Flurry of Chinese plans to build aviation hubs raises concern

Flurry of Chinese plans to build aviation hubs raises concern

5:32pm EDT

BEIJING (Reuters) – More than 50 cities in China have answered Beijing’s call for cleaner economic growth with plans for aviation hubs, airports clustered with industrial zones. The problem is that they may not all be needed. The cities hope the projects will attract investment in areas like logistics, high-technology and finance – the sort of businesses Beijing is encouraging to move the economy away from the smoke-stack industry that has driven rapid growth for years. But critics argue the projects will exacerbate a problem China is trying to stamp out – debt-fuelled construction that local authorities have used for years to boost their local economies.After years of massive investment, Beijing is trying to turn the economy more towards consumption-led growth, worried that continued rapid investment in factories and infrastructure will be redundant as growth slows.

Such “plans often start high key, but end poorly,” said government researcher Wang Jun, who visited an airport project last month.

“It is not necessarily a good thing for the whole nation, as so much investment will often lead to overcapacity and increase local government debts,” Wang, who works at the China Centre for International Economic Exchanges, a government think tank, said.

“There are already signs of redundant investment, as some regions in China have too many airports, which are not in full operation.”

Developing an aviation hub is more than simply building an airport, said Wang Xiaohua, a senior consultant specialising in the aviation industry at Kent Ridge Consulting in southern Fujian province.

It first of all requires minimum annual passenger flows of 10 million and cargo volume of 200,000 tons, she said. Only Beijing, Shanghai, Guangzhou, Chengdu, Shenzhen and Kunming met that criteria at the end of 2012.

“It’s hot. Many cities are crazy about the idea,” said Wang, who has advised cities in northern Inner Mongolia province and south-western Yunnan province on aviation-hub projects.

To be sure, China will need more airports as the economy grows. China has 19 airports per million square kilometres versus 57 in the United States.

But profits are elusive. Of China’s 183 airports, 143 are loss making, data from the Civil Aviation Administration of China (CAAC) shows. That suggests that more than 60 of the 80 new airports envisioned in China’s economic masterplan for 2011-2015 will end up in the red.

A third of all passengers and half of all cargo go through just three aviation hubs – Beijing, Shanghai and Guangzhou, CAAC figures show.

Illustrating how fierce competition is, Shijiazhuang Zhengding International Airport, less than 300 km (190 miles) from Beijing, will reimburse the cost of people’s travel to the airport from eight cities, including the capital, in order to attract passengers following a 4 billion-yuan ($645 million) expansion.

Such a tough business landscape has not put off Zhengzhou, a city 650 km (400 miles) south of Beijing, which aims to expand trade at its existing airport 10 fold to $200 billion by 2025 by adding three more runways.

“We will work to reduce logistics cost from Zhengzhou to eastern, western and central part of China, and also build highways to connect the airport to the rest of China,” said Xie Fuzhan, governor of China’s most populous Henan province, where Zhengzhou is the capital.

But Yong Hu, chief China representative of Global Express Association, whose members include delivery companies Deutsche Post’s DHL, (DPWGn.DE: QuoteProfileResearchStock Buzz), FedEx Corp (FDX.N:QuoteProfileResearchStock Buzz), TNT Express (TNTE.AS: QuoteProfileResearchStock Buzz) and United Parcel Service (UPS.N: QuoteProfileResearchStock Buzz), is not convinced the idea will work.

UPS already services Foxconn (2317.TW: QuoteProfileResearchStock Buzz), Apple Inc’s (AAPL.O:QuoteProfileResearchStock Buzz) main supplier in China and the only major company near the airport.

“Apart from Foxconn, what other big firms are there?” Yong said. Yong visited the airport earlier this year.

Despite Yong’s scepticism about the project’s viability, Zhengzhou’s plan has been endorsed by the central government. Local authorities do not need the stamp of approval from Beijing, but such endorsement gives a city the opportunity to receive financial aid.

Otherwise, they may resort to debt-financing to fund a project. Nearly all the cities planning aviation hubs are eyeing Fortune 500 companies for investment, said consultant Wang.

“Many cities resort to offering free tax and cheap land,” Wang said, which in turn reduces the local government’s ability to service its debts.

Still, airport fever has struck. Among the projects, the northeast coastal city of Dalian is building a 20.9 square kilometre island for a brand new airport, the largest of its kind in the world. Hilly Shennongjia, in central Hubei province, has flattened the tops of five mountains to build its airport.

Li Jiaxiang, head of regulator CAAC, suggested at an industry forum in May that building an airport was a reflection of the economic times:

“In the 80s, people would say ‘if you want to get rich build a road’. Nowadays they say ‘if you want to develop, build an airport’.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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