Back in the 1990s when everyone was speculating on the effects of the looming Chinese takeover of Hong Kong and Macao, I suggested that perhaps people have it backwards.  Maybe Hong Kong and Macao were about to conquer China.  Now it seems to be happening:

Hengqin Dao is an island in Zhuhai, a prefecture-level city and Special Economic Zone in the Guangdong province of the People’s Republic of China. It has a population of about 3,000.

The whole island is designated a special economic district, as Hengqin New Area, similar to Binhai New Area in Tianjin and Pudong New Area in Shanghai.

Hengqin Island is adjacent to Ilha da Taipa and Ilha de Coloane of Macau, and is connected to Macau’s Cotai via the Lotus Bridge. The island is the largest among the 146 islands of Zhuhai, being roughly three times the size of Macau. It has broad bays, sandy beaches, strangely shaped jagged rocks, beautiful scenery, fresh air, and natural vegetation cover.

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Since the land reclamation and development, there has been a growing opinion in Macau that the island should be leased to Macau, where land is very limited and there is little room for further development. By 1 September 2005, plans were revealed that the government of Guangdong will allow tax exemptions and adopt flexible immigration control in Hengqin to promote investment from Hong Kong and Macau.

In late 2005, Las Vegas Sands openly discussed its multi-billion dollar plan to develop parts of Hengqin Island into a convention and resort destination. The project was to include four million sq ft of convention space, hotels, retail, vacation homes, and golf, tennis and yachting amenities.^[3][4]

On 27 June 2009 it was officially announced by the government of Macau that the University of Macau will build its new campus on 1 km² of the island, in a stretch directly facing the Cotai area, south of the current border post. This is the first of other possible projects. Construction of the campus shall take three years^[5] and is slated to include an underwater tunnel.^{[citation needed]} Macau law will apply in the university campus and it will not be necessary to pass a formal border post.^[6] The Macau Special Administrative Region will pay an amount of rent which has not yet been set for the use of the land.

And Hong Kong is also getting into the act:

ELSEWHERE in the developing world, towns grow before the infrastructure is quite ready to support them. Things are different in Shenzhen, China’s original Special Economic Zone (SEZ), a stone’s throw from Hong Kong.

The subway station at Qianhai bay, on the city’s west coast, is spick and span, with a full complement of signs, announcements and billboards, including one for a performance by the BBC National Orchestra of Wales, sponsored by Classy Kiss milk. But only one exit is open. And it surfaces in the middle of a wasteland of dirt, scrub and puddles. It is, surely, the best connected nowhere anywhere.

This empty spot is, however, full of big ambitions. It is one corner of a 15-square-kilometre zone earmarked for experimentation by China’s cabinet. The zone has licence to try policies that are “more special” than those prevailing even in an SEZ. It aims to attract “modern service industries” rather than big-box manufacturers. It will charge only 15% corporate-profit tax and levy no income taxes on the finance professionals, lawyers, accountants and creative people it hopes eventually to attract.

These cosmopolitan folk will live in a “waterfront city”, says James Corner, whose firm won a competition two years ago to design the bay’s future landscape. Over the next couple of years, he explains, the city will build a system of “water fingers”, large parks that collect, retain and purify the streams that flow from the hinterland, allowing water to enter the bay clean and clear.

Water is not the only flow Qianhai aims to collect and retain. It also wants to attract some of the offshore yuan that have pooled outside mainland China’s borders. Over 550 billion yuan ($87 billion) now sits in Hong Kong deposit accounts; another 60 billion yuan sits in Singapore, and 35 billion more resides in customer deposits in London, according to an April study by Bourse Consult.

These yuan cannot flow freely back into mainland China, however. Banks can invest a limited amount in the mainland’s inter-bank bond market. Companies that raise yuan outside China can seek permission to invest the money in their operations inside the country. But the money can easily become bogged down in China’s exchange controls, especially when the authorities are trying to tighten credit.

