Replies to post #1814 on The Rising Influence of Rising Affluence

[DewDiligence]

New Arrivals Strain India’s Cities to Breaking Point

[Why are there ten times as many posts about China on this board as there are about India, the world’s second-largest country (#msg-48556414)? The reason is not India’s lack of GDP growth per se (which was 8.9% in 3Q10), but rather that India’s per-capita income is less than half of China’s (#msg-57188901), and hence India remains an afterthought for many multinational companies. (Pharmaceutical companies such as ABT are a notable exception, however—see #msg-53738489.) This article cites some of the ways in which India impedes its own economic progress.]

http://www.nytimes.com/2010/12/01/world/asia/01delhi.html

›November 30, 2010
By LYDIA POLGREEN

NEW DELHI — Mahitosh Sarkar came here from his distant village in West Bengal 12 years ago looking for a better life, and he found it. He abandoned the penniless existence of a subsistence fisherman to become a big-city vegetable seller. His wife found work as a maid. Their four children went to school. Their tiny household, a grim but weather-tight room in a dilapidated tenement, had a color TV and a satellite dish.

But these days Mr. Sarkar is counting losses, not blessings. His 10-year-old son died along with more than 70 others when their tenement collapsed on Nov. 15. His wife is in the hospital with a broken leg. All of their possessions, including that color TV, are gone.

The crumbled remains of the illegal building in which the Sarkar family lived in a riverside neighborhood of East Delhi have become an emblem of India’s failure to come to grips with its urban explosion.

After decades of being primarily a nation of farmers, India’s countryside is emptying out, as millions leave their stagnant villages and flock to the cities. But India’s urban infrastructure has not kept pace, and that failing now threatens to undermine the nation’s ability to vault its multitudes out of poverty and share the fruits of its nearly double-digit growth more widely. [It was reported yesterday that India’s GDP grew 8.9% year-over-year in 3Q10.]

A recent report by the McKinsey Global Institute estimated that by 2030, 70% of India’s jobs would be created in cities, and about 590 million Indians would live in them. To provide enough housing and commercial space, it said, India must build the equivalent of the city of Chicago every year.

But it has no such plans, and the cities already here are buckling under the strain of their new arrivals. From Mumbai to Bangalore, Delhi to Chennai, roads are perpetually choked. Sewers, water lines and electricity are lacking. Perhaps most important, housing is desperately short, especially for impoverished new arrivals, leaving India with more slum dwellers than anywhere on earth.

“We require a radical rethinking about urban development,” said K. T. Ravindran, a professor of urban design who frequently works with the government on urban issues. “It is not that there are no ideas. It is that there is no implementation of those ideas.”

Like those of many Indian cities, Delhi’s building codes and zoning laws were written for a much smaller city in a different time, with policies that actively discourage growth.

The number of floors in most neighborhoods is capped at five stories, and in many areas fewer. The government largely controls land, and government approval for new development is difficult to obtain, even to house the wealthy and middle class, never mind the poor.

The dilapidated state of Indian cities is in some ways by design. For decades, Indian governments tried to discourage migration to cities by making city life unaffordable and unbearable for new arrivals.

These policies were driven at least in part by a Gandhian belief that India should be a rural nation, and more broadly by a centrally planned, socialist approach to development. But rural Indians have voted against these notions with their feet.

A recent report on urban slums published by the Center for Policy Research and the Centre des Sciences Humaines concluded that these measures “have made formal housing expensive and unattainable to a large share of the population, reinforced both chronic urban infrastructure shortages citywide and squalid, precarious living conditions in urban slums.”

Indeed, cheap rental housing outside of slums, like the tiny room Mr. Sarkar and his family shared, is almost impossible to find because it is very difficult to create such housing legally.

“If I want to build for the poor, the current building codes wouldn’t allow me to do it profitably,” said Sanjeev Sanyal, and economist and expert on urbanization. “There is a demand that is not being met, and the only way to meet it is by breaking the law.”

The building’s owner, Amrit Singh, appears to have flourished by bending the law. He had more than 25 criminal cases pending against him, according to the Delhi police.

His misdeeds included selling adulterated cement, the police said, and dealing in stolen goods. According to local news reports, he also bragged of having bribed building inspectors to avoid penalties for adding floors to his rental buildings.

Local residents said the building was notorious for its shoddy construction, and Mr. Singh well known for flouting building rules.

