Bejing's Olympian Splurge
From his 16th-floor office on Beijing’s Avenue of Eter- nal Peace, distressed-debt specialist Jack Rodman has a grandstand view of the $160 billion worth of construc- tion that will add the equivalent of three Manhattans to the skyline by 2008, when China’s capital will host the Olympic Games.
To the east, a new central business district is rising near a futuristic television tower designed by Dutch archi- tect Rem Koolhaas. To the west, a Chinese Wall Street is taking shape around the glass-prism Bank of China Ltd. headquarters created in 2001 by Chinese-American architect I.M. Pei. Across the city, work is under way on luxury apartments, subway and rail lines, ring roads, Olympic venues and an airport terminal that will be bigger than all five at London’s Heathrow. Already completed is the 4.9 million–square-foot (455,200-square-meter) Golden Resources Shopping Mall, which is twice the size of Bloomington, Minnesota’s Mall of America, the largest shopping center in the U.S. “The scale of development here is unprecedented anywhere in the world,” says Rodman, 59, a partner at Ernst & Young LLP, the second-biggest U.S. accounting firm.
So, Rodman adds, are the risks for property speculators. “When I look out of my window at all those construction sites, I see a sea of nonperforming loans looming large on the horizon,” he says. “The numbers defy logic.” He estimates a total of 1 billion square feet of offices, shops and apart- ments will come onto the market before the Olympics—more than will be needed.
Much of the property being built isn’t of the quality and specifications demanded by international companies mov- ing to Beijing, says James Quille, 53, chief executive officer of Bermuda-based Macquarie Global Property Advisors Ltd., a $5 billion real estate fund manager. “There’s a lot of stock being developed that will be obsolete before it is completed,” Quille says. Still, he says, there are profits to be made from the good-quality buildings under construction, and his fund has allocated $600 million to acquire property in Beijing and Shanghai.
The International Olympic Committee is also predicting profit from the 2008 Summer Games. The total may exceed the record $224 million made by the 1984 Olympics in Los Angeles, according to IOC officials. The profit will come from broadcasting and licensing fees and at least $1.87 billion from international and domestic corporate sponsors. Corpo- rate sponsors for the games are attracted by the possibility of advertising to China’s population of 1.3 billion. That’s 100 times the number of people in Greece, which hosted the last Summer Olympics, in 2004.
China—whose economy recently surpassed that of Italy to become the sixth largest in the world and is set to overtake France and the U.K.—is using the games to speed up its capital’s transformation into one able to keep pace with the world’s fastest-growing major economy. China’s gross domestic product grew 9.8 percent in 2005, the official Xinhua news agency reported on Jan. 3, and has grown at an average of 9.6 percent for the past quarter century, more than triple the pace in the U.S.
“This is an amazing opportunity for us, but we feel a real- ly big responsibility,” says Huang Yan, 41, deputy director of the Beijing Municipal Planning Commission, who carried out advanced studies in urban planning at Harvard University on a one-year Loeb Fellowship in 2003–04. “The pressure is unbelievable because everything is going so fast. You don’t have too much time to make decisions. A lot of things, we could do better.”
‘The scale of development is unprecedented anywhere in the world,’ Ernst & Young’s Rodman says.
There is still time for U.S. and other foreign companies to profit from all of that investment, says Craig Allen, chief of the U.S. Commercial Service at the American Embassy in Beijing. While most of the construction contracts have already been given to groups led by Chinese state-owned companies, Allen says the Chinese will put more contracts up for bids in the first half of 2006, ranging from subway signaling to traffic management and communication systems.
Beijing officials are spending $13 billion trying to clear up the smoggy skies that make the city one of the world’s most-polluted capitals, according to World Bank statistics. City authorities are moving coal-burning heavy industries such as Beijing Shougang Co., China’s fourth-largest steel- maker, to neighboring Hebei province. They’ve built two natural gas pipelines so the capital no longer has to rely on coal-burning plants that belch sulfur dioxide into the air and obscure Beijing residents’ views of their favorite week- end playground, the mountain range known as the Fragrant Hills. Officials are even using People’s Liberation Army rockets, cannon and aircraft to fire chemicals into the sky to “seed” the clouds and, they hope, ease pollution and in- crease rainfall.
So far, results have been mixed, according to a 2005 environmental report from the U.S. Embassy. In 2004, Beijing met its target of 227 “blue sky days” when there was good or moderate air quality. The number of days when there were extremely unhealthy pollution levels also rose, according to the report.