Qianhai, however, will be permitted to broaden these channels. Its firms will be given help in raising yuan offshore. Hong Kong banks will be allowed to enter the zone more easily. The ground will also be laid for greater cross-border lending. “Since the mainland is targeting the gradual achievement of full yuan convertibility, Qianhai should be a pioneer for progress,” said Zhang Xiaoqiang of the National Development and Reform Commission, China’s planning body.

The plan poses some puzzles. If offshore yuan were to be lent freely to Qianhai firms, what would stop them lending the money on to the rest of the country? An easing of capital controls between Hong Kong and Qianhai would seem to require a tightening of controls between Qianhai and the rest of the mainland. Otherwise the stream of yuan inflows could become a flood. 

I seem to recall that Paul Romer is having difficulty finding a country to adopt his excellent proposal for the creation of Hong Kong-type special economic zones.  It looks like China decided to adopt his idea.  Why haven’t we heard about this success?  Because it smacks of neo-colonialism, and China is intensively nationalistic.

But within China pragmatism often trumps nationalism.

PS.  There is a third SEZ just south of Guangzhou (Canton) which is called ‘Nansha.’

In Shanghai I talked to a chemical engineer, who had moved back from the states. He said salaries for people like him were slightly higher in Shanghai than in Philly. He bought a 135 sq foot place for 200,000 US dollars in 2003 (in central Shanghai, the most desirable area.) It’s now worth a million.

[Ouch:  I meant 135 sq meters–it makes a big difference!]

Talked to a taxi driver in Anhui today. He was a tea farmer who moved to the city with little money. His wife sold fruits and nuts, and he peddled a rickshaw. They saved money like crazy, worked constantly. Even the two year old was often home alone. He says urban Chinese no longer undertake these hardships. Eventually got money for a taxi, and license (which costs more than the taxi.) They both take turns driving it. By 2006 he was able to scrap up enough money to buy an apartment. Paid 150 US dollars per sq meter in 2006, now it’s worth 900 per sq meter. No wonder there is so much new construction, there’s no way construction costs have risen that fast. I asked the average size of an apartment bought by people like him, and he thought about 100 sq meters. That’s actually fairly big. He said a three bedroom unit is typical. One for the parents, one for the children, and one for the grandparents who then move to the city from the countryside and live with their children.

China is a huge country, so it’s hard to generalize, but Anhui is not all that atypical. Perhaps a bit poorer than average, but growing fast. And this taxi driver was better off than the masses of Chinese still stuck in inland China villages, but worse off than many urban Chinese. He was in the middle group involved in the rural to urban transition. Take it for what it’s worth.

Everywhere I go in China it looks richer than the income data shows. Shanghai has the income of a middle income country but looks like a high income East Asian country. Maybe the suburbs are poorer. Rural eastern China has the income of a third world country, but much of it looks like a middle income country. Especially in the Yangtze River delta area, where the rural areas are full of three and four story houses with turrets, like a castle. And I’m not just talking about a handful, but millions of such dwellings, in the supposedly poor countryside. And yet I have no reason to assume there aren’t lots of places in China that look third world, especially rural western China. It’s hard for a tourist to ever see a completely random cross section of the place.

Tomorrow I climb Yellow Mountain, or die trying.

. . . Taxi starts to drive away with all our luggage . . . Frantic banging on the windows . . . Finally get on the boat for Anhui province. After 10 minutes the boat mysteriously turns around and returns to dock. . . Seems a family called and said they wanted to ride along, but were late. Forty minutes more waiting, then an obnoxious family of seven from Guangdong board. It’s 95 (35 C) and ultra humid. No AC. Four hours later arrive in deepest darkest Anhui. Bus takes off without us. After frantic calling it turns around and returns. Now we’re the jerks holding everyone up. Typical zany 3rd world bus ride, then transfer to another bus. Now sitting on luggage. Entire province seems to be a giant construction zone . . . May have to rethink my skepticism of China RE bubble theories. Looks like complete mess, but billboards show plans for “Narnia”, which will be full of elegant mansions in the French, Italianate and English Tudor styles. The pictures sure look pretty.

