Aspirational Hazard

Beijing’s golden resources mall ought to be a shopper’s paradise. Built on the city’s outskirts in 2004, the Art Deco-style center boasts a staggering 6 million sq. ft. (560,000 sq m) of retail space, making it the world’s second largest mall, 30% bigger than Minnesota’s famed Mall of America, once the largest. Golden Resources accommodates more than 1,000 shops, dozens of restaurants, 230 escalators and an ice-skating rink. On its five floors, you can buy everything from fur coats to exercise equipment to pet supplies.

There’s something missing, though: shoppers. On a recent Monday afternoon, despite blazing temperatures outside, the only crowd to be found in the air-conditioned expanse of Golden Resources is a gaggle of shopgirls on their breaks. The few customers loitering around appear to be just window-shopping. Nearly half of the mall’s original restaurants shut down in the first year after opening. The parking garage’s 10,000 spaces host a handful of cars. Xiao Chen, a shoe salesman, states the obvious: business stinks. “Monthly sales here are not as much as a weekly sales in other stores located in those shopping centers downtown,” Xiao says. “But what can we do? No traffic.”

Golden Resources’ barren parquets are less the exception than the rule in China these days. Rampant overdevelopment of retail space and too-optimistic expectations about the spending power of the country’s growing middle class have produced a plethora of gui gouwu zhongxin (ghost malls) in the nation’s metropolises—megacenters like Golden Resources that are struggling to attract shops and consumers. Although retail sales throughout China have been growing at 12% a year and in 2006 totaled $800 billion, during China’s recent construction boom far more retail space has been added than the market can absorb. More than 500 new malls have been built since 2002 and at least 100 more are expected to open this year, adding a total of about 320 million sq. ft. (30 million sq m) of new retail space—16 times Manhattan’s total. “It’s a huge supply in any market,” says Morgan Parker, the Hong Kong-based president of Taubman Asia, a subsidiary of U.S. real estate developer Taubman Centers.

China, home of the Great Wall, is a crowded country where bigger is usually viewed as better, so it’s no surprise that retail-property developers seem to be trying to outdo each other with giant construction projects. The mainland already hosts the world’s largest shopping center, the 7 million sq. ft. (650,000 sq m) South China Mall in the southern manufacturing city of Dongguan. Like Golden Resources, South China Mall suffers from a dearth of stores and shoppers. Yet more megamalls are on the way. By 2010, China expects to be home to seven of the world’s 10 largest shopping centers.

What developers didn’t count on, though, was stingy consumers. Despite the country’s rapid economic gains, the average citizen has little to spend on frills. Per capita annual income remains below $2,000. The average household saves more than 25% of its pay, in contrast to Americans, who in recent years have tended to spend more than they make. Just 4% of Chinese have credit cards, and purchases using plastic average less than $1,000 a year per cardholder. By Western standards, Chinese consumers simply have not yet begun to spend. As a result, “less than a handful of these new [malls] will meet expectations,” Parker says. “China’s most important cities are literally littered with spaces that are dark and underperforming.” Statistics detailing nationwide vacancy rates for retail centers are hard to find, but in the economic powerhouses of Beijing and Shanghai, rates hover around 8%, according to real estate firm Jones Lang LaSalle. That’s twice as high as rates in the strongest U.S. markets; in Singapore, less than 2% of retail space lacks tenants.

China’s mall woes stem from a bubble-forming combination of inexperience, exuberance and excess capital. Local mall developers are often first-generation capitalists looking to reinvest riches reaped from the booming residential sector, Parker says, and many lack expertise in running successful commercial projects. Local governments push through new mall projects because they hope to enhance infrastructure and increase commerce. Meanwhile bankers, eager to expand their loan portfolios, become too-willing accomplices to overbuilding. Parker calls it a recipe for “the perfect storm.” Banks in a mature market “provide the sanity check to a developer, but in China, there are no checks and balances,” he says. “Just because you can build doesn’t mean you should.”

None of the Chinese developers contacted by TIME for this story would agree to an interview. But real estate consultants and market observers say developers too frequently adopt a “build it and they will come” mind-set. Feasibility reports or market surveys are rare. Plans often stress sheer size over appropriate locations. “A lot of [China’s] wealth remains concentrated in the metropolitan bases, such as Beijing, Shanghai and Shenzhen,” says Arthur Kroeber, director of the market-research firm Dragonomics. “But that doesn’t mean that those areas can support an infinite number of malls.”

Moreover, the business model followed by many Chinese developers is geared for making a quick buck, not for long-term profits. In the West, many developers build, own and manage their malls. In China, retail projects are “condominium-ized.” That means the developer builds the space and then sells off individual shops to retailers. Because this strategy offers almost instant profits for investors, builders have little incentive to pick tenants carefully—and no incentive to ensure the facility is properly managed for the long haul. “If there’s any empty stall when it comes close to time to open, all planning goes out the window,” says David Hand, head of Jones Lang LaSalle’s Beijing office, who estimates 95% of malls opened in China over the next five years will fail.

There’s also scant attention to populating malls with the right mix of shops. Alan Liu, Shanghai-based managing director of Colliers International’s North Asia practice, says most try to attract upscale brands. “Everyone thinks they need Prada, Gucci, Fendi in every project, even smaller ones,” Liu says. “Well, the vast majority of customers won’t spend their money on upmarket products like that.” Indeed, at Beijing’s Shin Kong Place recently, office worker Zhang Ting, 28, called the center’s many high-end international brands “prohibitively expensive.” While hundreds of local office workers like Zhang crowded the downtown mall’s basement food court, few ventured upstairs to buy anything. The mall was so quiet that the whirring of escalators could be heard. “Business has been slow since the mall opened in April,” says Zhang Zihua, a saleswoman at menswear shop Notting Hill. “Most of the big shopping malls in Beijing are like this,” says Zhang’s fellow shopgirl Lu Miao. “Have you seen a shopping mall filled with customers?”

In fact, there are success stories. Shanghai’s Raffles City and the MIXc, a mall in the city of Shenzhen, which borders Hong Kong, have good locations and a profitable tenant mix, says Bryn Davies, executive director of retail services for CB Richard Ellis in Greater China. And, despite the glut of space, the mainland’s retail sector remains in bull-market mode. Economists expect as the country’s consumer culture continues to develop, demand will continue to increase. China today accounts for 5% of global consumption, but investment bank Credit Suisse predicts that number will rise to 14% by 2015, making the country the world’s second largest buyer of consumer goods behind the U.S. That potential will lure more and more foreign retailers and investors, Hand says. For example, CapitaLand, a Singapore-based real estate investment company, aims to add 100 Chinese malls to its portfolio, which would more than double its current assets, according to the company’s annual report. “Foreign firms will pass along good management practices and experience to local developers,” Hand says.

But much of this optimism rests on unknowns, such as whether China’s economy can keep up its annual double-digit growth rate. David Simon, president of Simon Property, the U.S.’s largest public real estate company, may have summed up the market best during a meeting with analysts in February: “China is lots of ups and downs,” Simon said. His company has four malls under construction on the mainland and has plans to build another eight. But after that, Simon said he foresees “no further activity in China until we get some more experience under our belt.”

Meanwhile, retailers at Golden Resources say they have little choice but to hang on in hopes that customers will eventually discover the megamall. Xiao, the shoe salesman, is upbeat. “The store manager always tells us we should persevere, it will be getting better,” he says. It’s hard to imagine things getting worse. As a mall security guard dryly observes: “On weekdays we have so few cars, this must be the best parking lot in Beijing.” Unfortunately for the builders, it’s a parking lot attached to 6 million sq. ft. of unloved retail space.