity. Add to that she invested 2 mil. What is now worth, my money is on 5-10 million. How many bank accounts does she have, my money is on four to six. why not also confirm she does not have a credit card only debit cards. How much does she have invested in stocks? Any other assets? Whats her net worth?
The bottom line she is doing fine my money is on a USD millionaire. And somehow this is spun into negativity?
Small wonder no one has any idea what is going on in China everyone refuses to think.
You seem way too bitter to be objective :-)
I am not surprised by this situation - everybody knows that manufacturers have been moving the cheaper inland (Chongqing, etc.) while they couldn't make up for that with value-added services.
I am only surprised collapse hasn't started earlier.
Sure, Dongguan hasn't collapsed and it won't anytime soon (hint: Meredith was early in her prognosis, too), but the place is currently slowly going down. If you bought a place in China when prices were at the top, I see why you may be upset at people who are spreading the bad news.
Silver Dragon, I have never been to "Dongguan", and I apologise for any insults. I respect "the people" , your self that are working to make "Dongguan" a beautiful place again.
Dongguan is in a very strategic geographical area of the " South China Sea". You should pursue internal support from your government Eg; PBoC to reclaim the area.
Money looks like this ... Dongguan, what a grim and nasty place, like you have died and gone to hell.
Blown up in a war ... would be an improvement.
Steve,
ya gotta get out more cant stay in Virginia all the time, regarless of how beaufiful it is. There are areas in Dongguan that are similar to Australia or Canada. I kid you not.
I’ll bet both places are beautiful. Why should we visit and hand over our precious fiat to support your lunacy. We’ll be laughing at your deranged structure, by gauging you to Detroit beta programme.
Global warming scare too costly to let continue
Australia's carbon tax takes effect
be nice Atomizer. we know you are a smart cookie. :-)
Non Passaran,
I sold all my properties years ago, better to sell at the top was my thinking.
No bitterness its annoyance at ignorance, even a site like ZH has articles written by three year olds that refuse to even visit, what they are writing about.
And you, why even comment about "the disputed islands", its all misdirection. WTFU.
tThe term/enunciation, you are looking for is (pari' passu)
In the late 1980s, the French police would not send a crime technician to the scene of a burglary unless the heist was worth more than FRF 250,000, or about USD 45,000 at the time.
Maybe they can call Goldman Sachs for a solution or two. Or a war with Taiwan and Japan might help. If that doesn't work just to be certain they could have a controlled nuclear exchange with the west or India Or Russia and India and the whole world could just push the fucking button and get it over with. Is Greece going to default?
I think in ( 3-D) Tyler. That drip thru paragraphs in the lower case of your post hit home!
Well done, but lacked the real exploitation of your thought! China was a singular thought?/
These markets have so much helium in them right now! Its pathetic! Next week they are going to do the "weeble wobble"
People are so fucked, and don't realize it! Taxes are going to go up, and the " Free meal ticket" is going to get cut off.
The Government is going the "Let God sort em out approach"!
Solution? Build another empty city to pump the Chinese GDP and bury the problem.
IMPENDING SELL OFF.
Longs please be careful.
Due to recent central bank intervention and short covering spikes, these daily charts are extremely overextended and significant correction expected very soon:
SPX, DOW, NASDAQ, NZDUSD, GBPUSD, AUDUSD, COPPER, CRUDE, GOLD, SILVER. [USD strength will return]
http://www.zerohedge.com/news/2012-12-24/market-analysis
http://trader618.com