“The government didn’t do anything,” said Ratan Haldar, a social worker who helps migrants in the neighborhood. “They make rules but never implement them. Officials take bribes and ignore the rules. People died as a result.”

No one who lived in the building dared complain, however, because housing is so scarce in Delhi that they knew they would just end up back in a slum or on the street. That is precisely what happened to the residents of another building Mr. Singh owned, which was evacuated after the collapse.

Narayan Sharma, a 35-year-old carpenter from Bihar, stood shivering and barefoot in a downpour beneath a flimsy tarp surrounded by bundles of his family’s belongings. He had rented a room from Mr. Singh for about $50 a month and was grateful to have it. Life in Delhi beat the one he left behind, he said. His children could have much bigger dreams than he ever did.

“I am illiterate because I could not study, I had to work,” he said. “I am giving so much importance to education for my children so they don’t have to live the kind of life I am living.”

As miserable as living conditions in city slums and tenements might be, they are much better than the ones villagers leave behind. Abysmal as urban infrastructure is, a recent government report said 65 percent of villagers lacked toilets, while only 11 percent of city dwellers did. Cities also have much better access to piped water and proper sewage.

At a city morgue, workers prepared the flimsy wooden caskets of those who died in the building for the journey back to the villages from which they hailed. The bodies of 27-year-old Shahen Shah, from rural West Bengal, and 13-year-old Iftikhar, from Bihar, would be loaded on trains heading east. But few of those who survived the collapse plan to follow. Even the most precarious perch in the new India is too precious to be abandoned for the old.

“Our life is here now,” said Manoj Sarkar, Mr. Sarkar’s 20-year-old son. “We cannot live anywhere else.”‹

[DewDiligence]

China’s 4Q10 GDP Expands 9.8% Year-over-Year

[2010 full-year GDP grew 10.3%.]

http://online.wsj.com/article/SB10001424052748704590704576092730688164622.html

›JANUARY 19, 2011, 9:27 P.M. ET
By AARON BACK

BEIJING—China's gross domestic product in the fourth quarter grew 9.8% from a year earlier, faster than the third quarter's 9.6% rise, which may increase market expectations for further tightening on monetary policy.

The expansion was above market expectations of a 9.2% rise, according to the median forecast of 13 economists polled earlier.

In 2010, China's GDP grew 10.3%, the National Bureau of Statistics said in a statement, up from 2009's growth rate of 9.2%, and above economists' median expectation of a 10.1% rise.

"China will consolidate the achievements of countering the impact of the global financial crisis and ensure steady and relatively fast economic development" in 2011, the National Bureau of Statistics said in a statement.

The National Bureau of Statistics is holding a news conference on the data that started at 0200 GMT.‹

[DewDiligence]

A Yuan-Denominated Bank Account? Yes, You Can!

http://online.wsj.com/article/SB10001424052748704307404576080222812076888.html

›JANUARY 14, 2011, 7:07 P.M. ET
By BRETT ARENDS

The Bank of China here in the U.S. has started allowing American customers to open an account and to invest up to $4,000 per day—and a total of $20,000 a year—in Chinese yuan, or renminbi. Until now, you had few options to hold money in yuan, which is a "closed" currency managed, and protected, by Beijing.

The bank has three U.S. branches—two in New York, and one in Los Angeles. You'll have to fill out paperwork to open an account and provide two forms of ID. And there's a minimum deposit of $500.

Is this a good idea? You may wonder why anyone would do this. Investing in Chinese currency may sound like something best left to speculators.

But in reality this may be no more exotic than, say, Peking duck. Holding some of your money in Chinese currency—as part of a diversified portfolio, as they say—might be a very sensible move for all of us.

Why? Five reasons.

• It's very unlikely to go down.

• It's very likely to go up.

• You won't miss out on a lot of interest elsewhere, as nowhere else is paying a lot of interest.

• It will diversify your portfolio.

• And, finally, it may offer you and your family something of a hedge against the decline of the U.S. economy.

Let's take these in order.

• First, it's very unlikely to go down. Of how many investments can you say that? The yuan has very little room to fall farther because it is already seriously undervalued. Beijing has spent hundreds of billions of dollars keeping the currency artificially cheap for years to boost exports.

What's the discount? Nobody really knows for sure. But right now each yuan costs about 15.1 cents. Most economists say fair value is somewhere north of 18 cents—and maybe a long way north. According to the International Monetary Fund, the value of the yuan in real, purchasing-power terms is about 27 cents.

