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The tropical Hainan Island in southern China has traditionally been a haven for dreamers. Its pristine beaches, pure air, and moderate climate have drawn numerous migrants from the northern regions.
However, these aspirations have occasionally morphed into nightmares. In 1993, Hainan witnessed China’s first modern property crisis, initiated by a construction boom meant to accommodate the influx of new residents. As real estate prices plummeted, 95% of developers in Haikou faced collapse after Beijing raised interest rates.
Although the current property crisis in China is not primarily centered in Hainan, signs of a national trend and obstacles for policymakers are evident. Property prices across 25 major cities in China have declined by 25 to 30 percent from their peak in July 2021, as reported by the Beike Research Institute and cited by Nomura. Additionally, there is a surplus of incomplete pre-sold homes, especially in smaller cities where funding has dried up. Nomura economists estimate that around 20 million pre-sold homes have not been delivered on schedule due to a funding shortfall that amounts to approximately Rmb3 trillion.
Traveling through Hainan brings these statistics to life. The island is dotted with unfinished construction projects initiated during a period when the country’s growth seemed unstoppable. Among the most notable is Ocean Flower Island, an artificial island shaped like an orchid in Danzhou City, envisioned as a flagship project by the defunct property developer Evergrande. The ambitious project was meant to feature a theme park, shopping complex, wedding venue, luxury villas, and a “fairytale world,” with initial investment estimates reaching Rmb160 billion ($22 billion). Today, the sprawling 800-hectare project is far from completion, and during my visit, there was merely a steady but sparse flow of visitors.
The project reflects the extreme excesses of China’s prior economic exuberance and serves as a cautionary tale as Beijing attempts to revive the property market through stimulus initiatives. During my visit to the resort last month, a typhoon had recently caused chaos in the northern part of Hainan. Even without the adverse weather effects, the park appeared to have limited visitor engagement. The orchid-shaped wedding venue was enveloped in dust, the film studio seemed dormant, and the fairytale world remained incomplete. Staff at empty stores looked astonished when a visitor appeared.
Evergrande broke ground on the resort in 2012. Danzhou officials, wishing to transform the city into a tourist destination to rival Sanya in the south, hastily approved the scheme, ignoring environmental and construction regulations by allowing sand dredged from the sea to be used for the project. Signs declaring “Consumer Confidence in Hainan” scattered around the resort echo the initial optimism.
The project became entangled in a wider anti-corruption crackdown in China. Zhang Qi, the senior politician in Hainan who endorsed the project, was convicted of corruption in 2020, which led to authorities ordering parts of the project to be demolished two years later. In March, regulators fined Evergrande’s founder Hui Ka Yan and permanently barred him from participating in the securities market after alleging he and the company inflated revenues by nearly $80 billion over 2019 and 2020. Recently, Reuters reported that he has been transferred to a special detention facility in Shenzhen.
While the theme park remains operational, much of the development has been left to decay, including a series of luxury villas where workers abandoned tools, hard hats, and paint barrels in haste.
China has undergone significant changes since the inception of Ocean Flower Island. It seems unfathomable that today, one of the nation’s wealthiest individuals could orchestrate such a lavish project without encountering regulatory hurdles.
The current challenge lies in restoring confidence in the property market while reducing economic dependence on property. Hainan epitomizes both of these dilemmas.
Last week, Beijing initiated a series of stimulus measures, with economists anticipating additional steps, possibly becoming a builder of last resort for unfinished projects. Meanwhile, Hainan is striving to diminish its reliance on property, launching visa-free travel initiatives and promoting itself as a duty-free shopping paradise and a center for medical tourism. As China prepares to implement stimulus measures to enhance consumption and property markets, Hainan will again be closely observed — this time as a barometer for any economic recovery.