The embassy report blames the pollution on an increase in traffic: Some 2.5 million vehicles—more than 10 percent of China’s total—now clog Beijing’s streets, and the number is growing by 1,000 a day. The report also cites particles re- leased by construction work at the city’s 8,000 building sites. In 2004, the amount of particulate matter in Beijing’s air was equal to that of Atlanta, Los Angeles, New York and Washington combined, the report says.
Jiang Xiaoyu, executive vice president of Beijing’s organizing committee, says the city now has good air quality 60 per- cent of the time, more than twice as often as in 1998. “As you Westerners say, Rome can’t be built in a day,” Jiang, 57, says.
The organizers weren’t always so patient. In 2004, the city was constructing venues for the games so quickly that Hein Verbruggen, the International Olympic Committee executive overseeing Beijing’s preparations, says he had to ask the organizers to slow down. If the structures were finished too early, Verbruggen says, they would cost more to maintain and could even depreciate—a problem given that some of the Olympic buildings will be converted into luxury apartments and sold after the games.
‘The pressure is unbelievable because everything is going so fast,’ a city planner says.
The only parts of town immune from the transformation are the Forbidden City, which contains the palaces of Chi- na’s Ming and Qing dynasty emperors, and the red-walled Zhongnanhai compound where President Hu Jintao and his Communist Party comrades now live and work. Even the area around Tiananmen Square, where in 1949 Mao Zedong proclaimed the People’s Republic of China from atop the Gate of Heavenly Peace and where the 1989 crackdown on pro-democracy protesters took place, has not avoided the construction frenzy.
Just behind the monolithic Great Hall of the People, the tear-shaped $325 million National Grand Theater, made of titanium and glass and designed by French architect Paul Andreu, is taking shape amid an artificial lake. Beijingers have nicknamed it the Egg on the Water. Huang says her commis- sion’s aim is to create a modern metropolis while preserving the historical core around the 600-year-old Forbidden City and the remains of the walls demolished by Mao and later replaced by a ring road. “In earlier years, we made a lot of mistakes and destroyed many things,” she says. “But we still have a lot that remains.”
Olympic Park, the main venue 10 kilometers (6.2 miles) north of the city center, has been chosen to straddle the north-south axis of the ancient city that also passes through Tiananmen Square and the Forbidden City.
Despite the slowdown order, some 7,000 workers are toil- ing on three shifts, 24 hours a day, on the $382 million, 91,000-seat National Stadium. The venue, designed by Basel, Switzerland–based architects Herzog & de Meuron Architekten and Beijing-based China Architecture Design Institute, features intertwined steel struts resembling the wooden twigs that make up a bird’s nest. The stadium, which is due for completion in December 2007, was originally supposed to have a retractable roof.
Olympic officials decided against the roof and made other cutbacks to comply with a 2004 Chinese government clamp- down on investment in steel, real estate and other industries aimed at slowing what it feared was an overheating economy. The organizers had planned to use 380,000 metric tons of steel, or 0.1 percent of China’s annual output, to build stadiums and gymnasiums. The National Stadium was redesigned to cut its cost by one-third after steel prices soared.
Nearby, the National Swimming Center, known as the Water Cube because it will resemble a block of ice, will cost $125 million. The Olympic village, which will be home to 16,000 athletes and officials and will feature 40 buildings of six or nine stories, will be sold to local and foreign investors after the games. Each streetlamp in the village is individually solar powered.
The stadiums are just a small part of the overall spending. From 2002 to ’08, the Chinese government is expected to pump $60 billion into construction, according to Business Beijing, a magazine sponsored by the city government’s information office. That’s four times the amount London will spend to improve itself for the 2012 games, according to organizers of the U.K. games.
“I can’t think of another city anywhere in the world that has embarked on such an infrastructure program,” Macquarie Global’s Quille says. “In more-sophisticated, mature mar- kets, they often can’t build one tunnel or one rail line without significant cost blowouts.”
From January to September 2005, some $99 billion of real estate projects were under way, almost equally divided between commercial and residential properties, according to Anna Kalifa, Beijing-based head of research for China at Chicago-based Jones Lang LaSalle Inc., the largest U.S. commercial real estate broker by stock market value.