Whatever the details, one thing is clear: Anyone buying yuan today is getting a pretty decent margin of safety. As a kicker, accounts at the Bank of China's New York branches – though not in L.A. – also come with FDIC deposit insurance, which will protect your deposit from outright forfeit if the bank were to fold (though not from exchange-rate fluctuations).

• Second, it's very likely to go up. Why? China is growing rapidly, is a manufacturing powerhouse and is running an enormous trade surplus. Countries like that usually have very strong currencies. Think of the Japanese yen, or the old German Deutsche mark.

And these days, a rising yuan may be in Beijing's interest. China no longer has the same need for such an artificially cheap currency. After all, the plan worked: It has now taken over a vast amount of manufacturing from the U.S. And it's moved up from making socks and toys to iPads and, now, stealth bombers. Based on purchasing-power parities, the Chinese economy is now expected to overtake that of the U.S. within six or seven years.

Meanwhile, China's artificially low exchange rate is starting to backfire at home. Politically, the country is under international pressure to rein in its huge trade surplus. That is sure to be an issue when Chinese President Hu Jintao comes to Washington next week. But, more importantly in Beijing, the low exchange rate is also backfiring economically by fueling inflation. This is pouring gasoline on a Chinese economy that is already overheating.

Beijing is trying to tamp down the fires. Letting the exchange rate rise more quickly will help. It ought to happen, so it's reasonable to guess it probably will. In the past five years, China has already allowed its currency to rise 25%. It may have plenty more room to go.

• The third reason for holding some money in yuan: What else are you going to do with it? Interest rates elsewhere are minimal, so you won't be missing out on much. According to Bankrate.com, the highest-yielding six-month certificate of deposit pays just 1.3%, before taxes. The dividend yield on the stock market is 1.7%. You can earn better yields from government bonds—the 10-year Treasury is paying 3.3%—but that's also subject to federal taxes, and you can put yourself at risk from inflation.

In these circumstances, the so-called opportunity cost of having some of your money in Chinese currency, at least for now, has rarely been lower.

• The fourth argument for a yuan account: It makes you more diversified. That's the holy grail of investing. The yuan-dollar exchange rate probably has little, if any, correlation to any other asset in your portfolio. (As a bet against the dollar, it might have some correlation to gold.) The exchange rate between the renminbi and the dollar will follow its own path. This is unlikely to be dictated much, if at all, by developments in stocks or even bonds.

• The fifth and final argument for holding Chinese currency: It may help you offset the costs of U.S. economic decline.

Our share of the world economy, which was 24% a decade ago, is this year expected to sink below 20%—the lowest figure in modern times. We are running a current account deficit of 3.5% of gross domestic product. Our national debt has nearly tripled in a decade, and deficits stretch out as far as the eye can see. Will the greenback survive as the world's reserve currency? Why should it? The British pound didn't.

What makes the issue of decline particularly acute for you and me in financial terms is that we work here. Our financial lives are closely tied to the U.S. economy. Consider: If we still had the 5.5 million manufacturing jobs we lost in the last decade, mostly to China, our unemployment rate today would be far lower.

While trade can benefit both sides, of course it doesn't always do so. It may make sense to make bets within your portfolio that will pay off as China overtakes the U.S.—compensating you, as it were, for the lost opportunities.

What are the risks of opening a yuan account? The principal one is probably the missed opportunity of doing something else with the money. There is still no guarantee the yuan will rise by much any time soon, so you could be sitting on dead money for a long time. And in theory China could always suspend convertibility back into dollars, though the chances of that must be minimal.

As ever, you need to do your own homework and understand what you're getting into. Chinese bank accounts, like Peking duck, aren't for everybody. But they're not crazy.‹

[DewDiligence]

Building Boom in China Sparks Fears of Debt Overload

[This article should be read in conjunction with #msg-57188901 and #msg-56791233. With a population of about 10 million, Wuhan is the largest metropolitan area in central China.]

http://www.nytimes.com/2011/07/07/business/global/building-binge-by-chinas-cities-threatens-countrys-economic-boom.html

›July 6, 2011
By DAVID BARBOZA

WUHAN, China — In the seven years it will take New York City to build a two-mile leg of its long-awaited Second Avenue subway line, this city of nine million people in central China plans to complete an entirely new subway system, with nearly 140 miles of track.

And the Wuhan Metro is only one piece of a $120 billion municipal master plan that includes two new airport terminals, a new financial district, a cultural district and a riverfront promenade with an office tower half again as high as the Empire State Building.

