Yujiapu, one of China's most prominent development zones, is often referred to as the country's Manhattan. The zone in Tianjin's Binhai New Area is notable for its vast scale and ambition, and also for the reportedly 200 billion yuan ($ 32.5 billion) investment being made by the local government. A Lincoln Center is in the plans, backed by the Rockefeller family, and even a Juilliard School of music.
Yujiapu is also frequently referred to as one of China's ghost cities.
I recently made the one-hour, 120km journey to the area, taking a high-speed train from Beijing's South Railway Station through Tianjin's city center and ending in nearby Tanggu. We drove through a bustling retail cluster and then saw a skyline emerge in the distance. That was the first surprise of the day: The skyline was not Yujiapu but another new district across the river, called Xiangluowan.
The plans for Yujiapu call for developing 9.5 million sq. meters of real estate over four phases. Today, in phase one, we see the results of the planners' "9 plus 3" strategy. Only the first nine office buildings are under construction -- and nearing completion -- along with three other projects, including a convention center. The nine office buildings are apparently backed by end users such as state-owned enterprises and major financial institutions, as opposed to speculative developments.
Over in Xiangluowan are 30 additional office buildings. Seven are completed and stand virtually empty. Three of the 23 unfinished buildings appeared to be undergoing some form of construction when we visited, while the other sites looked devoid of activity. In addition, the skeleton of one of the largest hotel projects in China sat dormant a stone's throw away, having seen little or no progress for over a year.
Later, we found a contrast in the bustling downtown of one of China's earliest and most successful industrial development zones, the Tianjin Economic-Technological Development Area, just 5km away. There, the zone administration is on its way to completing 1 million sq. meters of Grade-A office space as well as supporting retail amenities. This area has enjoyed fairly strong demand from manufacturers in the zone, from the service companies that count those manufacturers as their customers, and from various government entities.
Question of competitiveness
The central challenge for Yujiapu and Xiangluowan appears to be competitiveness, or lack thereof. Much has been made of the new Chinese leadership's intentions to let market mechanisms play a larger role in the allocation of resources. The flip side is that markets are based on competition. Companies, locations and projects that are not competitive will not win resources in a market setting.
My impression of Yujiapu and Xiangluowan was of places in search of a raison d'etre. The zone officials we met acknowledged the difficulty of articulating the area's competitive advantages. They played up experimental policies being pioneered and the enormous investment in infrastructure and connectivity. They extolled the support received from the central government, where Tianjin's former mayor, and Yujiapu's executive sponsor, is a member of the Standing Committee -- one of China's top seven statesmen.
But when you go to Yujiapu, you see a place lacking the most important resource: people.
In the recent past, a "build it and they will come" approach was highly effective, with the state directing resources and guiding development. However, slowing growth is the new normal in China -- 7.5% now and 6% in the not-too-distant future. As competitiveness plays an increasingly decisive role, projects like Yujiapu seem like the legacy of a bygone era.
From a real estate perspective, phase one of Yujiapu should be OK, being a largely owner-occupier endeavor. Subsequent phases may take much longer to come to fruition than initially planned, which could save developers from building projects too far ahead of demand. Still, for the local government, which has already invested huge sums in infrastructure -- bridges, tunnels, subway lines, a high-speed rail station, utilities and roads -- that could be too little, too late.
The chance of sufficient economic development to generate the necessary tax and land sale revenue seems slim. Who will foot the bills? Will the banks be forced to continue rolling over loans? Will the Tianjin municipal government be able to refinance through the newly opened municipal bond market? Will investors lose money in a default? These are relevant questions in today's China.
Yujiapu is an easy target to raise this question over, but for China's future prosperity, a new model for economic development is needed. Officials at all levels need to think about growth not as the guaranteed result of ambitious new projects but as the outcome of a well-articulated competitive advantage.
Michael Klibaner is head of research for Greater China at JLL.