Beijing's first shopping mall and the largest in China to-date Golden Resources Shopping Mall is ready for its opening in October.

Though officials from the Golden Resources Group, acting as both developer and operator of the massive commercial real estate project, said they were confident about the future prosperity of the mall, insiders worry it may follow in the steps of other shopping malls in China, which are mainly turning in poor performances at present.

However, despite gloomy outlooks for already existing malls, there are many large shopping malls under construction around China and developers are actively lobbying local governments to support designs for mall construction.

The phenomenon has been called "mall mania" by some experts.

Mall mania

So far, the mania is spreading across the nation, as increasing numbers of large and fashionable shopping malls are being built and local governments are offering various encouraging policies to support mall developers.

The prospects seem rosy. However, there are problems. How much bank money is being devoured by mall mania?

The majority of huge investment in these gigantic projects depend on bank loans. In other words, banks are shouldering the high risks, said Chen Jianming, general manager of Oriental 3invest Consulting Co Ltd, a property design and consulting company.

Although no official national statistics on mall construction investment are available, it is generally believed in the banking industry that construction expenses for big malls in the planning stages or under construction at the end of 2003 exceeded 200 billion yuan (US$24 billion), and at least 60 percent of that funding came from banks.

A common formula used by developers is: Buy the land use rights from local governments at preferential prices, borrow the money for construction from banks by using the deeds as collateral, and when the malls are completed, mortgage the estates to get cash flow to finance daily operations.

"Developers sometimes only need less than 10 percent of the overall investment to buy the land use right in the initial phase, and loan approval can be very smooth with intervention by local governments," said Chen.

According to the experiences of foreign mall investors, who developed commercial models in the United States and the European Union countries from the 1950s onwards, it takes more than 10 years to get back the overall investment, if the malls operate well.

"You can imagine, if many shopping malls mushroom in China, how large the fund will be and how long it will take for the money borrowed from banks to be repaid," Chen said.

Furthermore, duplicated construction may result in uncompleted building, unethical competition or poor performance of competitors, which will lead to a large amount of non-performing loans and damage the nation's fragile finance system.

Rough statistics show that, by the end of last year, there were around 300 large shopping centers, including shopping malls, in China, an increase of 100 from 2002, while the figure rose to 400 in April.

In line with Beijing's 10th Five-Year (2001-05) Development Plan, four malls are to be established in the downtown area.

But, apart from a few abortive mall projects because of fund shortages, 10 commercial giants are under construction in the capital city at the moment.

Mall construction in Shanghai is more "prosperous," as 13 malls with a combined business area of 970,000 square meters are in operation, while 15 and 19 are in construction and design stages respectively, whose total business areas will exceed 1.6 million square meters and 2.4 million square meters, say sources from the Shanghai Commercial Information Center.

"Actually, malls in operation are all lingering in worsening conditions," said an official from the center, who declined to be named.

He said at Chai Tai Square in Shanghai, the first shopping mall in the city, one-third of the booths were idle and the mall has been operating at a loss since its opening.

In Chongqing, a municipality in Southwest China with a population of more than 30 million, five large shopping malls are to be opened soon.

"Even in some small and medium-sized cities, such as Yixing and Jiayi, there are signs of mall construction mania," said Zhang Shuping, vice-president with the China General Chamber of Commerce.

Stimulus for mall fever

Why have so many projects been launched almost at the same time and why are they almost excessively dependent on bank credit?

It is partly due to the developers' tactics of using mall projects to obtain money from banks. Meanwhile, local governments' stimulation of the sector also cannot be ignored.

"We can attribute the local governments' enthusiasm for mall development to their desire to speed up construction and cultivate commerce, but, to some extent, the pursuit of political achievements by officials plays an important role," said Zhang.

The local authorities' short-sighted attitude reflects some fundamental problems with China's perennial official assessment system which is almost solely concerned with economic indicators in officials' short terms in office.

Reining in mall mania

Experts' worry and media reports on signs of overheated investment in mall construction prompted Premier Wen Jiabao to personally order a thorough investigation of the situation in late February.

The China Banking Regulatory Commission (CBRC), the Ministry of Commerce, the National Reform and Development Commission and Ministry of Construction are jointly conducting the investigation nationwide.

To increase efficiency, CBRC focused on the situation of banking loans for mall projects in seven key cities: Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu, Chongqing and Wuhan.

The Ministry of Commerce has sped up its general survey on large commercial centers and added capital resources to the survey questionnaire.

As one step to addressing this problem, the ministry is planning a set of rules governing the commercial layout of cities. It is considering whether to introduce public hearings before the construction of mega-stores.

The ministry has asked cities to submit commercial layout plans which focus on the opening of mega-stores for review, but the move does not have the legal impact of rules.

Meanwhile, the State Council, the nation's cabinet, dispatched 10 teams to 20 provinces and municipalities to carry out investigations on fixed-assets investment.

In late April, large malls were found on the National Reform and Development Commission's list of "overheated" industries alongside steel, cement and electrolytic aluminium. The China Banking Regulatory Commission also warned State bank presidents the increase in credit loans for fixed-asset investment was "abnormally high."

Faced with thorough investigation focusing on the fund resources, mall developers are apprehensive, thinking mall fever implies developer groups must be washed up.

To the contrary, some are unperturbed about their robust funds support and rich experiences in large shopping center operations.

Cai Shanxun, vice-president of Golden Resources Group, the sole developer of Beijing Golden Resources Shopping Mall, said bank loans for their project are estimated at 1 billion yuan (US$120 million), compared with total investment of over 5 billion yuan (US$600 million).

"In addition to our capital strength, we prefer to use relatively low rental fees to attract more retailers, which may guarantee stable cash flow for our mall and keep it a sound and healthy operation," Cai said.

So far, all the booths in the Golden Resources Shopping Mall have been rented out, as 40 tenants, including New Lufthansa, Guiyou, Christian Dior, Nike and Admire, have signed 20-year contracts with the group.

Yu Lai, chairman of the board of Guangzhou Tianhe City Square, the first and the largest shopping mall in the South China city, appreciates the central government's move.

"Consolidation of the sector is necessary and far-sighted, as overheated development and overuse of administrative leverage have made mall construction a reckless and risky game," Yu said.

"Moreover, mall fever entails high risks for the commercial banks, which may not only deal a blow to the finance system but also bring misadventure to the shopping mall sector."

Experts and insiders support the central government's decision to burst the mall bubble, but they point out that commercial estate and the mall projects should be differentiated.

"Development of a commercial real estate project, or shopping center, aims at selling and property, and the buyers will be responsible for the business operation by themselves," Guo Zengli, secretary-general with the Shopping Center Commission of the China General Chamber of Commerce.

A mall project is an integration of real estate development and commercial business operations, in other words, the developer and the operator are one company.

"A mall developer should not sell property to retailers, but must formulate the general scheme and select suitable tenants in line with the scheme," said Guo.

Mall mania reflects that a general commercial layout design system has not yet been established in China and efficient and convenient information exchange and macro investment guidance mechanisms should be highlighted, Guo said.

(China Daily June 15, 2004)