“That supply will far exceed demand, meaning owners will find it increasingly hard to rent out their properties and repay their debts,” says Ernst & Young’s Rodman, who estimates $65 billion of bank loans in China could turn bad, meaning they’re 90 days past due but not yet classified as nonperforming. Rodman says that in the event of a downturn, the most exposed banks will be China’s four largest—Industrial & Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China—which ac- count for 76 percent of all lending in China and which have been struggling to reduce their percentage of bad loans to attract foreign investors. Spokesmen for all four banks declined to comment.
Since 1998, the Chinese government has spent $432 billion, or 23 percent of its gross domestic product last year, bail- ing out the country’s debt-plagued banks, according to a September 2005 report from Moody’s Investors Service. In the first quarter of 2005, China’s four biggest banks reported a rise in problem real estate loans to $8.7 billion—or 10 percent of their total property loans, according to China’s central bank. Rodman says he’s advising his clients to sell off their bad loans soon. Quick action, he says, could help them recover as much as 50-60 cents on the dollar rather than as little as 30-40 cents if they delay and the buildings begin to age.
Bad loans could leave foreign investors exposed. Allianz AG, American Express Co., Bank of America Corp., Goldman Sachs Group Inc., HSBC Holdings Plc, Merrill Lynch & Co. and Royal Bank of Scotland Group Plc are among overseas lenders that have committed $19 billion to buy strategic stakes in four Chinese banks: Bank of China, China Construction Bank, Industrial & Commercial Bank and the country’s fifth- biggest lender, Shanghai-based Bank of Communications Ltd. In addition, Construction Bank and Bank of Communications in 2005 raised $11.4 billion selling shares in Hong Kong. Bank of China plans to have its initial public offering in the first quarter of 2006, and China’s biggest lender, Industrial & Commercial Bank, has an IPO set for later in the year.
So far, investors in the banks are remaining bullish. Since they began trading on June 22, shares of Bank of Communications have risen 59 percent to 3.98 Hong Kong dollars on Jan. 6, outperform- ing the 8 percent rise in the benchmark Hang Seng Index. Shares of Construction Bank, which made a U.S.$9.2 billion offering in October, have risen 23 percent to HK$2.90. “International investors have not gone into this with their eyes shut,” Rod- man says.
Beijing real estate prices are still rising. In the first nine months of 2005, new-home costs rose 21.1 percent to $834 per square meter and commercial property rose 16.3 percent to $1,879 per square meter, according to Jones Lang LaSalle. That contrasts with Shanghai, where prices fell for three consecutive months in the second half of 2005.
In all of 2005, foreigners bought $1 billion worth of Beijing real estate—a fivefold increase from 2004, says Chris Brooke, 37, managing direc- tor for China at Los Angeles–based CB Richard Ellis Group Inc., the world’s largest commercial real estate services firm. Even with the gains, Bei- jing prices are one-half of those in Hong Kong and a quarter of those in London and New York, Brooke says.
Huang says she’s hoping that all of the building will help improve housing options for the city’s 15.2 million people, some 3.6 million of whom are illegal migrants from the countryside, according to city statistics. Beijingers average less than 250 square feet of living space each. Some city residents are paying a heavy price for more space. Developers are demolishing many of Beijing’s traditional, centuries-old hutongs, or neighborhoods of narrow lanes, and their residents are being forced to move to far-flung suburbs or to 11 new satellite towns being built outside Beijing.
Olympic organizers expect to recoup some of their $2.3 billion investment in sports-related facilities via sponsorship revenue and spinoffs such as souvenirs. Some 200 stores selling Olympic-branded goods opened in China in November as Beijing marked the 1,000-day countdown with an extravaganza at the Workers Gymnasium to launch the games’ five mascots—a panda, a fish, a swallow, a Tibetan antelope and a flame—collectively known as the Five Friendlies. The stores sell everything from pens to $50,000 jade ornaments. In a city where knockoff DVDs of recent Hollywood movies sell for less than $1, no dubious Olympic goods were on display in the city’s market stalls immediately after the mascot launch.
Corporate sponsors such as General Electric Co., Samsung Electronics Co. and Visa International have agreed to pay a total of $867 million for global sponsorship rights of both the 2006 Winter Games in Turin, Italy, and the 2008 games in Beijing, according to IOC financial statements.
Other companies—including seven top-level sponsors from China and three from Western countries—have paid a total of $1 billion for domestic sponsorship rights for the Beijing games. That’s almost double the $536.7 million the Athens Games raised in 2004 from all sponsors, domestic and international. The three Western domestic sponsors are Adidas-Salomon AG, Johnson & Johnson and Volkswagen AG. “They want to be perceived to be Chinese,” says Carl Walter, Beijing-based chief operating officer for JPMorgan Chase & Co. “It’s a good idea for companies like that.”
