Earlier this year, when cracks started to appear in the tunnels of Guangzhou's brand new Yn 13bn metro line, many residents of Guangdong's capital city assumed shoddy work was to blame. For several days, local newspapers and television stations lambasted project managers and. their contractors for negligence. Even People's Daily, the official mouthpiece of the Chinese Communist Party, asked whether the subway cracks were yet another case of `bean-curd dregs' construction.
Under increasing public pressure, Guangzhou Metro Corporation's general manager Lu Guanglin hastily called a press conference' to announce that the fissures presented no danger to the subway system or to the public. The phenomenon, he said, was as much a result of the city's muddy topography as it was a failure of construction quality. Besides, Lu added, the area had been made unstable by the pile-driving of foundations for a 200,000 sq metre commercial and residential project that the Hong Kong-based Henderson China Holdings was building overhead.
Financial distress
It has been that kind of year for Guangzhou – a potent blend of difficulties, uncertainty and accusations. From the financial distress of the municipality's two principal fund-raising companies, Guangzhou International Trust & Investment Corporation and Yue Xiu Enterprises (Holdings), to a local economy weakened by slowing demand for goods and services, Guangzhou has found itself in the unaccustomed position of having to battle to stay on top. Even the city's formidable foreign trade economy lies in tatters, yet another casualty of the regional economic crisis.
For this city of 6.66m people, which during the early years of the reform era thrived on brazen self-confidence and freewheeling deal-making, it has all come as something of a shock. Cleaning up the mess is not going to be an easy task.
In many ways, Guangzhou is a victim of its own success. Starting in 1978 and continuing almost without interruption over the following two decades, China's Ram City experienced unparalleled economic growth. The zenith came in 1992, following Deng Xiaoping's tour of southern China. The city's GDP almost doubled from Yn51bn to Yn97.62bn in the three years between 1992 and 1994.
"Nobody could have figured that change would have taken place so quickly," comments Mr. Lu Jinkui, Guangzhou's state enterprise reform chief. "Nobody knew that Deng Xiaoping's remarks would have propelled reform so quickly."
Waste of resources
The changes created a paradox for government leaders. State controls were receding rapidly, but state planning was not. Complicating matters was the city's easy access to cheap domestic and international credit. The outcome, predictably enough, was a phenomenal waste of resources.
No single investment better captures the extent of the city's miscalculation than the Guangzhou Ethylene project, a Yn8.37bn (US$1bn) municipally-funded petrochemicals plant that was forced to close within three months of opening in September 1997. The plant's designated capacity, determined at the start of the decade at 150,000 tonnes a year, made it structurally impossible for it to break even, let alone turn a profit. Annual losses were projected to run at Yn800m for each year the plant operated.
The ethylene facility was designed at a time when Guangzhou's household appliance manufacturing sector was rapidly increasing its capacity, says Lu. Plastics were in short supply and prices for down-stream oil products were higher. "The central government controlled most of these [resources] and local governments needed to figure out ways to get hold of them when we needed them." he explains.
In March, under a sweetheart deal brokered by the State Economics & Trade Commission and State Council under the direction of Premier Zhu Rongji, Guangzhou Petrochemical Complex, a subsidiary of China Petrochemical Corporation, agreed to purchase the plant, assuming Yn5bn in debts. As part of the arrangement, the Guangzhou government agreed to shoulder responsibility for separate liabilities amounting to Yn2.5bn.
Although the outcome has saddled the profitable Guangzhou Petrochemical with dubious assets and a debt burden stretching over several decades, enterprise president Hong Zhiming says there was little choice in the matter: "The ethylene project has state-owned assets and Guangzhou Petrochemical is state-owned too, so we have a responsibility to save it."
Tightening credit
The fiasco also helped turn the spotlight on difficulties at the Guangzhou municipal government's domestic fund-raising and investment arm, Guangzhou International Trust & Investment Corporation (Gzitic), which was the chief offshore financial guarantor for the project. Like its provincial government cousin, Guangdong International Trust & Investment Corporation (Gitic), which in October last year was ordered to close down by the People's Bank of China, Gzitic emerged in the 1980s as a leading Mainland `window company' charged with implementing the government's economic agenda.
