From the China anecdotes file, reader Gary writes …

“Hi Mish, I have a friend that is an architect in Shanghai. I sent him an article that talked about counting dark apartments at night to determine vacancy rates. He confirms everything I’ve been reading on your blog.”

My architect friend says…

Once you get out of the city and into the second tier cities these 50% vacancy figures ring true. I’ve been to so many smaller cities and they are full of residential high rises going up everywhere. Most have a significant vacancy rate from what I see just from driving by.

The idea of “build it they will come” mentality has been fueling this. However, the government has since put down some hard rules to slow all of this down but so many buildings were either just completed or in the middle of construction before these measures were put into effect.

What’s sad is that these buildings are built very poorly and I’m not confident that they will survive long enough for the migration from rural to urban to occur. The developers here are severely handicapped when it comes to what and how to build. they are usually farmers who sold their land for big money and know absolutely nothing about developing profitable projects. They don’t do any valid market research from what I can tell.

It’s usually left up to us (the architecture firm) to figure things out for them.

Culturally these guys feel like they are the ones in power and must exhibit this power by making radical decisions so it appears to the cronies in the room that they are in charge. The crazy thing is China is so big and robust they can make many mistakes – build a shopping center, it fails, demolish, rebuild, all within short period of time – and they don’t go bankrupt.

This type of program would ruin development in the united states but it doesn’t have similar results here. I think it’s going to take China another 20 years before they get up to speed and find their identity, until then China is still third world in terms of knowledge, quality of work.

Malinvestment is the word that best describes what Gary’s architect friend describes.

It has indeed bankrupted many State Owned Enterprises (SOEs), and such development will come to a screeching halt sooner rather than later as I have mentioned many times, most recently in 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin? 

Mike “Mish” Shedlock
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