The construction frenzy cloaks Wuhan, China’s ninth-largest city, in a continual dust cloud, despite fleets of water trucks constantly spraying the streets. No wonder the local Communist party secretary, recently promoted from mayor, is known as “Mr. Digging Around the City.”

The plans for Wuhan, a provincial capital about 425 miles west of Shanghai, might seem extravagant. But they are not unusual. Dozens of other Chinese cities are racing to complete infrastructure projects just as expensive and ambitious, or more so, as they play their roles in this nation’s celebrated economic miracle.

In the last few years, cities’ efforts have helped government infrastructure and real estate spending surpass foreign trade as the biggest contributor to China’s growth. Subways and skyscrapers, in other words, are replacing exports of furniture and iPhones as the symbols of this nation’s prowess.

But there are growing signs that China’s long-running economic boom could be undermined by these building binges, which are financed through heavy borrowing by local governments and clever accounting that masks the true size of the debt.

The danger, experts say, is that China’s municipal governments could already be sitting on huge mountains of hidden debt — a lurking liability that threatens to stunt the nation’s economic growth for years or even decades to come. Just last week China’s national auditor, who reports to the cabinet, warned of the perils of local government borrowing. And on Tuesday the Beijing office of Moody’s Investors Service issued a report saying the national auditor might have understated Chinese banks’ actual risks from loans to local governments.

Because Chinese growth has been one of the few steady engines in the global economy in recent years, any significant slowdown in this country would have international repercussions [duh].

As municipal projects play out across China, spending on so-called fixed-asset investment — a crucial measure of building that is heavily weighted toward government and real estate projects — is now equal to nearly 70 percent of the nation’s gross domestic product. It is a ratio that no other large nation has approached in modern times.

Even Japan, at the peak of its building boom in the 1980s, reached only about 35 percent, and the figure has hovered around 20 percent for decades in the United States.

China’s high number helps explain its meteoric material rise. But it could also signal a dangerous dependence on government infrastructure spending.

“If China’s good at anything, it’s infrastructure,” said Pieter P. Bottelier, a China expert at the Johns Hopkins School of Advanced International Studies in Washington. “But right now it seems the investment rate is too high. How much of that is ill-advised and future nonperforming loans, no one knows.”

For the last decade, as economists have sought to explain China’s rise, a popular image has emerged of Beijing technocrats continually and cannily fine-tuning the nation’s communist-capitalist hybrid. But in fact, city governments often work at odds with Beijing’s aims. And some of Beijing’s own goals and policies can be contradictory.

As a result, China’s state capitalism is much messier, and the economy more vulnerable, than it might look to the outside world.

In the case of Wuhan, a close look at its finances reveals that the city has borrowed tens of billions of dollars from state-run banks. But the loans seldom go directly to the local government. Instead, the borrowing is done by special investment corporations set up by the city — business entities whose debt shows up nowhere on Wuhan’s official financial balance sheet.

Adding to the risk, the collateral for many loans is local land valued at lofty prices that could collapse if China’s real estate bubble burst. Wuhan’s land prices have tripled in the last decade.

The biggest of the separate investment companies set up by the municipal government here is an entity known as Wuhan Urban Construction Investment and Development, created to help finance billions of dollars’ worth of projects, including roadways, bridges and sewage treatment plants.

According to city records, Wuhan U.C.I.D. has 16,000 employees, 25 subsidiaries and $15 billion in assets — including the possibly inflated value of the land itself. But it owes nearly as much, about $14 billion.

“U.C.I.D. is heavily in debt,” a company spokesman, Sun Zhengrong, conceded in an interview. “This may lead to potential problems. So we are trying to make some adjustments.” He declined to elaborate, saying the state company’s finances were “our core secret.”

Dozens of other cities are following a similarly risky script: creating off balance-sheet corporations that are going deeply into debt for showpiece projects, new subway systems, high-speed rail lines and extravagant government office complexes. And they are doing it despite efforts by the central government in Beijing to rein in the excess.

To limit the cities’ debt, Beijing has long prohibited municipalities from issuing bonds to finance government projects — as American cities do as a matter of course. Lately, too, China’s central government has put tighter limits on state-owned banks’ lending to municipalities. But by using off-the-books investment companies, cities have largely eluded Beijing’s rules.

