Failing, Dongguan-style

A city that epitomised China’s old growth model faces financial crisis

Failing, Dongguan-style

Dongguan: China’s version of Greece?

This summer the Californian cities of Stockton, San Bernardino and Mammoth Lakes all grabbed headlines when they filed for bankruptcy protection. Analysts say a depressed real estate market, a lack of budgetary oversight and restrictions on the ability to raise local tax revenues were behind the financial collapse.

As it turns out, the same problems have manifested themselves on the other side of the world. Reckless spending and a dramatic drop in income in Dongguan in Guangdong province has pushed the city to the brink of bankruptcy.

Dongguan, a once boom town founded around hundreds of entreprenurial villages in the 1990s, now has more than eight million inhabitants. But it has been having a bad time since the beginning of the year. Labour intensive industries across the city have been grappling with a drop in orders, while double-digit wage inflation has prompted businesses to think about moving to cheaper locations.

For village authorities used to leasing community land to factories as their main source of income, this is generating a huge financial problem. “The revenue model is based solely on property rental, especially for those undertaking low-end industries and low-end land development,” one city government official told CBN.

Now hundreds of buildings – both residential and industrial – are displaying banners advertising their availability. Yet local agents say there is little interest from new clients. Uncertain demand for whatever a factory might produce is part of the explanation. So is concern about the quality of many of the properties available for purchase or rent. Factories were put up in a hurry in the past and have been maintained poorly since.

As a result, many of the 584 villages that make up municipal Dongguan are running budget deficits, with the South China Morning Post reporting that up to 60% of them are so close to bankruptcy that they will soon need a bailout from the city government.

Some are worse off than others. Zhangmutou, a toy-making hub, is one of those said to be close to insolvency, with debts of Rmb1.6 billion ($256.7 million).

“Every town borrows money, it just depends on how much,” says Zhangmutou’s Party secretary Li Mantang. “Zhangmutou is not the most serious, it’s probably somewhere in the middle.”

It’s true that Zhangmutou isn’t alone. Last year Changping generated Rmb1 billion in income while its debt levels reached Rmb2.2 billion. The village of Shipai also saw its debt soar to Rmb3 billion while income remained stuck at Rmb300 million, says the Southern Metropolis Daily.

The situation is so serious that the Apple Daily has taken to referring to it as “Dongguan’s Greece problem”.

Experts say the debt woes stem partly from political pressure on village chiefs to pay generous “dividends” to voters in rural elections. “In some rare cases, the leader-elect promised to give each household Rmb10,000 a month,” Lin Jiang, a professor at Sun Yat-Sen University, told the SCMP, adding that the funds usually come from the village community “investment” pool – that is, rent collected from factories.

That becomes a problem when rental income is falling as factories close. Changping’s Party secretary Chen Guiming reckons that the debt level in many townships has reached “the most dangerous level”.

“All the news about village government on the brink of bankruptcy is not alarmist talk. Even if the city government doesn’t come to the rescue this time round, they will still have to come later and pick up the bodies,” he warns.

But is the Dongguan city government in any better shape to handle the debt crisis? The city’s GDP growth hit a three-year low of 2.5% in the first half of the year, rendering it the slowest growing economy in Guangdong province (average growth over the past eight years was about 11% annually). Perhaps as a result, Xu Jianghua, Dongguan’s Party secretary, urged villages last month to stop raising money to pay dividends but few took heed…

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