Why Is China Building A $1.3 Billion Hotel When Entire Cities Are Sitting Empty?

Burj Khalifa

Photo: AP

Earlier this week we saw reports that “Beijing authorities plan to build a “seven-star hotel” modelled after Dubai’s Burj Khalifa — the world’s tallest building — in a $1.3 billion joint project with Saudi Arabia.”Yes, the same building that symbolized Dubai’s $20-plus billion in malinvestments and required a bailout by Abu Dhabi.

In Russian there is an expression: The wise man learns from someone else’s mistakes, the smart man learns from his own, and the stupid one never learns.

 You’d think I’d be putting the Chinese government in the latter category – obviously the Chinese have not learned from Dubai’s mistakes, and they don’t seem to want to learn from their own – empty shopping malls and cities which, based on these Google Earth images, are scattered all over China.

So erecting a $1.3 billion “seven-star hotel,” when Beijing’s office vacancy rate was over 20% just a year ago (I doubt it has changed much, considering how much they’ve built in a year) would appear to be less than smart. Wrong! It is brilliant! 

The report also states, “The Saudi side was expected to foot the entire bill.”  The “Saudi side” will bear the eventual losses. The construction of Burj Khalifa 2.0 is brilliant on so many levels: the Chinese government gets the “Saudi side” to finance its objective of growth and full employment at any cost, the Guinness Book of Records gets another entry with a Chinese name, the Chinese communist propaganda machine has another news story for us all to digest, and a few years from now Burj Khalifa 2.0 will be bleeding money and the Chinese government will bail out the “Saudi side” at 20 cents on the dollar. 

Brilliant! brilliant! brilliant!

I wrote about a year ago in Dubai’s Shot to The Moon, an article that is as relevant today as it was then.

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo.  He is the author of  upcoming The Little Book of Sideways Markets (Wiley, December 2010).  To receive Vitaliy’s future articles by email, click here.

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