Huaxi village is a microcosm of China’s predicament. Like China itself, Huaxi can no longer rely entirely on its struggling steel mills, real estate projects. So the village’s autocratic leaders build a hotel taller than the Chrysler Building in the middle of nowhere but many of those staying there are villagers who pay their way with subsidies from the authorities

Last updated: June 9, 2013 7:28 pm

Economy: Out of proportion

By Jamil Anderlini

A model village that is proving to be a microcosm of the nation

Dizzying heights: Huaxi village has built a hotel taller than the Chrysler Building but many of those staying there are villagers who pay their way with subsidies from the authorities

On a clear day, you can see the 72-storey Longwish Hotel from more than 20km away, rearing up above the lush paddy fields of Huaxi village in southern Jiangsu province.

The ostentatious skyscraper, with 826 rooms, cuts an incongruous sight in a village of only 2,100 people; it is even crowned with a giant golden ball holding a revolving restaurant staffed by elegant waitresses from North Korea. Taller than New York’s Chrysler Building and the Shard in London, Longwish was completed in 2011 at a cost of more than Rmb3bn ($490m). The only problem is that it is hard to fill so many rooms. During a quiet lunchtime, the North Korean waitresses perform traditional dances for a handful of inattentive locals who now live in the hotel with the help of subsidies from the village authorities.The fate of the hotel is a powerful symbol of the dilemma facing Chinese leaders as the growth engines that have powered 10 per cent annual expansion over the past three decades run out of steam and the country tries to forge a new economic model.

Huaxi village is in many ways a microcosm of China’s predicament. For decades, it has been paraded as a showcase of economic success and claims to be the country’s wealthiest village. Its model of “Socialism with Chinese characteristics” – the Communist party’s frenetic, contradictory embrace of the market – has lifted China from the brink of starvation and turned it into a rising superpower.

But today Huaxi, like China itself, can no longer rely entirely on its struggling steel mills and chemical factories. The old mainstays of growth – real estate projects and surging global demand for Chinese exports – no longer promise to create the wealth they did over the past two decades. So the village’s autocratic leaders have plumped for a new kind of service-based economy that they do not fully understand, building a hotel in the middle of nowhere and hoping that it will draw the tourists.

 

“In the future we envision fewer and fewer factories with more and more tourism and other service industries,” says Wu Xie’en, Communist party secretary of Huaxi village and chairman of Huaxi Group Corporation. “China has already walked to the end of the road of industrialisation.”

Mr Wu, referred to by everyone as the “new secretary”, inherited his position as village leader from his father, the visionary “old secretary” Wu Renbao, who steered Huaxi’s rise to prosperity but died of lung cancer in March at the age of 84.

The older Wu formed the village into a corporation in the 1990s, retaining collective ownership among the original Huaxi villagers so they could get rich together as China industrialised. In that sense Huaxi is different from most other places in the country, but in most other respects it is a China in miniature.

“The Huaxi model is actually the China model,” says Wen Kejian, an independent economist and an ardent critic of Huaxi, which he describes as little more than a Potemkin Village used by China’s rulers as a display case for their latest policies.

The old secretary famously required his comrades to study the Communist party mouthpiece, the People’s Daily newspaper, every day and base all local economic and political plans on the Party’s priorities.

But the old secretary’s death came as Huaxi, along with most of the rest of the country, grapples with slowing growth, slumping exports, industrial overcapacity and growing debt. While still high by most countries’ standards, many economists are worried about China’s dip in the first quarter, when the economy expanded 7.7 per cent from a year earlier, compared with 7.9 per cent in the fourth quarter of 2012.

To tackle this slowdown and rebuild long-term sustainable growth, economists and the country’s leaders say China must shift its model away from investment in infrastructure and exports and towards consumption and services.

Huaxi shows this is easier said than done. Occupancy in the Longwish Hotel has not met expectations. Nor has demand for the village’s helicopter rides. In an attempt to make up the shortfall, Huaxi Group has convinced many of its villager shareholders to move into the hotel and has given them coupons to spend on services in Huaxi in lieu of dividends.

Meanwhile, the factories have been struggling to stay profitable since the global financial crisis. At the peak of its exporting prowess in 2006 and 2007, Huaxi was exporting goods worth about $500m per year. Its steel mills accounted for 20 per cent of all UK imports of a particular kind of flat bar, according to village officials.

Its exports have more than halved since then. Although the villagers say they have concentrated their efforts on selling to the domestic market, production levels are still well below those at the peak of the export boom.

Apart from tourism, Huaxi Group has moved into shipping, logistics, maritime engineering and finance, with a chain of pawn shops and loan companies providing credit to small businesses in the region.

According to new secretary Mr Wu, Huaxi Group turned a profit of almost Rmb4bn before tax last year on Rmb52.5bn in total revenue from all its businesses, more than half of which was earned from what he called “non-traditional industries”. But according to filings with the Shenzhen Stock Exchange, the group’s much smaller publicly listed subsidiary expected to make a loss of up to Rmb13.3m in the first quarter of this year and its shares are trading at about a third of their 2010 peak.

“In the 1980s, 1990s and early 2000s, China’s development was all about boosting productive capacity, from small-scale manufacturing to large-scale heavy industry and export manufacturing but in the last few years the economy has relied increasingly on real estate and on credit,” says Mark Williams, chief China economist at Capital Economics. “The key difference and difficulty about switching to services and consumption is that you can’t just build it and expect everybody to come.”

The village’s fabulous growth was also spurred by the same combination of powerful forces that saw China become the workshop of the world as well as the most important factor in the global commodity supercycle.