Zhang Dong, a municipal government adviser who also teaches finance at the Zhongnan University of Economics and Law in Wuhan, estimates that less than 5 percent of the city’s infrastructure spending comes from Wuhan’s general budget. “Most of it comes from off-the-books financing,” he said.

This system is not a secret from Beijing, which now says there are more than 10,000 of these local government financing entities in China. In fact, because Beijing now takes a large share of government tax revenue, local governments have had to find their own way to grow, and land development is primarily how they have done it.

But it is a risky game. A recent report by the investment bank UBS predicted that local government investment corporations could generate up to $460 billion in loan defaults over the next few years. As a percentage of China’s G.D.P., that would be far bigger than the $700 billion troubled-asset bailout program in the United States.

As frightening as that may sound, many analysts see no reason for panic — no imminent threat of an economy-collapsing banking crisis in China. That is largely because of Beijing’s $3 trillion war chest of foreign exchange reserves (much of it invested in United States Treasury bonds), and the fact that China’s state-run banks are also sitting on huge piles of household savings from the nation’s 1.3 billion citizens.

Because all that cash is protected by government restrictions on money flowing in and out of the country, a global run on China’s banks would be unlikely.

The real problem, analysts say, is that municipal government debt in China has begun casting a large shadow over the nation’s growth picture. If instead of investing in growth, China had to start spending money to gird the banks against municipal defaults, some experts see a possibility of China eventually lapsing into a long period of Japan-like stagnation.

A Recession Peril

Kenneth S. Rogoff, a Harvard economics professor and co-author of “This Time Is Different: Eight Centuries of Financial Folly,” has studied China’s boom. He predicts that within a decade China’s lofty property bubble and its mounting debts could cause a regional recession in Asia and stifle growth in the rest of the world.

“With China, you have the ultimate ‘this time is different’ syndrome,” Professor Rogoff said. “Economists say they have huge reserves, they have savings, they’re hard-working people. It’s naïve. You can’t beat the odds forever.”

By Beijing’s estimate, total local government debt amounted to $2.2 trillion last year — a staggering figure, equal to one-third of the nation’s gross domestic product. A wave of municipal defaults could become a huge liability for the central government, which is sitting on about $2 trillion in debt of its own.

And Beijing’s estimate of what the cities owe might be too low, in the view of Victor Shih, a professor of political economy at Northwestern University who has studied China’s municipal debt. He says that by now, after even more borrowing in early 2011 and some figures hidden from government audits, total municipal debt in China could be closer to $3 trillion.

“Most of the government entities that borrow can’t even make the interest payments on the loans,” Professor Shih said.

Around the clock, seven days a week, the construction crews burrow to build Wuhan’s $45 billion subway system. One segment snakes beneath the mighty Yangtze River.

“For most areas we dig down 18 to 26 meters,” said Lin Wenshu, one of the planning directors of the Wuhan Metro. “But for part of this line we’ve had to go down 50 meters because there’s high pressure and a lot of mud from the river,” he said. “But the citizens want a subway system, and so we’re going to build it as fast as possible.”

In all, city officials say there are more than 5,700 construction projects under way in Wuhan. In some neighborhoods, workers demolish old homes with little more than sledgehammers and their bare hands to make way for shopping malls, high-rise apartment complexes and new expressways.

Having seen Beijing, Shanghai and other coastal metropolises thrive on big infrastructure projects, cities thousands of miles inland, like Wuhan, are trying to do likewise. Wuhan wants to become a manufacturing and transportation hub for the heartland — China’s version of Chicago.

But it is a dream built on debt. This year, relying largely on bank loans, Wuhan plans to spend about $22 billion on infrastructure projects, an amount five times as large as the city’s tax revenue last year. And aspirations notwithstanding, Wuhan is still relatively poor. Residents here earn about $3,000 a year, only about two-thirds as much as those in Shanghai.

But Wuhan has made the most of the soaring value of its land. In the northwest part of the city, for example, bulldozers have cleared a huge tract more than twice the size of Central Park. A dozen years ago it was a military air base.

Giant billboards advertise a new purpose: future home of the Wangjiadun Central Business District, featuring office towers and luxury apartments for 200,000 people. That assumes, of course, that financing for the project — a web of loans and deals based largely on the underlying value of the land — holds up.

Planning began in 1999, when the city decided to relocate the air base. After the city ran short of cash for the project, in 2002, it turned to a deep-pocketed Beijing developer, the Oceanwide Corporation. Oceanwide agreed to chip in $275 million and pay some of the infrastructure costs in exchange for a prime piece of the land.

