Energy & Resources

It’s cost $50 billion so far

Is the reclaimed island of Caofeidian a symbol of Chinese financial excess?

CHINA-CAOFEIDIAN/

They reclaimed 276 square kilometres from the sea to turn Caofeidian into the financial disaster it is today

In May 2007 former premier Wen Jiabao visited Caofeidian, an island 70 kilometres from Hebei province’s Tangshan City, for his annual Labour Day inspection tour. Only a few days earlier, Wen had been told that a huge oilfield had been discovered there. “It is the biggest find [by China] in more than 40 years. I was so excited on hearing the news that I couldn’t fall sleep all night long,” he told workers once he arrived in Caofeidian. He went on to encourage local authorities to develop the area into a new economic zone and make it a model of sustainable development.

A rather embarrassing revision later emerged. The oilfield is actually less than half as large as initially projected, with CNPC, PetroChina’s state-owned parent, advising that the Nanpu block has 450 million tonnes of proven oil.

The problem this raises? Sinopec, another of China’s oil majors, planned to build a huge refinery in Caofeidian based on the previous reserve estimate (see WiC6). Some of that capacity now looks surplus to requirements.

But the economic planners in Caofeidian have made other mistakes too. For another way to conceptualise what is happening on this little-known island, think Dubai. Just like the emirate’s much- vaunted development The Palm, Caofeidian is an artificial archipelago reclaimed with sand and financed with debt. Ten years ago. Caofeidian comprised just four square kilometres (when the tide was fully out). But the biggest reclamation project in Chinese history began in 2003 and changed all that, creating 280 square kilometres of dry land. More is in the making. The 21CN Business Herald reckons nearly $50 billion of investment has been lavished on the Caofeidian project over the past decade and a further Rmb280 billion is waiting on the sidelines to go in.

At this point you may be thinking who planned this? A Dr No-style James Bond villain, intent on carving out a luxury lair from the ocean? In fact this was anything but the work of an unpredictable maverick. Rather, it’s the result of work completed by some of the most talented bureaucrats in China’s central government.

Their strategic thinking – written into the 11th Five-Year Plan – is to build Caofeidian into a new economic hub supported by four key industries: a port, steel production, oil refining and electricity generation. For good measure, there’s a mega desalination plant on the agenda too, capable of producing 400 million cubic metres of fresh water a year. For perspective, that’s a third larger than the Jebel Ali facility in the United Arab Emirates, currently the world’s biggest (See WiC20).

“If you missed Shenzhen’s opportunities in the 1980s, come here now,” was the slogan of choice for Caofeidian property firms (albeit in 2008). In fact, developers had been marketing Caofeidian as “China’s Dubai” until late 2009, albeit they changed course when Dubai World shocked the financial world by declaring a technical default on its own debt.

In many ways, the comparisons with Dubai aren’t wholly convincing. While the emirate markets itself as a tourism, transport and services hub for the Middle East, Caofeidian’s rationale is a little different. Planners wanted to move some of their heavy industry out of Beijing and Tianjin. They picked off-shore Caofeidian as a preferred alternative. But somewhere along the way, the island’s pitch seems to have broadened to incorporate an offer of an exciting opportunity to buy luxury real estate. That sounds confusing: Caofeidian may well be able to offer homes with a sea view but who wants to live within steaming range of a desalination plant?

Despite this, the Dubai analogies turned out to be prescient in at least one respect: Caofeidian is on the brink of its own debt crisis too.

After more than a month of investigative research into Caofeidian, 21CN has concluded there are signs of a liquidity crunch for many of the fantasy island’s infrastructure projects. CBN came to similar conclusions. A much-hyped ‘Eco-City’ project was supposed to be home to 800,000 people by 2011. But its reporters could find only an old man and a few dogs keeping watch on large areas of undeveloped land.

The industrial zone looks more disastrous still. Each of the four key industries in Caofeidian has failed to take off as planned. Historically, neighbouring Tangshan is the most famous steel production base in China and in 2005 Beijing-based Shougang formed a Rmb68 billion joint venture with Tangshan Iron and Steel in an effort to relocate part of its capacity to the island and away from the capital. However, the Economic Observer reports that Tangshan Iron has already lost Rmb13 billion on its 49% stake in its Caofeidian joint venture in the last four years. The steel industry is in a funk, but the new project has still performed very poorly.

Few details have been made available on Caofeidian’s overall indebtedness. But figures from the Tangshan branch of the China Banking Regulatory Commission suggest that commercial banks had lent up to Rmb62 billion to Caofeidian companies by the end of 2011. Policy lender China Development Bank also has Rmb40 billion in outstanding credit to Caofeidian.

Some of that debt now needs to be repaid, with more than Rmb10 billion of loans due this year, many of them involving local government financing vehicles (LGFVs) set up by Tangshan City to support the development of Caofeidian. But the combined fiscal income of Tangshan City and Caofeidian stood at less than Rmb70 billion last year. “Even if all Tangshan’s people don’t eat or drink, it would take two years to repay Caofeidian’s debts,” a commercial banker wistfully told CBN.

Caofeidian’s financial trauma signals wider financing trouble for towns, municipalities and provinces elsewhere in China. Until recently the data for the official estimate of local government debt was more than two years old, with the National Audit Office suggesting Rmb10.7 trillion in total. But there was another update this month, after the NAO conducted research in 15 provincial capitals incorporating 36 municipalities to reach a new estimate that debt has grown by 13% since 2011. Notably, the latest audit revealed that 14 cities have at least Rmb18 billion in overdue debt and nine municipalities were found to have debt ratios higher than 100%.

In May the IMF also suggested that government debt in China is higher than previously thought, at closer to 50% of gross domestic product (rather than the 22% of GDP implied by Chinese government data). Why? The IMF added an estimate of local government debt (a total not previously included) to their calculation.


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