
China's innovation economy a real estate bubble in disguise? - T-A
http://www.reuters.com/article/us-china-economy-innovation-insight-idUSKCN0ZM2KY
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seanmcdirmid
One of these innovation centers popped up recently next to our office. These
are basically re-purposed "ghost malls" for malls that couldn't make it in
retail, of which there are many. So call it "fall out" from the real estate
bubble more than anything, and who wants to be stuck in a window-less
subterranean labyrinth? Not the best place to be innovative.

At least this is in Beijing Zhongguancun, which does have a startup
scene...kind of. And such space might be appealing to lower cost startups who
don't want to rent office space out in the suburbs.

~~~
soperj
Because most garages that start ups In Silicon Valley were originally in were
windowed?

~~~
matt4077
I'd guess they were mostly operated with the doors open, at least in the
summer. From what I recall, most startups in the garage-stage also had no
employees. I can see myself working without daylight, but I'd never consider
subjecting employees to that (It's also illegal in my jurisdiction).

~~~
johncolanduoni
> I'd never consider subjecting employees to that (It's also illegal in my
> jurisdiction)

I'm curious, what jurisdiction is this? I've never heard of such a restriction
(though I have to say I'm a fan).

~~~
seanmcdirmid
Fire code. Offices must have Windows, or barring that something else very
expensive. Also true for most houses.

China doesn't really have a fire code, or if they do, it is routinely ignored,
so it wouldn't be an issue here (e.g. consider the ant tribe of people who
live in apartment building basements). And obviously, underground malls are
treated differently in general.

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jonathankoren
I came from Dalian last month and the entire city seems to be under
construction. Just in 5 years, the city has changed. There's a new subway,
that wasn't even under construction then, and everywhere you look there's a
new high rise condominium being built, often times just a couple of blocks
away from another either under construction, or worse yet, a finished, but
completely empty building. The city is trying to get people move into the
reclaimed land in East Harbor, and bizarrely even a 19th century Parisian
neighborhood... which is empty for 2 years except for an "American-style"
kindergarten and a wedding photographer.[0]

It's clearly a bubble. It's hard to understand how any of these are going to
be filled. There's no real place to invest except real estate in China, and
even there it's full corruption. It's apparently not unusual to "own" (well,
have a 70 year government lease on) on a property but not actually have the
deed, because the deed has been lost somehow.

It's very weird.

[0]
[http://english.sina.com/culture/p/2014/1024/748460.html](http://english.sina.com/culture/p/2014/1024/748460.html)

~~~
zhte415
Fantastic. I live in Dalian, and have done for around 10 years.

The city has changed - that's why I dropped an alternate career - to see what
newspapers were writing about in the mid-2000s, about China's rise.

Dalian is not unique in this respect. Cities across the seaboard and a select
few more inland are all doing the same thing.

But is it a bubble? Yes, it is, but in a strange kind of way. 10 years ago
there was one software park with around 12 buildings and a local college. Now,
that software park has 30+ buildings, and there are an additional 3 software
parks located further from the city center all larger than it.

The industrial development zone was a road with a bar district and a few 24
hour restaurants (many nearby factories operate round-the-clock shifts), a
couple of hotels, and several large lots filled by largely Japanese
corporations. Now it is a city of 1 million+ itself, a city on the edge of the
city.

10 years ago there were also a lot of empty buildings, all of which are now
full. When you visited you probably noticed a lot of high-density housing near
the newer office and industrial districts. The local government makes around
1/2 of its revenue (highly trusted word of mouth) from land sales to
developers, who in-turn make their profit from the workers that fill these
hugely subsided commercial buildings, including the cost of the subway and
subsidising busses.

What's the core driver for this?

Jobs for educated people from rural areas who have no hope nor desire to work
on the farm or in the rural town. Their family will invest all they have on
ensuring their child 'makes it' with a stable job at a big-name company in a
clean city. As long as the jobs are coming, the city is sustainable.

For Dalian, a lot of jobs have stopped coming over the past 1-2 years (4-5
years ago was boom-time, especially in BPO and ITO) and construction
considerably slowed, but these are cyclical. Somewhere else a city is allowing
companies to enjoy lower taxes (a lot of incentives in Xi'an, Chengdu,
Chongqing for 'soft' jobs where the export is electronic in the form of email
and SVN and not hindered by these cities' physical locations), and the boom is
happening there, and the city is making money despite the tax breaks it's
offering. It's a bubble, for sure, but it's being juggled.

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mrslave
Tangentially: independent of the truth of this article, the volume of
criticism of China's economy from Western media is hilarious in contrast to
propaganda reported verbatim from the USA: the "slow recovery"; metrics that
are hollow once the surface is scratched (e.g. jobs numbers comprising large
below-full-time service sector, new housing starts with growing shared-
residence numbers). Never mind bankrupt cities, territories, and soon states;
inflation; and the national debt.

