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Inflationary Boom in China Creates a Bubble Real Estate Market

Posted on August 14, 2013

China’s phenomenal construction bubble, driven by local governments that must keep their economies growing, no matter what the costs, and funded largely by state-owned megabanks, has led to an equally phenomenal misallocation of capital, overbuilding, waste, ghost cities, empty shopping malls, and recently: an epidemic of shuttered luxury department stores.

The ghost cities and dead malls have been documented in riveting photos or videos, such as CBS’s 60 Minutes. “If the bubbles are not controlled, the result will be catastrophic,” Wang Shi, chairman of China Vanke, the largest residential property developer, had warned a while back.

They aren’t “controlled.” And some are already popping. In retail land, for example.

Overall retail sales remain strong. In July, they rose 13.2% year over year. Online retail sales jumped 67.5% in 2012, accounting for 6% of total retail sales. They pressure brick-and-mortar retailers, particularly department stores. One of the culprits: apparel. The department store staple has become a very popular item for online retailers. Department stores as a whole booked average sales growth of 16.5% in the period of 2006-2011, but in 2012, sales rose “only” 8.9%.

Yet, they continued to sprout like mushrooms, often side by side, with exactly the same products on their shelves, a homogenized bunch, with nothing else to fight over than price. Hence ferocious price wars. Shopping malls, which are also sprouting like mushrooms, are syphoning off customers. Department stores have few defenses in this shifting retail environment. Most of them are new, or relatively new, and have not yet been able to create a loyal customer base.

At the same time, costs are soaring. Wages, utilities, everything. Rents for large outlets jumped 21% in 2012 nationwide, according to the Commerce Ministry.

Consequences? In Shenyang, a city of 8 million people in northeast China, the Chinese department store chain New-Mart closed a store on August 1, a couple of months after its next-door neighbor, the Japanese department store Isetan, had shuttered its doors, the Asahi Shimbun reported. There are about 10 department stores in that area of town. In the city overall, floor space of department stores, including those under construction, has now reached 4 million square meters – more than four times the floor space of large department stores in shopping megalopolis Tokyo. Department stores have also shut down in Beijing, Shanghai, Chengdu (a major store closed in July after its rent had quintupled!), and other cities.

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