. . .

According to local legend, it all began in the Cultural Revolution in the late 1960s, when starvation and Wu Renbao’s irrepressible capitalist tendencies drove him to start a secret factory producing nails that the villagers sold on the black market for food.

At the time, this was a crime punishable by death but with the launch of market reforms in the 1980s and 1990s, Huaxi attracted investment and built the manufacturing capacity that set up China for its boom.

Restructuring and privatisation of lossmaking state enterprises in the late 1990s, entry to the World Trade Organisation in 2001 and a seemingly endless surge in construction helped produce double-digit growth rates.

This transformed China from the world’s sixth-biggest economy on a par with Italy 10 years ago to the world’s second-largest today. Even when key export markets in the US and Europe collapsed during the crisis of 2008, China barely seemed to stumble as it unleashed a credit deluge.

This prompted another wave of construction, particularly of residential real estate, which boosted headline growth and China’s demand for raw materials. This kept the steel mills and factories of Huaxi humming, albeit at a lower rate than previously.

The nationwide credit flood also accelerated a shift in Huaxi’s attitude to debt. The old secretary had always been against the idea of borrowing but had relented over the years and eventually agreed to a debt-to-asset ratio of 20 per cent for Huaxi Group.

Today, the company has a debt-to-asset ratio of 65 per cent, still a relatively benign level but one that independent analysts say could be artificially suppressed by inflating the value of assets such as the Longwish Hotel and the surrounding land.

. . .

As it started to take on more debt, Huaxi was also seduced by the lure of real estate. The village has built hundreds of “European-style luxury villas” that nestle between smokestacks, warehouses and rice paddies.

The rush to transform farmland into real estate has probably been the most important driver of the Chinese economy for much of the past decade after the government began to create a commercial urban housing market at the end of the 1990s.

Like many local governments across China, Huaxi expropriated farmland from surrounding areas and converted it into far more profitable purposes, at the expense of the villagers who used to earn their living in the fields, according to some of those villagers.

According to new secretary Mr Wu, Huaxi village expanded in 2001 and was given the task of administering an additional 35 square kilometres and “improving the lives” of the almost 36,000 people who lived on it and farmed it.

These new residents were not given shares in Huaxi Group and they became in effect second-class Huaxi citizens.

Some of them say they were required to leave their homes and farmland. They received only minimal compensation, which they were in effect forced to spend buying low-quality villas built by Huaxi Group.

Across most of China, this type of land seizure is the standard operating procedure for cash-strapped local governments looking to pump up revenues. But with most prime land around cities and towns already sold off, this process now provides diminishing returns as more and more apartment blocks lie empty across the country.

As China’s economy slows, even the most bullish analysts have been downgrading their expectations for growth and more bearish observers see a period of painful adjustment that could affect global growth.

“I think GDP growing at 6 or 7 per cent instead of 8 or 10 per cent is normal although of course there will be many companies in China that go bankrupt [at this lower rate of headline growth],” says Mr Wu. “I believe that after we go through a few years of economic adjustment we will arrive back in a new period of healthy economic development.”

In order to help Huaxi prepare for this bright future and take advantage of the shift to services and consumption, the village has a secret weapon that is part talisman, part tourist attraction and part insurance policy.

On the 60th floor of the Longwish Hotel, handfuls of tourists visit a life-sized sculpture of a bull made from one tonne of gold worth Rmb300m when it was commissioned in 2011.

The guide ushering visitors into the room explains proudly that Huaxi was incorporated in the year of the bull, so it has become the village mascot.

But when pressed for details, the guide admits reluctantly that the golden bull of Huaxi is actually hollow.

Commandeered land: Displaced peasants complain of a raw deal

He holds the title of Communist party secretary for Huaxi village and he professes to be building a “new Socialist countryside” but Wu Xie’en’s political and economic views are hardly orthodox Marxism.

“Why don’t we give [shares in Huaxi Group Corporation] to people from the surrounding villages? Because we believe in getting rich through our own labour and because if we share everything nobody will have any motivation to do anything,” Mr Wu says.

“Europe’s biggest problem is that the motivation for innovation is not sufficient and social services are too good.”

Mr Wu is clearly not an admirer of the welfare state or traditional socialist ideals, at least when it comes to anyone outside the core of 2,100 villager shareholders in Huaxi Group Corporation. Those villagers have profited handsomely from Huaxi’s extraordinary development during the past 30 years.

But for others, such as Liu Jianguo, 47, whose village was swallowed by Huaxi about a decade ago, the experience has been more difficult.

Mr Liu and some of his neighbours under Huaxi’s administration have publicly protested in recent years over their second-class status and what they describe as exploitation by the authorities.

An unemployed peasant farmer who lives in a sparse villa in greater Huaxi, Mr Liu says he has been intimidated, threatened and was even detained briefly by police for complaining about the deal he got when his home and his farmland were taken over.

He says Huaxi Group pays him about one-eighth of the money it gets from renting out his old farmland to factories and the company, in which he cannot get shares, also made a profit by demolishing his old house.

He received Rmb80,000 in compensation for his old home but was made to pay Rmb300,000 for the villa in which he now lives, which was built by Huaxi Group at a cost of just Rmb160,000.

Mr Liu does not hold a legal title to the villa so he is unable to freely sell it on the market.

“If they have all gotten very rich in [the original Huaxi village] then that’s their business and we don’t begrudge them that,” Mr Liu says.

“But they shouldn’t be able to come and damage our rights and interests in order to make even more money.”