Since then, the city has sold large plots of the former air base to other developers, while earmarking yet other parcels for future sale to help pay for the new business district.

There is no question that China needs new infrastructure and transportation networks if it is to meet its goal of transforming most of its huge population into city dwellers. Less certain is whether the country can afford to keep building at this pace, and whether many of these projects will ever pay off in terms of the economic development they are meant to support.

Beijing helped ratchet up the municipal building boom in early 2009, when in response to the global recession, it pressed local governments to think big and announced a huge economic stimulus package. That unleashed a wave of government-backed bank lending.

“What we’re seeing was not very common before 2008,” said Fu Zhihua, a research fellow at the Research Institute for Fiscal Science. “Now, all cities are rushing headlong into this.”

And now, try as it might, Beijing seems unable to stop the stampede.

Part of the problem may be incentives in China’s Politburo-driven economic system. Simply put, municipal officials in China keep their jobs and earn promotions on the basis of short-term economic growth.

“The fact is, local governments in China compete to grow G.D.P. in order to get promoted as government officials,” said Zeng Kanghua, who teaches finance at the Central University of Finance and Economics in Beijing.

Ruan Chengfa, Wuhan’s 54-year-old local Communist party secretary, who was promoted earlier this year from mayor, has certainly benefited politically from his “Mr. Digging” reputation.

He declined to be interviewed for this article. But in a speech in February, he said, “If we want Wuhan to have leapfrog development and enhance people’s happiness, then we must build subways and bridges.”

Pressure From Beijing

Wuhan is starting to show symptoms of financial stress.

Despite selling about $25 billion worth of land over the last five years, according to Real Capital Analytics, a research firm based in New York, Wuhan is struggling to pay for its projects. City officials have announced a big increase in bridge tolls. Under pressure from Beijing to reduce Wuhan’s debt, they have promised to pay back $2.3 billion to state-backed creditors this year.

Whether the city would do this by borrowing more money or selling land or assets is unclear. But rolling over old debts with new borrowing is not uncommon among Chinese cities. In 2009, for instance, Wuhan’s big investment company, Wuhan U.C.I.D., borrowed $230 million from investors and then used nearly a third of the money to repay some of its bank loans.

Mainly, Wuhan’s leaders are counting on property prices to continue defying gravity, even if some analysts predict a coming crash.

In a report this year, the investment bank Credit Suisse identified Wuhan as one of China’s “top 10 cities to avoid,” saying its housing stock was so huge that it would take eight years to sell the residences already completed — never mind the hundreds of thousands now under construction.

But criticism has not deterred Mr. Ruan, the local party secretary, who has vowed to keep his foot on the shovel. “If we don’t speed up construction,” he said in the speech in February, “many of Wuhan’s problems won’t be solved.”‹

[DewDiligence]

Shanghai’s Pudong, Once Soulless, Rises Up

http://online.wsj.com/article/SB10001424052970204770404577080491863427170.html

›DECEMBER 21, 2011
By JAMES T. AREDDY

SHANGHAI—Pundits once mocked Shanghai's Pudong district, a purpose-built version of Manhattan, as overdesigned and underoccupied, evidence in steel and glass of a property bubble of historic proportions.

Deng Xiaoping sparked the transformation of Pudong's riverfront of warehouses with a 1990 utterance: "Shanghai is our trump card." A decade later, Pudong was Exhibit A for critics of an urban-development model guided by state planners, a soulless district where 70% of the buildings stood empty. Visiting economist Milton Friedman called it "a statist monument for a dead pharaoh on the level of the pyramids."

Today, as worries of a Chinese property crash are back in force, there is an unlikely bright spot: Pudong.

The district's transformation into a vibrant nexus for finance, trade and entertainment is testament to factors like the strong momentum of Chinese migration toward urban centers. Pudong was conceived as an international gateway—fronted by a world-class skyline—but its foundations today rest on domestic trends, including leaders' development plans and an expanding middle class.

For watchers of China's property fluctuations—the focus of much angst since shocks in the world's second-largest economy could reverberate around the world—Pudong's ascendancy serves as a reminder of still-vast demand in China for new office and apartment buildings.

One big question is whether Pudong's "build it and they will come" approach will work as well in cities without Shanghai's advantages: a strong industrial base, widespread prosperity and favorable geography at the mouth of the Yangtze River.

