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China's Debt Soars With $160B Olympic Outlay MoneyNews
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Beijing is getting ready for the 2008 Summer Olympic games – and as a result of those preparations a fresh batch of millionaires is being created within the local construction industry. Chinese officials are spending $160 billion on new construction that, as Bloomberg News points out, will "create the equivalent of three Manhattans to the city skyline." That includes a "Chinese Wall Street" on the city's west side, and in the area around Tiananmen Square, right behind the 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 being constructed atop an artificial lake.
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"Beijingers have nicknamed it the Egg on the Water," says Bloomberg. Big-name architects like Chinese native I.M Pei and Rem Koolhas of the Netherlands have been brought in to design some of the new structures. "Across the city, work is underway 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," says Bloomberg. "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. All told, the new architecture will take up one billion square feet of new office space." But all that building has generated some concern among financial industry observers.
Jack Rodman is a distressed-property specialist and a partner at Ernst & Young LLP, the second-biggest U.S. accounting firm. He tells Bloomberg: "The scale of development here is unprecedented anywhere in the world. 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." And another Bloomberg source, James Quille, CEO of Bermuda-based Macquarie Global Property Advisors Ltgd., tells the news service that much of the new space is below quality standards and doesn't even meet the specifications set by international companies moving to Beijing. "There's a lot of stock being developed that will be obsolete before it is completed," Quille says. Even so, Quille himself has earmarked $600 million for office acquisitions in Beijing. That probably had something to do with the International Olympic Committee's prediction that the 2008 Summer Games could earn $224 million in profits and generate $1.87 billion from business sponsors across the globe. "Corporate sponsors for the games are attracted by the possibility of advertising to China's population of 1.3 billion," says Bloomberg. "That's 100 times the number of people in Greece, which hosted the last Summer Olympics, in 2004." Still, debt issues cloud the Olympic landscape in Beijing. Bloomberg cites Moody's Investors Service, which says that the Chinese government has spent $432 billion (or 23% of its gross domestic product last year) bailing out the country's debt-plagued banks. In the first three months of 2005, the four largest banks in China reported that 10% of their total property loans were "problem" loans. "Rodman says he's advising his clients to sell off their bad loans soon," says Bloomberg. "Quick action, he says, could help them recover as much as 50 to 60 cents on the dollar rather than as little as 30 to 40 cents if they delay and the buildings begin to age." Major lenders facing substantial liability in Beijing as a result of new construction loans include Allianz AG, American Express, Bank of America, Goldman Sachs Group, HSBC Holdings Plc, Merrill Lynch and Royal Bank of Scotland Group Plc.
Overseas lenders 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. 2. U.S. Budget Deficit to Hit $337B According to a report today from the Congressional Budget Office, the U.S. budgetary gap will hit an astounding $337 billion for this fiscal year. That is less than the Bush administration's prediction that the deficit would reach $400 billion, or 3.1% of the country's GDP. According to one report, the agency anticipates U.S. GDP rising by 3.6% on the year. And the Bush administration has promised to slash the deficit considerably. However, the CBO report says that "because of the statutory rules that govern baseline projections, CBO's current estimates omit a significant amount of spending that is likely to occur later this year.
"In particular, additional funding will probably be necessary in 2006 to pay for military activities in Iraq and Afghanistan and for flood insurance claims. If that funding is provided, CBO expects that outlays will grow by another $20 billion to $25 billion this year, resulting in a deficit in the vicinity of $360 billion, or about 2.8 percent of GDP." Editor's Note:
3. Copper Prices Dive on Home Slowdown Concerns The price of copper took a dive from its record high as the markets reacted to worries of a slowdown in new-home construction and overall economic growth. And this could be the end of a five-year housing boom that spurred the doubling of copper prices in the first place, according to Bloomberg News, which cites U.S. Labor Department figures that show U.S. construction jobs are down for the first time since February 2004. In fact, all the metals are down a little bit as of today.
"Copper futures for March delivery fell 0.15 cents, 0.1%, to $2.202 a pound at 9:41 a.m. on the Comex division of the New York Mercantile Exchange, after earlier reaching a record $2.2175," Bloomberg reported. Copper has spiked by 53% over the last year in response to production shortages, the result of overwhelming global demand. Editor's Note:
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