~~~
ra1n85
Can you elaborate or provide sources? The language you use is incredibly
dense, almost as if an online translation service was used.

~~~
paulsutter
The labor force participation rate kept declining throughout the supposed
recovery.

[http://static4.businessinsider.com/image/563caf319dd7ccfc418...](http://static4.businessinsider.com/image/563caf319dd7ccfc418bcbfb-1200-900/october-2015-labor-
force-participation-rate.png)

The "unemployment" rate doesn't include people who gave up looking for work
among other adjustments, it doesn't tell you how many people are actually
working. That's what the labor force participation rate measures.

The rise of nontraditional candidates is less surprising in light of this.

~~~
wildengineer
In 2006, the federal bureau of labor statistics under George W. Bush concluded
the labor participation rate would continue to fall for decades. Labor
participation rate is not a strong indicator given our aging workforce.

[http://www.bls.gov/opub/mlr/2006/11/art3full.pdf](http://www.bls.gov/opub/mlr/2006/11/art3full.pdf)

~~~
ZoeZoeBee
Yes, the decline in the Labor Force Participation Rate due to Demographics has
been known for quite some time. It is the inevitable consequence of an aging
work force with birthrates below replacement level for a few decades.

The problem is the Labor Force Participation Rate has fallen much quicker than
any of the forecasts based upon Demographics. The reason for this is the lack
of people working in their prime working years, the funny thing is the LFP
would be even lower if Boomers were retiring at the rate they are supposed
too, but the weaker economy had led many of them to delay retirement which in
turn harms those who should be working.

A Closer Look at the Decline in the Labor Force Participation Rate

[https://www.stlouisfed.org/publications/regional-
economist/o...](https://www.stlouisfed.org/publications/regional-
economist/october-2013/a-closer-look-at-the-decline-in-the-labor-force-
participation-rate)

------
chvid
From the article:

"The result: like steel mills, theme parks and housing before them, the
country now faces a glut of innovation centers as another top-down policy
backfires to leave white-elephant projects and a further buildup of debt."

Western media have always had a skewed one-sided perspective on China and
today that perspective is predominantly negative. So negative that it is
almost silly.

The other side of the story is: No other place has a middle class of that size
growing that strongly. Internet giants Facebook and Google are excluded from
the market leaving big room for smaller companies to innovate. Electronics are
produced right next door opening for all sorts of crossplay innovation between
hardware and software.

~~~
JPKab
While I agree with the often one-sided and biased western view of China, these
innovation centers are being built in droves, and remain empty.

A commenter below who lives in China and works next to one of these new
innovation centers describes it as yet another "ghost mall".

In all fairness, the US economy has it's own version of ghost malls, which is
defense spending. We spend billions of dollars on military hardware that just
floats and flies around with nothing to do and no purpose except to fight a
war that's almost certainly not going to happen in that equipment's lifetime.

~~~
ctvo
We do have our own version of ghost malls. Actual ghost malls. The US is where
that term was coined. Most of the time those developments involved partly
public funds (directly or via tax incentives).

And I wouldn't characterize our military spending as ghost malls. They serve a
purpose even when not actively used: deterrent. You can argue how important
that is but it's not useless.

~~~
Retric
[Source?] US has dead malls, but those had actual stores at some point.

ex: [http://www.businessinsider.com/23-haunting-photos-of-a-
dead-...](http://www.businessinsider.com/23-haunting-photos-of-a-dead-mall-in-
ohio-2015-8)

Often because a much better mall was built in the area, or just completion
from online shopping. As retail goes online you just don't need as many
stores.

