The Good, The Bad and The Ugly in Chengdu
First, the good.
The extra level to the Second Ring Road has turned out to be a surprisingly efficient piece of work, with its own anoetic beauty. The clean concrete lines of the pylons, and the fresh, unblemished blacktop contrast so well with the sagging moldy balconies of last century’s buildings. The grass beneath the BRT high speed bus lane is untrampled and naturally green; the new parks, curbs, and facades along the Ring Road are inroads of order and modernity.
And it works!
The bus lanes are free of joyriding black sedans and the trip on the bus from Hongpai Lou to Kehua Bei Lu, once a torturous half-hour to hour, now takes five minutes. With every Chen, Li and Wang racing to the upper deck to take advantage of no stoplights, the rest of us can dip between the many lanes of the ground-level Second Ring in peace, admiring the new Yong Feng Flyover gardens and stopping for a seat and a smoke somewhere past Dongmen.
Chengdu’s Global Center (Video)
Earlier this week, the New Century Global Center, the largest stand-alone building in the world, opened its doors to the public. I personally have an issue with “stand-alone” – it’s an asterisk placed there by haters. Like Jordan lovers scoffing at Lebron. Stand anywhere near the Global Center and consider yourself what exactly “stand-alone” qualifies. The building is spectacular. I have been inside, all around, and worked in an office close enough to turn around and watch the wings of the western corner rise up and be clothed in steel and light.
I admit to often feeling a dark foreboding, as if any moment the leaden sky above the center would crack open, unleashing a howling horde of demons, devils and dragons upon the city. But that hasn’t happened yet, and the other day as I rode past on one of the sunniest afternoons I have ever experienced in Chengdu, I joined white-gloved BMW chauffeurs and unwashed bread van drivers in a great gawk. It was the first time that everyone on the road was conscious enough of everyone else to dodge deftly while gawking. If that is all the Global Center ever inspires, then it is enough.
My friend Greg and I made a short documentary about the Global Center, The Second Ring Road improvements and construction in general. We also talk a little bit about the Tianfu New City, the Li Chuncheng corruption saga and some other topics as well. Check it out below:
While we were shooting footage for the documentary above, we also did a bit of timelapse with my friend Jia Maoyan, a local videographer. Below is a short of the Global Center at dusk:
Although the Fortune Global Forum came and went like the promise of a brisk cold wind in the middle of a stifling Chengdu afternoon, as a comment on “What Have You Done for Chengdu?” pointed out, it will be years before anyone can adequately judge the impact the forum had on Chengdu’s economy. Indeed, based upon the series of videos available to Fortune magazine subscribers, there is a lot going on behind the curtain that most of us won’t even guess at.
MNC’s in Chengdu
One of Fortune’s roundtable videos, “Technology, Innovation and The Emerging World” discusses how multi-national corporations are localizing their marketing and R&D operations, the logical follow-up to massive investments in manufacturing. We are seeing that in the Tianfu Software Park, and according to the panelists, global companies will push this trend ever further – designing, manufacturing, and selling in local markets like Chengdu and Sichuan.
“We will meet the aspirations of people to have a healthy life, access to good food, good education, but affordable,” said Frans van Houten, president and CEO of Royal Phillips Electronics NV. “So I am shifting the paradigm where I say, we have global business units that decides things globally to a market led innovation force, while leveraging global competencies, and therefore we go to a much more balanced way of innovation.”
A recent article in Marketwatch briefly outlines Texas Instruments plans for Chengdu, which include billions of dollars toward manufacturing and testing:
“On June 7, 2013, Texas Instruments Inc. (TI) outlined its long-term strategy for manufacturing facilities in Chengdu, China. The Company’s future plans include a new assembly/test operation and the expansion of its existing wafer fabrication factory. TI reported that its investments in these operations could total up to $1.7 billion over the next 15 years and potentially include facilities, manufacturing equipment and land.
‘The Chengdu Hi-Tech Zone has been an excellent location for TI’s manufacturing investments in China. We believe this region offers significant benefits to TI and the more than 100,000 customers we serve,” said Kevin Ritchie, Senior Vice President of TI’s Technology & Manufacturing Group.'”
Just as the congestion and pollution that preceded a complete BRT system seem like distant (bad) memories, in a decade from now we may be speaking of Chengdu as a cosmopolitan, innovative hub and world-class market. The Forum may be that blip in our daily life that historians will point to as the pivotal event in Chengdu’s rise. The pieces are in place and, judging by the optimism dripping from the high-level CEOS who spoke at the Fortune Forum, the end will justify the means.
The best place to begin is with a recent story in the WSJ about Chinese property developers’ new favorite city, Shanghai. Chengdu held this coveted position for two years in a row, but was knocked off this year.
“Chengdu fell to 7th in development prospects and 8th in investment prospects, as it faces an oversupply of offices, shopping malls and mixed-used complexes, especially in the central business district, survey respondents said.”
How big is Chengdu’s bubble?
The answer to this question depends on how you define bubble, says Eddie Ng, managing director of Jones Lang Lasalle’s Chengdu office. Certain sectors of the real estate industry are certainly facing a bubble, such as retail malls on the south side of the city, but others are actually looking at healthy growth, most notably office space downtown and around the Tianfu Software Park .
