A herd of white elephants?

China’s explosive economic growth has led to some amazing real estate projects. But what happens if the bubble bursts? By Aaron Lovell.

Thames Town seems like your average, run-of-the-mill rural English village, complete with a sandstone church, cobbled streets, tiny boutique shops, mock Tudor houses and an inn, much like the Rock Point Inn in seaside Lyme Regis, West Dorset.

The thing is, Thames Town isn’t on the English Coast. It’s in Songjiang, on the outskirts of Shanghai. As China’s financial and trade hub continues to expand, the city has commenced building a series of satellite towns on its periphery, all based on different European countries.

Anting, a city looking to become a center for automobile production, is reportedly taking its cues from the German industrial town of Weimer—right down to the pastel apartment buildings, Bauhaus-influenced offices and a Formula One track.

Thames Town got the details of the Rock Point Inn so well that the owner of the actual inn in England—as well as the Cob Gate Fish Bar, also copied—felt a bit miffed.  

“As you can imagine, the jokes are absolutely rife here,” she told the Reuters news service last month. “They are as follows: ’I have been Shanghai-ed’ and ’My business is on the Chinese take-away menu.’”

Additional jokes about bootleg DVDs and CDs aside, economic growth in China has been one of the biggest real estate stories of recent years as the country’s fundamentals continue to impress.

According to a recent report released by the International Monetary Fund, China’s GDP growth in the second quarter of 2006 was 11.3 percent over the same quarter the year before, fueled by a “renewed acceleration in investment growth and surging net exports.” Meanwhile, the demographic story has become the stuff of legend: legions of people moving to cities and metropolises springing up out of the rice paddies.

For those that have visited the country, the evidence of this growth is apparently everywhere. In addition to the planned satellite cities of Shanghai with playful, EPCOT-style themes, Shanghai is also building its own deepwater port to compete with Hong Kong and Singapore.

But there is also growth further inland, away from the vaunted coast. Here, the investment is driven by local governments and developers. For example, Zhengzhou, a dusty, medium-sized plains city, is reportedly positioning itself to become the “Chicago of the East,” going so far as to pursue large-scale convention and cultural projects in the style of the Windy City.

A recent Wall Street Journal article on the country’s building boom provided a laundry list of the city’s imaginative and expensive civic projects: a hotel, modeled after a pagoda, that will stand three-quarters as tall as the Empire State Building when completed; a $100-million (€80 million) waterfront art complex seemingly modeled on a nest of eggs; a conference center—replete with climate-controlled seats—that reportedly looks like an “unfurled umbrella”; and an exhibition center that sports the largest free-standing roof in Asia. 

Private equity real estate firms have certainly become entranced with China, slowly entering the market via office buildings and luxury residential projects in the primary cities on the country’s affluent coast. But before they wander too far from the shore, shouldn’t the Chinese government get their house in order?

Despite government measures to slow down the overheated economy, the investment and construction continues unabated, oftentimes in defiance of the central government. As the Journal reported earlier this fall, Beijing has taken to using spy satellites to scope out illicit construction projects in distant provinces.

Of course, it isn’t hard to understand why cities are pushing for arts centers that look like duck eggs—projects such as those help boost the local economies.

But what happens when that economy tanks? When the country’s low inflation starts creeping upwards? What if US consumer spending drops and hurts China’s export market? Who’s going to come to the exhibition center to see Asia’s largest roof? It’s somehow not hard to imagine a city like Zhengzhou turning into a post-modern ghost town, a Mad-Max landscape of abandoned civic projects and a derelict hotel that looks like a giant pagoda.

Of course, that probably won’t happen. But with local, regional, national and now international investors looking to place capital in China, keeping an eye on the overall economics trends, not to mention the downside of a project, are probably more important than ever—in addition to usual lessons about investing in a hot, though still emerging, market.

Because the exit market for distressed convention centers in Henan province probably isn’t everything its cracked up to be.