22 October 2019

White Elephants: Even China is Susceptible

White elephant - a term used to refer to an outlandishly expensive project that was expected to produce tremendous socio-economic benefits, but ended up effectively as a failure, generating nowhere near the predicted amount of social nor economic benefit.

The term has its origins in the sacred white elephants that were kept as pets by royalty in Laos. These so-called sacred white elephants cost a fortune to maintain but provided no practical use or benefit to the owner.

China has had its fair share of white elephant projects, both on home soil, and outside of its own borders. This comes as no surprise: a nation that uses construction projects to stabilize and grow their economy is bound to get it wrong some of the time.

A standout example of a Chinese white elephant project, is the Addis Ababa-Djibouti railway line, connecting the capital city of Ethiopia, to Ethiopia's neighboring country, Djibouti. Inaugurated in January 2018, it was expected to be the shining crown of the Ethiopian transportation system but instead has been plagued by problems from inception.

Electricity shortages, poor management, and adverse incidents, including collisions with cattle, have led to far lower than expected usage, forcing Chinese state-owned insurer Sinosure, to write off $1 billion in losses on the project.

An even bigger white elephant, this time inside of China’s own borders, was the New South China Mall, in Dongguan. Previously dubbed the South China Mall, it’s opening in 2005 was followed by over a decade of near desertion. The owners expected shoppers to number in excess of 100,000 per day and for the mall to be a pinnacle of commerce, trade, and entertainment in Dongguan.

Instead, the mall opened with less than 20% occupancy and the majority of the 1016 pre-leasing tenant agreements falling through. The following years saw no improvements in tenant occupancy nor shopper numbers – all that followed the opening was lease cancellations and the early signs of dereliction, resulting in the mall being nicknamed the ‘Ghost Mall’.

Although there have been errors made in the past, particularly in the due diligence phase of projects to ensure their economic viability and net social benefit, the Chinese have demonstrated the ability to observe and correct.

Proving that not all white elephants are destined to remain as such, particularly in the rapidly expanding Chinese economy, The South China Mall has since been re-branded as the New South China Mall and was refurbished and re-launched not once, but twice. Although it still hasn't reached the levels of occupancy and trade that were first predicted upon its opening in 2005, it has seen an increase in both shoppers and tenants.

This turnaround was achieved through an adjustment of the mall’s strategic focus and target market, to more middle-income, rather than high-income customers. This is more suited for those living in the industrial city of Dongguan and the ghost mall is beginning to show signs of life for the first time since it was built.

As the Chinese leadership usually does, they have learned from errors of the past and self-adjusted. More caution is now being exhibited when it comes to the undertaking of large construction projects. President Xi Jinping has stated that the time of building "vanity projects" has now come to an end and they will be making way for projects that have a proven economic and social benefit.

Beijing should “pay more attention to how projects connect with the development and basic interests of relevant countries.” - The People's Daily, mouthpiece of the CCP.

This renewed investment prudence, however, is by no means a signal that infrastructure investment is under threat of being throttled. To-date this year, the National Development and Reform Commission has green-lighted $107.8 billion worth of infrastructure projects, doubling the size of their construction pipeline from the same time last year. This is all part and parcel of Beijing’s reversion to their tried and tested method of economic growth and stabilization, and they show no signs of pulling back.