Plumbing China’s Real Estate Puzzle Box

Fast-changing China presents an intricate puzzle box of real estate challenges. Here are some of the big issues, derived from Site Selection research and interviews:

Corruption: Hong Kong scorns it. C.Y. Leung, the No. 2 man in Hong Kong’s provisional government, pointedly suggests, “Anyone seeing corruption should report it immediately to the Hong Kong Independent Commission Against Corruption.”
But China’s corruption potential is sky-high (though perhaps exaggerated). Establish guanxi (the right contacts), be patient, and don’t deal with big-promising bag men, insiders say.

Visas: A doomsayers’ bust. Beijing liberalized policy, particularly on China access. Those with pre-Jul. 1 visa-free Hong Kong access kept it. “PLA troops are at the border to make sure illegal immigrants don’t come in, not to keep people out,” says C.Y. Leung & Co.’s Richard Leider.

Currencies: The official line: one country/two currencies, with 50-year with protection for Hong Kong’s dollar, pegged to the U.S. dollar at a 7.8-to-1 rate.

Long term, don’t bet on it. “Market practice won’t allow two fully convertible currencies,” MMS Intl. financial analyst Meryl Phang contends. And China may balk at Washington’s dollar-linked clout: A fifth of Hong Kong’s currency circulates in South China.
As contrasts fade, the scenario will shade toward one country/one system. A currency merger isn’t likely, though, until the early 21st century, Beijing’s target for full convertibility for the mainland renminbi.

Buy vs. lease: Actually, you can only lease. “Buying” a long-term lease limits flexibility, but demonstrates long-term commitment — a major concern given rampant turnover. Plan to span the flexibility-vs.-turnover paradox.

Banking: Hong Kong swims with global financial thoroughbreds. But China’s banks demand used-car-lot caution: $600 billion in outstanding loans, with estimated bad loans making up a third of GDP. The U.S. savings and loan debacle was only 2 percent of GDP. Scary.

Space standards: Hong Kong landlords rule supreme: Floor plans aren’t often shared before sign-up, and tenants foot fit-out of stripped-bare space — perhaps a godsend if you have specific high-tech requirements; much space lags way behind the techno-curve. Negotiate for what you want, not what’s there.

Use extreme care with mainland space, which can pur?e logic — e.g., sealed buildings with without central air. Bona fide Class A space is scarce. And scrutinize nearby tenants’ space.

Political stability: Politics, schmolitics. Economic symbiosis will drive outcomes, provoking everybody-make-nice predictability: Hong Kong adds 21 percent to China’s economy; and if China blows it, it can forget Taiwan, worth 10 Hong Kongs in “reunify-mother-China” doctrine. The last Communist power wants to come in from the cold to international respectability’s warm glow. Adam Smith over Mao on points.

Legal protection: China’s pre-privatization system offers anorexic cover. But Hong Kong’s esteemed, bewigged legal order is China’s lifeline for shifting capital. Cut it, and investment, trade and China’s economy wither. Moreover, many mainland firms are entrenched in Hong Kong. “Money is a coward,” goes one of China’s oldest proverbs.

Manufacturing sites: You can locate in Hong Kong’s very limited space, which skill requirements and intellectual property rights may dictate.

Choose carefully among China’s ubiquitous potential plant sites. Environmental disasters are rampant. The government has also arbitrarily scattered much heavy industry; goods must be shipped cross-country over backward infrastructure. Connect your product distribution dots. Smart cowardly money beats up gullible cowardly money.