A desert city infamously littered with new but vacant apartment buildings and idle construction sites is getting no relief in the parched climate for local government budgets.
Ordos, where local leaders have been trying for years to build a thriving community almost from scratch, remains a people-ready but empty ghost town.
Officials haven’t given up hope that vast coal reserves under the loess and sand of the surrounding Ordos Desert, in south-central Inner Mongolia Autonomous Region, will be their ticket to urban prosperity. Ordos is home to one-sixth of China’s coal reserves.
The government in 2003 started awarding coal rights to mining-and-real estate development companies that agreed to build housing, office buildings and roads. The plan was to prepare a thinly populated section of Ordos called Kangbashi for up to 1 million people.
And during the build-up between 2003 and last year—a period marked by high coal prices—Ordos recorded blistering growth. The city’s GDP rose 15 percent year-on-year to 322 billion yuan in 2011.
But companies, jobs, and people never arrived to fill Kangbashi’s industrial parks and apartment complexes. In addition, central government real estate controls in 2010 curtailed the speculative investment that encouraged development. And mining enterprises at the foundation of the local economy have watched revenues dwindle in the face of overseas competition and a slowing domestic economy.
Today, the local economy is suffering and the city government is struggling to arrange banks loans, issue bonds, and attract private investors to continue growth.
The government has fueled the boom through borrowing schemes and by attracting investment, betting that any public money spent on building projects would yield handsome returns in the future in the form of tax receipts.
Local officials haven’t abandoned hopes for Ordos, population 600,000. Nor have they stopped betting that investment will eventually pay off as government revenues rise.
Indeed, Mayor Lian Su said in April that the city government plans to “do everything possible to expand credit (and) guarantee new loan issues top 50 billion yuan in 2012.”
Frozen Market
It’s a tall order for Ordos, where unoccupied and unfinished buildings line wide, quiet streets.
One property developer said 70 percent of all downtown construction projects have been halted. “Capital chains are broken,” he said. “There’s no money.”
A city construction bureau official said small property developers “have suspended almost all work” on apartment buildings. “Those that are still working are either government companies or subsidiaries of large energy groups.”
First-quarter, new apartment sales in one district fell 93 percent from the same period 2011, the government said, to the equivalent of a few dozen apartments of average size.
Pessimism prevails at Inner Mongolia Yitai Real Estate Co., whose parent also controls local coal mines. The company’s general manager, Wang Yongjun, said the property market is frozen, and he sees no chance for a rebound in the next year or two.
Banks have dramatically scaled back property lending. The Ordos branch of China Construction Bank, for example, has stopped lending money to property developers, a bank employee said. And only major enterprises qualify for local loans from the Industrial and Commercial Bank of China, a source said.
A source at another state-owned bank said there is little room left for new lending in Ordos. So far this year, the Big Four state banks have issued more than 10 billion yuan in local loans, mainly to coal and power companies.
“There were almost no loans to property companies and for local infrastructure projects,” the source said, adding that his bank “seldom cooperates with urban development companies,” which function as financing platforms run by the local government.
Urban development companies in Ordos have raised billions of yuan through bonds and trust products in recent years. Since 2009, for example, the Dongsheng City Development Group has lined up some 10 billion yuan.
But debts are rising. The Dongsheng group’s liabilities grew to 14 billion yuan late last year from 634 million yuan in late 2008.
And credit has tightened since the central government started strengthening its oversight of government financing platforms in 2011. “There are fewer new loans this year and no plans for new bond issues,” said a city government official.
Spending Path
Yet the Ordos government is still writing urban expansion and infrastructure investments into its economic roadmap.
To get around the lack of bank credit, the city has borrowed money from private firms. The Dongsheng group, for example, borrowed about 2.7 billion yuan from several private companies in the region last year, according to the group’s financial report.
Revenues are still officially rising for the Ordos city government, which reported taking in 23.6 billion yuan in the first half, up 8.9 percent year-on-year.
City officials have launched aggressive plans to build another 600 kilometers of expressways, fourteen industrial parks, and eighteen power transformer substations. They budgeted 150 billion yuan worth of private and government investment this year, up from 107 billion yuan last year and 80 billion yuan in 2010.
Since late last year, the government has unveiled several measures designed to boost the property market. These include a program whereby the government would buy and convert unoccupied housing into rental units for low-income families.
So far, though, the government’s confidence and special initiatives have failed to improve market confidence.
Dragging down market sentiment is the government’s lack of capital, highlighted by payment delays for some public projects. These delays are apparently well-known among investors and other players in the local financial community.
Indeed, as of August, the government owed some 5 billion yuan to construction companies for vacant and incomplete buildings in Kangbashi.
Efforts to pay off debt have been complicated by falling demand for undeveloped land, which the Ordos government—like counterparts across China—auctions to property developers. City revenues from land transfers declined 80 percent in the first half from the same period 2011.
And the city has found it increasingly difficult to pay off creditors with land in lieu of cash.
“In the past, the government used land for repaying debt,” said a project manager for a local road contractor. “But land is losing value now, and companies are unwilling to accept it.”
The city’s glut of unoccupied housing and commercial buildings offers glaring evidence of a market in distress.
A property developer said the local government took an approach to economic development that was irrational and out of synch with central government real estate market controls as well as shrinking financial options.
More than 41 million square meters of floor space was added to the local housing stock last year—an amount equal to about half of all property development in the entire Inner Mongolia region in 2011.
Bian Yanyun, deputy general manager at Zhejiang-based Fangzheng Real Estate Development Co., said three to five years will be needed to digest the existing housing inventory.
Delivering a separate but more serious blow to the government’s treasury has been a recent slowdown for the coal industry. Coal sales accounted for more than 60 percent of the city’s GDP and 50 percent of government revenues in 2008.
Coal prices have been falling since April, and hundreds of area mines have been affected.
An industry analyst said only 101 out of the area’s 306 coal mines were operating normally this summer. Many had cut back production. Other mines closed, leaving behind more empty space in Ordos.
Zhu Yishi is a Caixin staff reporter.