As grandiose new skylines sprout across China, new urban centers are also replicating the infrastructure that was crucial to making Pudong's makeover viable.

Apartment prices have started to weaken across China in recent months, including in Pudong. Still, Chinese cities are riding a powerful urbanization trend. Each year, 17 million people move from rural to urban areas in China—equivalent to the populations of the four biggest U.S. cities. Pudong's planners were able to harness this vast internal migration, attracting armies of workers who built the infrastructure, provided a pool of labor for its factories and filled its apartments. Two million people moved to Pudong in 10 years.

Pudong was advertised as China's international window, a marketing tactic now widely copied. Hardly any Chinese downtown lacks a World Trade Center or plans for global finance. In fact, analysts say locals were far more important to Pudong's evolution than were foreigners, as they will be in newer urban areas.

Sam Crispin's bullish reports on Pudong a decade ago made the property analyst a contrarian.

Now, as director of China real estate at PricewaterhouseCoopers LLC, Mr. Crispin says growing talk about China's unoccupied "ghost cities" reminds him of the doubts many had about Pudong. "A lot of the commentary frankly was quite similar to the ideas that are being bandied about for the property market today," he says. "The reasoning is quite similar—who's going to occupy all those buildings?"

Mr. Crispin argues that the lesson of Pudong is how badly Chinese demand was underestimated. Real-estate development, he says, tends to produce "sensationalist" viewpoints.

Within weeks of Mr. Deng's 1990 endorsement, the government unveiled a blueprint and earmarked billions of dollars to pay for it.

A garish rocket-shaped tower higher than the Empire State Building was the kickoff project. Positioned at Pudong's tip, the Oriental Pearl Tower was a cartoonish totem for China's race into modernity and an emphatic counterpoint to the Bund, a strip of colonial-era buildings on the opposite Puxi bank of the Huangpu River.

Twice the surface area of Manhattan has been constructed in Pudong since 1995 —120 million square meters of floor space by the official tally, including more than 70 skyscrapers. But according to international real-estate agency Jones Lang LaSalle, less of Pudong's grade-A office space is empty than Manhattan's—9.5% versus 10.3%. The space leases for $693 per square meter annually, nearly a tenth more than Midtown Manhattan.

Initially, Pudong drew snickers faster than tenants. "The Shanghai Bubble," a 1998 essay by Joshua Cooper Ramo, compared the city's building "explosion" with Europe's postwar reconstruction. "The result is a kind of what-is-wrong-with-this-picture economics," the then-magazine editor wrote. Today, Mr. Ramo, vice chairman at Kissinger Associates Inc., calls Pudong the capital of Chinese "exceptionalism" and attributes its rise to the central government's use of the massive economic tools at its disposal.

Gordon Chang, author of the 2001 book "The Coming Collapse of China," charged that Pudong's glitz masked an unsustainable model. "I'm definitely in the not-impressed category. You can always get growth when you spend money," he says.

Still, spurred by 25 river crossings and other infrastructure, Shanghai's center of gravity has shifted.

"You came to see they actually did what they said," says Stephen White, managing director of iaction, an architectural firm that initially built Pudong offices for international banks but now sees mostly Chinese take-up.

Apple Inc. chose Pudong for its first Shanghai store. Walt Disney Co. is erecting the biggest-ever Cinderella Castle there. Citigroup Inc. and HSBC Holdings PLC own Pudong towers. Also arriving were tenants like the trade-development office of Changzhou, a Chinese city that uses Pudong "like a bridge" to engage foreign investors, says its director Thomas Zhang.

Filling the district hinged on mindset changes for Shanghai natives like Yao Wei, a 40-something real-estate executive who long swore by the adage "Rather a bed in Puxi than a house in Pudong."

Ms. Yao made one of her first visits to Pudong in 1994 to check a client's plan to rent restaurant space atop the yet-uncompleted Pearl Tower. "It's too early," she advised. A decade later, she offered the same advice to another client.

But Ms. Yao now owns a modern riverside apartment in Pudong and marvels at its affordability compared with London. The twinkling cityscape from her balcony mesmerizes guests, she says. "They come to the building and say, 'Oh, this is Shanghai."‹

[DewDiligence]

A study by Wang Xiaolu, an economist at the China Reform Foundation, suggested that in 2008, average income for China's urban households was 90% higher than reported in the official data.

Source: http://online.wsj.com/article/SB10001424052970204257504577150200360070464.html