Supply & Demand in Chengdu
“There is a huge supply right now, but demand is also picking up,” said Ng. “It will take time for the city to digest the supply of office space, but it’s retail where I am more worried. There are a lot of inexperienced developers going into retail, especially in the south,” he added. “But I don’t see any developers closing up their offices.”
Precisely. In typical fashion, developers in Chengdu are building without giving much thought to whether or not the management companies they hand their projects over to will be able to make their money. Bank loans and government subsidies (one and the same?) cover the developer’s costs and profits, after which the city itself has to grow into the new capacity.
Last month I sat in the new Leanna’s on the second floor of the Suning Plaza and looked down upon a bustling Starbucks. The second floor was mostly unoccupied, but Leanna’s was huge and operational. I asked how much rent was, because I wanted to gauge the finances of the foreign founder – can’t help my hater instincts – and the waiter answered with a chuckle.
“Not much at all. It’s the management fee that really digs in.”
Turns out this is a common tactic to bring in tenants and earn a bit of cash. Low rents and high management fees with the promise of balance once the building fills out. Similar to the “key fee” renters charge each other for commercial property, high management fees are local adjustments to over-capacity and the overriding need to profit while the boom is booming.
The core obstacle to Chengdu becoming a world class market is … the market. Can the region urbanize quickly enough to fill the residential and commercial property shooting up like bamboo? Will enough farmers move to the city, buy iPhones and washing machines and put their kids through college? Will enough of those kids stay here and work in R&D and marketing?
Can wages rise quickly enough to create a middle class or will it be uber rich and ultra poor forever?
Actually, this sounds like a problem I would want to have and, at face value, nothing I would bet against. The middle class in Chengdu and across China is visibly growing, both in purchasing power and in social impact, and there is no stopping that movement in the short term.
The Coming Middle Class
The Second Ring Road BRT project and the Global Center were both built by farmers whose children are entering the middle class right now. Fan Qing, 52, has wrinkles in his face so deep you could hide a truck in them, especially when he smiles. He hauled scrap away from the Second Ring Road project for a year, making 3,000-4,000 yuan a month. He still has a home in Qionglai, more than an hour west of the city, but his daughter lives in Chengdu selling clothing and his grandson holds a Chengdu hukou and is going to kindergarten in the city.
A couple from Yibin help weld beams onto the roof of the Global Center, while their daughter goes to grade school in Chengdu. Every dime they make goes toward her education, so she can grow up with fine fingers, pale skin, an education and the means to buy a home in the capital. Liao Yun Zhong, another leathery old face running a crane on the Yong Feng section of the BRT, is saving up for his grandson; a group of seven villagers laying down glass panes on the bubble in the middle of the Global Center want to buy an apartment together in Chengdu. Near the center, underneath a phalanx of half-built skyscrapers, a family of four: daddy welds, momma serves up lunch outside the worksite, son sells smokes out of the back of an aunt’s breadbox van. Thousands more like them are building this city up from the ground and it is up to their children to fill that space.
They want to live in Chengdu. They want iPhones and apartments and Volvos and everyone from the CEOs at the Forum talking about emerging markets to the government officials selling land to developers is rooting for them to make it.
But unfortunately, a larger issue looms.
Chengdu’s bubble may be a calculated gamble by the city leadership – overcapacity now with the future middle class in mind – or it may be a massive grab for riches with little or no thought for what the city’s residents will end up with. We have covered the case of former Chengdu mayor Li Chuncheng on Chengdu Living, including his ties to Deng Hong, chairman of New Century Exhibition and Travel Group, the developer responsible for the Global Center and other projects.
Li Chuncheng had his fingers in so many pies that it is hard to determine if there is a project anywhere in Chengdu not tainted with some level of corruption. One by one, his associates have been brought in for questioning, including Jinjiang district police chief Wu Tao and former vice-governor of Sichuan province, Guo Yongxiang. These men have been linked to Zhou Yongkang, former Party secretary of Sichuan and now China’s “security tsar” – this article in Duowei includes a graphic showing how the web of embezzlement reaches to the very top.
Current Chengdu Party Secretary Huang Xin Chu is not connected to Li or Zhou, but has nonetheless moved forward with major projects connected to previous administrations, opening the Global Center last week and finishing the BRT late last month.
Huang has become a reviled figure on Sina Weibo and in the streets of Chengdu for pushing through dozens of construction projects all at once. The congestion and pollution caused by the construction of several Metro Lines and the BRT earned him the moniker Huang Wawa which means “Digger Huang” – much the way Li Chuncheng became a symbol of demolition and re-building 10 years ago.
He has ruthlessly censored the Internet, stamped out protests to the PX factory last month, and locked down the city during the Forum, but is he corrupt? With the bloated price tag for the BRT – 50 billion yuan according to television reports last month – and a dozen other projects underway, Chengdu residents find it hard to believe Huang and his associates are not making out like bandits.
But so far there are only rumors and no evidence. Perhaps a decade from now a strike hard campaign will find streaks of malfeasance in the concrete of the Metro lines, but by then the city will have already filled up the apartments and malls, or have long since drowned in debt.