Gzitic's political nature is reflected in the company's highly diversified investment portfolio, which claims two dozen wholly-owned subsidiaries and a list of ventures bearing questionable origins and carrying high market risks. These include unsecured loans to outside parties, significant exposure to the property market and direct investments in state companies manufacturing everything from steel, soda ash and plastics to electrical appliances and rubber tires.
Following Gitic's collapse, Gzitic was caught in the same noose of tightening foreign and local bank credit that has jeopardised operations at dozens of similar trust and investment companies throughout the Mainland. By December 1998 the company was informing creditors it was unable to meet repayments on its offshore borrowings. Nearly, a full year of protracted negotiations has followed. According to a restructuring report prepared by the company's financial advisers PricewaterhouseCoopers and published in August, Gzitic holds total liabilities of Yn29.7bn and estimated recoverable assets of Yn6.7bn.
More supportive
The corporation's future remains uncertain. The Guangzhou government, while refusing to grant sovereign backing to the company's liabilities, has been struggling to find an acceptable formula that would allow the company to avoid liquidation. At the end of the summer Gzitic presented a restructuring proposal, pledging cash repayment for 50 percent of its debts over a 10-year period, with the remaining half to be swapped for equity in a new joint venture company, presumed to be a bank. Creditors, however, have greeted the plan with scepticism. Missing from the proposal, they said, was any discussion about the commercial viability of the joint venture company.
Although the city has prevaricated over the fate of its domestic ?window,? it has been far more supportive of its Hong Kong investment arm, Yue Xiu Enterprises. Like Gzitic, Yue Xiu staggered in the wake of Gitic's bankruptcy, unable to find new financing to help service its outstanding bank liabilities of US$714m. However, under a plan released to creditors in September, the Guangzhou government said it would facilitate refinancing of Yue Xiu's debts by handing over to the company three choicecity-held property assets – Guangzhou City Construction & Development Holdings, Dong Fang Hotel Group and holiday resort Mingquanju – worth a combined value of US$870m.
The Guangzhou government, laudably, is also attempting to squeeze a positive outcome from the city's current woes, which have been exacerbated by 24 months of retail price deflation, declining exports and increasing unemployment due to the continued restructuring of state-owned industry. Under Mayor Lin Shusen's banner of "a small change every year, a modest change every three years and a great change by 2010," Guangzhou has embarked on a much-delayed building bonanza aimed at providing city streets with both a workable transportation infrastructure and a metropolitan atmosphere. A key test, municipal leaders say, will be the city's hosting of China's Ninth National Games in 2001.
City image projects
Current priorities, explains Guangzhou Urban Construction Commission's director-general Shao Yunping. include completing the city's 27km ring road, constructing the second 21 km subway line and much needed waste water facilities, and building a new international airport in the city's northern Huadu suburbs. Other important trans-century ?city image' projects include the construction of a grand theatre, a museum, a science and technology hall, and a new sports stadium.
The government announced in 1998 that it was prepared to spend Yn60bn over a four-year period on bankrolling its infrastructure efforts. Outlays during the first six months of 1999 alone reached Yn10.13bn, representing year-on-year growth of 38 percent and helping to fuel the city's first-half GDP growth of 12 percent, to Yn91.24bn.
Guangzhou's credit problems, however, may in the end undermine the city's ability to utilise infrastructure building as an economic growth engine. That situation, ironically enough, arises from Guangzhou's traditional reliance on foreign investment – particularly Hong Kong dollars – to finance municipal road and bridge projects. For example, Hong Kong-based Cheung Kong Infrastructure, together with Hopewell Holdings, is a primary shareholder in the east-to-south section of the city's ring road. Sixty-five percent of the northern section, meanwhile, is held by New World Infrastructure, which also claims a 50 percent stake in three Pearl River bridge crossings that started operations last year.
With Yue Xiu Enterprises facing a debt restructuring package and Gzitic contemplating an uncertain future, foreign corporations and their bankers are scrutinising municipal projects and their guarantees with increased wariness. Certain to he affected will be Yue Xiu's Hong Kong stock exchange-listed subsidiary, GZI Transport, which has invested in city and provincial highway development. GZI Transport announced earlier this year it would raise a further US$65m to help build a 50km expressway linking Guangzhou with its new airport. It already holds a controlling stake in a 20km section that was completed in 1997. Whether those plans proceed or not may depend on the city's ability to resolve some of its historic difficulties.
