Estate bubbles will trap Hainan in another lost decade
A bubble's destiny is to burst. These days, however, there is no signal that the overheating Hainan real estate market has stopped swelling.
A month ago the term on everyone's lips in this South China island was "international tourism," but now it's "real estate speculation."
Chi Fulin, senior director of a Hainan provincial government-affiliated think tank, has been warning about an ominously overheated market ever since the announcement that Hainan was going to be turned into a destination for international tourism. This is putting the local government in a very tense and fast-moving situation, but if the bubble is left to keep growing, Chi's prophecy will be grimly confirmed.
Most people have forgotten that Hainan is theoretically one of four national special economic zones, since it's had 15 years of economic stagnation after the collapse of asset bubbles in the mid-1990s. A series of failed development strategies after the collapse, such as industrialization and attempts to become an international shipping hub, have forced Hainan to re-orientate itself toward the tourism and service market.
Plans to make Hainan an international tourist destination are still just plans. As China's only tropical island, Hainan wants to be China's Hawaii or Florida, or even Las Vegas. Are these really the right models? Hawaii or Florida might be the right examples for Hainan, since both of them, as rich tourist destinations, have booming real estate markets.
A booming real estate market, however, is a result, not an engine, of the development of the tourist industry.
Hawaii, Florida, and Las Vegas experienced totally different development to today's Hainan. The US is still a vast and relatively sparsely populated country. Orlando, Florida, was swampland before Disney World was built in the 1960s. Las Vegas is still surrounded by desert. The most important strategy for the development of Florida and Las Vegas was to attract more people to be local residents.
Through the external economic effects of Disney World and the Las Vegas casinos, people rushed into Orlando and Las Vegas to invest assets. It is a beneficial economic circle where high quality service industries support the booming real estate market.
Hainan's 8 million people are closer to the situation of Mexico and other Central American countries which feature a vast gulf between a wealthy aristocracy, rich tourists, and vast numbers of poor people.
Wei Liucheng, secretary of the provincial CPC committee in Hainan, said that "one of the purposes of the international tourism island project is to enrich local residents."
But we've seen no sign of the detailed projects that Hainan will need to distinguish itself from other tourism destinations. Every tropical tourist spot has sun, sand, and luxury resorts, so why should tourists chose Hainan over Thailand or Indonesia? And how can we deal with the real estate speculation as Hainan's economy grows?
The development of Hainan, however, is putting the cart before the horse right now. The government released the project too early, since it is still only an outline.
The overheating real estate market will not drive the Hainan tourism industry. With all kinds of attention and money pouring into the island, bubbles are a real problem. Hainan may be drawn inevitably into a boom and bust cycle.
Hainan will probably become a playground of the rich from the Chinese mainland. But local poor residents will end up being squeezed out, forced into rock-bottom jobs as servants to the rich.
The high price of real estate will trap Hainan into a Catch-22 situation: Any policy will either push the price increases or burst the bubble, and the overheating market will drive real investors away, since any new project will face a terrible cost.
A booming real estate market can never be an engine for economic development. It is, and only is, the result of booming economic development.
Unfortunately, plans to become an international tourist destination are nowhere near reality.
If the Hainan government cannot survive the current asset speculations, the island will see another 10 lost years.