Malls take a critical mass of shoppers and stores to keep going. If not enough
stores move in they can be stillborn but I assume that's really rare in the
US.

~~~
dragonwriter
> US has dead malls, but those had actual stores at some point.

The US has dead malls that never had stores, includes ones that were abandoned
while under construction or prior to stores moving in (a number of these were
abandoned around the time of the finance crisis in 2007-2009 when whole
planned or in progress housing developments were either put on hold or
abandoned, along with the commercial development that were being built to
support them.)

~~~
Retric
Sounds like the developer went broke. However, malls as physical assets tend
to be resold in bankruptcy even if they get turned into office parks or
something.

Do you have any actual examples of completed structures that sit abandoned
without ever being used?

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spoonie

        "In any sort of market, you want the experts making the decisions, not some technocrat or bureaucrat,"
    

Seems to me the use of "technocrat" here is contradictory? Or are
business/marketing "experts" not called technocrats?

------
ommunist
Never forget, that China is not Western democracy. So they are not driven with
economic gain as such, or prosperity of "the one percent". Many awkward
economical decisions only look awkward for outsiders. Within Chinese system
these totally make sense.

Beware of approaching any feature in China with a western mindset.

So it is probably not what it looks like. It may be some kind of a social
sieve purposed for entirely other goal.

~~~
westiseast
What it looks like to me is this:

Beijing decides that innovation needs to be a key focus for the economy (for
face maybe). It announces funding, sets development goals for local
politicians, and writes the buzzwords in all new economic plans and
development documents. Local developers and politicians read that, and their
instincts kick in - they know now that _any_ development that can show
"innovation" will get a green light and throw themselves into it head first.
So now, any new development that goes on is not "grass roots" or "green" or
"core" \- it's innovative, creative. So a bunch of pretty standard, low
quality office buildings go up, but now they're called 'Creative Parks'. Rent
is low for any business that is 'creative'. So local entrepreneurs fill them
with creative businesses - fashion studios, wedding photographers, ad
agencies, designers. The businesses do well because they are effectively
getting direct government support and investment, and because there's no other
genuinely creative competition around to challenge them. Innovation all round!

It's a blunt and wasteful approach. It won't necessarily encourage creativity,
innovation, new approaches, risk taking. More likely at best it will create a
superficial impression of innovative industries, and maybe, _maybe_ that might
result in some innovation. This is the China way, and the reason China isn't a
global creative or innovative superpower. <Mic drop>

~~~
dilemma
This is the same way it works in every developed nation and every larger city.
The difference is just scale and speed.

~~~
westiseast
Yes and No. I mean, the whole relationship between government, local
government and business I described might be similar, but in China that's
still the _only_ activity going on. It's improving to some extent, but for
example in London or any city really, you might have a genuine creative scene
that can jump on a government investment in 'innovation', so the wave will be
filled with half- opportunists and half genuine businesses maybe. In China
it's more like 95% opportunists, because for years and years that's been the
only way to work.

------
liamconnell
I think its about putting the next generation to work. The Chinese model of
manufacturing, which has really been the world's model for two decades, is
that cheap labor is more economical than technologically advanced industrial
robots. That is eventually going to change, and maybe sooner than later [1].

Then what do you do with half a billion unemployed people? Even doing nothing
for them but giving them offices is better than letting their communities
decay, even if it loses money in the short AND long term. And who knows, maybe
after a few boom and bust tech cycles the innovation labs will actually make
something useful and profitable. That's just an added bonus.

[1]
[http://www.bbc.com/news/technology-36376966](http://www.bbc.com/news/technology-36376966)

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Kgas84
Not sure how often this is the case with innovation centres, but many real
estate developments take advantage of specific policies to secure backing for
their projects. By including 'Innovation centres' they might be able to get
land use rights, secure debt financing etc. for their project even if 80+% of
the m2 is actually office, residential, retail. Whether this creates a real
estate bubble depends on how well the other parts of the project do in the
market.

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chj
A real estate bubble in disguise? Yes! But considering that young people in
China don't have the luxury of garages, any rent-free office space can be of
great help to them. At least the empty buildings are now put to use.

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elgabogringo
"China's economy a debt bubble in disguise" <\-- There, fixed it for you.

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jdc
Betteridge