GE, the world’s biggest company by market value, planned to double its sales in China to $5 billion in 2005 from $2.6 billion as it began its Olympic advertising program on Beijing construction sites.
Paris-based computer services company Atos Origin SA, the official information technology provider for the games, now earns just 3 percent of its $6 billion of annual revenue in the Asia- Pacific region, says Michelle Liu, the company’s Beijing-based marketing director. Liu says the company hopes the Beijing games sponsorship will help increase that share fivefold. She sees op- portunities for Atos Origin’s computer systems in China’s burgeoning financial services and nuclear power industries.
Bank of China, meanwhile, is leveraging its sponsorship to promote its $8 billion initial public offer- ing in Hong Kong. “For us, the Olympics is a very good platform,” says Xu Chen, 41, Bank of China’s general manager of Olympic marketing.
The games will benefit smaller companies, too, such as Hong Kong–listed Li Ning Co. The sportswear maker, which is 37 percent owned by Li Ning, who won three gymnastics gold medals, two silvers and a bronze at the 1984 games, is one such company, says Chris Ruffle, 46, who bought some shares with the $15.9 billion he helps man- age for Edinburgh-based Martin Currie Investment Management Ltd. In December, Li Ning shares hit a record high of HK$5.70—a 46 percent increase since the beginning of 2005. Since the company first sold shares in June 2004, the stock had risen 138 percent to 5.60 on Jan. 6 compared with a 25 percent rise in the Hang Seng.
“He’s chairman and major shareholder but has brought in professional management,” Ruffle says of Li. Katie Tsui, a company spokeswoman, says Li, 42, declined to comment and confirms that the company is run by professional managers. The for- mer Olympian said in a news release last year that he hoped the Olympic Games would boost interest among Chinese people in sports and increase demand for sporting goods.
Ruffle says another company to benefit would be Beijing Capital International Airport Co., which is building a $2.3 billion, 9 million–square-foot terminal designed by British architect Lord Nor- man Foster. When finished in 2007, the terminal will be able to handle 60 million passengers a year—twice as many as now pass through the city’s airport each year. Athletes also stand to profit from the games. In a country where 17 percent of the population live on less than $1 a day, Olympic gold can translate into real gold. In 2004, the government gave gold medalists $25,000 each; silver medalists, $12,500; and bronze medalists, $9,880. “For the Beijing Olympics, I am sure the figure will be higher,” says Cui Dalin, deputy sports minister.
Cui says the General Administration of Sports is training 2,000 athletes—from which it will select a team of 400—for the games. China, which Cui says spends $100 million a year on sports, finished second in Athens, with 32 golds, versus 35 for the U.S. In the overall medals table, China was a distant third, collecting 62 medals to 102 by the U.S. and 92 by Russia.
Cui downplays China’s chances of overtaking the U.S. in gold medals. “It’s impossible,” he says. “We expect more medals, but it’s impossible to say how many in advance. That’s the charm of sport.” As for having the home advantage, Cui says: “It will help the athletes achieve better results, but there will also be more pressure. It’s both a burden and a boost. We will be trying to help our athletes to be relaxed and to balance commercial activities with their training.”
A record 155 million people, including 4.4 million foreign tourists, may visit Beijing in 2008, and city officials are trying to reassure the world that nothing will go wrong during the games. In November, Ma Zhenchuan, Beijing’s po- lice chief, invited foreign journalists to watch his SWAT team and other elite squads perform anti-terrorist exercises. As visitors watched from a grandstand, black-clad cops firing live ammunition scaled a four-story building to re- lease hostages, a formation team of kickboxers wreaked havoc on another gang of “criminals” and police dogs leapt through fiery hoops and into the open windows of speeding cars.
Meanwhile, city authorities are preparing Beijingers for their moment in the international spotlight. A half-hour drive west of Beijing, at the training center of Beijing Beiqi Municipal Taxi Group Co., 40 working-class Beijingers are packed into a language laboratory, hunched over computers reciting 80 English phrases they must know before they can obtain a taxi driver’s license: “Welcome to China. Can I help you?” they say in chorus. “It is the time of heavy traffic now. What a bad luck!” And Beijing’s Olympic slogan: “One World, One Dream.”
By 2008, Beijing’s real estate speculators will discover whether their dreams of riches have turned into reality.