China Reviews Venue Projects

Construction halted as government examines its real estate projects

By David S. Cohen -- Tradeshow Week, 8/30/2004

News of China's economic boom has moved from the business page to the front page as the country's huge demand for oil has helped drive up gas prices at American pumps. The world's fastest-growing economy over the last 25 years contributed more to global growth in the last year than the United States.

So it didn't go unnoticed when China announced belt-tightening moves aimed at curbing inflation and ensuring an economic "soft landing." What was widely overlooked, however, was one specific area targeted for restriction: exhibition and conference center construction.

China's National Development and Reform Commission on April 30 announced a review of projects in a number of areas, including exhibition and conference centers. The original timetable called for the review to be finished in about six weeks, but as of mid-August, it had still not been completed.

"The review means all construction of new centers must be stopped," said Liang Wen, chairman of the China Assn. of Exhibition Centers. The review will determine which projects will be canceled, postponed or given the official go-ahead. "It would take about six months, so we hope it will be completed for the end of the year."

Two major projects in Beijing have been affected by the freeze, as well as projects in Dalian and Suzhou, to name a few. The Beijing projects may not move ahead, despite the dire need for a new, modern facility there, because all major construction work must end by 2006 so the city can prepare for the Olympics.

According to Michael Dreyer of Koelnmesse, "There are other projects that are partially completed or being converted to another purpose or just staying empty."

Construction on the new 70,000 square meter (753,000 square foot) AsiaWorld-Expo in Hong Kong is not affected by the freeze.

Economic planners are concerned about over-investment in commercial real estate, including government-backed projects. "Many cities are trying to build exhibition centers regardless of market demand," said Liang. "They want to show the people they've done something in their tenure. They spend the investment, but they don't think about the return on the investment."

As in the United States and other countries, oversupply forces facilities to slash rental rates, sometimes cutting them below cost. Facilities can't be maintained and soon deteriorate. So it's not surprising that tradeshow industry executives appear supportive of the freeze.

But China's government isn't particularly interested in the tradeshow industry's welfare; it's worried about preventing instability in the country's banking system and making sure the current boom isn't followed by a bust.

As Fariborz Ghadar, professor and director of the Center for Global Business Studies at Pennsylvania State University explained, China's government must perform a difficult balancing act.

"China's growth rate is divided really into two," Ghadar said. "The coastal region is growing very, very rapidly, while the interior is growing very slowly or not at all. If the growth rate drops below 7 percent, the interior doesn't grow at all and people want to pack up and move to the coastal regions. Above 10 percent, inflation kicks in."

The stakes for the government are high. A bust would spill over into other East Asian economies that have come to depend on exports to China, and threaten social unrest at home.

Exhibition centers come into play because of the link between commercial real estate and banking. China's capital markets are still underdeveloped, with relatively little money moving into stocks and bonds, but it has a very high savings rate, around 40 percent. Those savings flow primarily through four somewhat shaky state-owned banks propped up by infusions of government cash. During the recent boom, those banks have extended vast amounts of credit.

With China's entry into the World Trade Organization, the state-owned banks are girding for foreign competition. That means tightening credit and cooling commercial real estate development, says James Barth, a senior fellow at the Milken Institute.

"A lot of the problems in the banking sector around the world historically have been because of a collapse in real estate prices, particularly commercial real estate," Barth said. "When there's excess capacity, prices come down. It's not the kind of thing that you can get rid of, like a home, where you might only show a paper loss. If (exhibition centers) are not used, they're not maintained, and that starts to be a downward snowball effect."

The poorer interior cities face a particular risk of finding their new facilities empty. For the long term, China has a "go west" policy, encouraging development of the interior. Western cities like Chengdu and Chongqing are either asking to build exhibition centers or have already done so, said Liang.

Liang supports the review and said that, with around 3 million square meters of exhibition space, China already has ample supply. (Ironically, Beijing itself needs a large new center badly, and it will almost certainly get the go-ahead to build one.) "We don't need more exhibition centers, we need more exhibitions," he said.