Now I see why the official figures show poor Anhui growing much faster than China as a whole. It IS growing much faster. Stuck in bumper to bumper traffic in some small nameless Anhui town with tons of tall buildings under construction, I imagine this is what New York and Chicago must have looked like around 1900.

Part 2. M is for Moron

Check my email for the first time in days, and find 100s of messages. My heart drops. Then I delete all the messages from Mike and Major, and find almost nothing left. That’s much better.

Don’t expect much posting until I return to the first world (I.e. Beijing.)

P.S. Had a very enjoyable dinner with Yichuan Wang in Shanghai. Also heard about Evan Soltas’s new gig. Well deserved.

PPS. You can get a filling (but basic) meal in a four star Anhui hotel for about two dollars.

So I see that the usual suspects are accusing me of being a “central planner” because I have the audacity to offer an opinion on whether the Chinese are building too many houses.  Of course by that logic anyone who offers an opinion on whether the Chinese (or Americans) are building too many houses is a central planner.  And that means that all those who now think the Chinese are building too many houses, or who believed (in 2005) the Americans were building too many houses, are central planners.  After all, only the market can know whether too many houses are being built.

In fact, I’m an agnostic on whether too many houses are being built.  My previous posts were questioning the logic of those who did claim to know.  I’m not sure what school of thought all these omniscient commenters belong to, but they talk a lot about Hayek, Rothbard, and von Mises.

I am currently in Shanghai, a city that seems at first glance to have far too little housing for its 23 million residents, and which is absorbing over 600,000 new migrants every single year.  OK all you experts who claim to know exactly how many houses China should build; answer the much simpler question of how many houses the city of Shanghai should be building each year.

There’s also the issue of what type of houses should be built in China.  The market is currently trying to build houses for the rich.  The government is trying to force builders to produce more houses for the lower classes.  I see no reason why the market is wrong, and indeed see lots of reasons why it is correct.  If that makes me a central planner, so be it.

BTW, the Chinese economy is not “centrally planned,” at least no more than the US economy is centrally planned.  It is a regionally semi-planned economy.

PS.  Bonus Jeopardy answer:   Scott Sumner and Kobe Bryant.

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Question:  Name two unusually tall Americans who were in Jinan, Shandong Province, P.R. of China on August 15, 2012.

This post is a sort of reply to a comment by Yichaun Wang.  Unfortunately I can’t open his blog in China, but I believe he has a post on the topic, which undoubtedly is much better than mine.  I’m travelling to Shanghai today,  and thus don’t have much time.  I’ll just sketch out the bones of an argument, and let you guys fill in the rest of the post yourself:

1  Today the vast majority of Chinese housing, even in urban areas, is of very low quality.  Appropriate for poor people in the US and Europe.

2.  I consider newer well-built urban apartments in the 100-150 square meters range to be appropriate for the middle class in developed countries.

3.  In a few more decades China will be much richer than today, more like the other East Asian economies (Japan, Korea, Taiwan, HK, etc.)

4.  New, well-built, high-rise apartments last a long time.

5.  The flow of new apartments is a small percentage of the stock of (mostly crummy) existing apartments.

6.  When the rising middle class moves into a nice new apartment, their previous unit becomes available for the poorer Chinese, perhaps migrants from the countryside.

Can anyone take these six facts, and construct the counterintuitive argument in the title of this post?

Update: Commenters immediately nailed me on the size of middle class units, probably my American bias creeping in.  I seem to recall that the average Chinese home was about 10 square meters a few years back, but it’s undoubtedly much larger now.  On the other hand 100 to 150 sq. m. may be too big, even in Europe and Japan many units are smaller.