China's Debt Bomb

Half an hour from Beijing, the potential ground zero of the Chinese real estate meltdown.

TIANJIN, China — The Binhai New Area in the municipality of Tianjin looks like a cross between a desolate stretch of the New Jersey Turnpike and the bottom of the ocean. Half-built residential high-rises shimmer in the sun-baked distance, so far apart that even thinking about walking between them is exhausting. Construction workers in yellow hard hats cross the road gripping sledgehammers; they look like schools of weary-eyed fish.

"That's an indoor rain forest," Dong Cui told me as she waved toward an I.M. Pei-style glass pyramid through the window of her silver Audi A6. "This is a cruise port," she said later, pointing at a curvy postmodern edifice many miles down the highway. "That over there will be a Hilton." Dong is a manager of San'Ai Business Exchange Co., a private organization that takes investors and government officials on driving tours of the area. On a hot day in early July, I was her only client. "This place is a kind of miracle," she told me. "It shows that our government can accomplish whatever it wants."

Welcome to Tianjin, China's sixth-most populous city and perhaps its biggest property bubble. A half-hour train ride from Beijing, a 200-mile-an-hour straight shot through open farmland and industrial sprawl, Tianjin was long known as a shipping hub with uncommonly tasty steamed pork buns. It is now considered a "dual-core city." Its old quarter is quaint and tree-lined, sprinkled with European and American architecture built in the late 19th century, when the city first opened up to foreign trade. Its other "core" is the Binhai New Area, an 876 square-mile swath of salt pan, wetlands, and old fishing villages now home to 2.48 million of the city's 11 million inhabitants.

Binhai's scope is difficult to fathom. The area is home to the largest cargo airport in northern China and the fourth-busiest seaport in the world. Slightly inland is the 12 square-mile Tianjin Eco-city, a $22 billion Sino-Singaporean joint venture where the area's white-collar workers will live in wind- and solar-powered homes. Along Binhai's 95-mile coastline is a $3.82 billion Israeli-made desalinization plant and an artificial beach, its sand imported from the southeastern province of Fujian. Docked nearby is the Kiev, an old Soviet aircraft carrier that has been converted into a theme park and a five-star hotel. Three yacht marinas are under construction. The Binhai New Area "is already the country's third engine of economic take-off after the Shenzhen Special Economic Zone and the Shanghai Pudong New Area," one high-level Binhai official stated in a promotional pamphlet last year.

Binhai officials have borrowed upwards of $64 billion to finance their vision, and their strategy seems to be working. Tianjin's GDP officially grew by 16.4 percent in 2011, the highest in China (tied with the municipality of Chongqing) and faster than any country in the world except Qatar. Much of this growth was driven by Binhai. Tianjin's per capita income is now close to Beijing's, a major coup for the city that has long been considered Queens to Beijing's Manhattan. But shady accounting schemes could mask major financial risks lurking just beneath the surface. "If you look at the local debt to local revenue ratio, one of the largest and worst debt bubbles exists in Tianjin," Victor Shih, an expert on Chinese financing, said in an interview with the bank Credit Suisse in March.

In 2008, the central government issued a $586 billion stimulus program to help China weather the global financial crisis, and local governments were suddenly awash in easy credit. They splurged on subways, airports, luxury condominiums, and five-star hotels -- anything that would boost short-term GDP growth. According to China's National Audit Office, local governments had amassed about $1.7 trillion of debt by the end of 2010, about 27 percent of the country's GDP -- but other estimates put the number at almost twice that. Tianjin took out more loans than any other Chinese city in 2009, increasing its outstanding debts by 47.2 percent, far above the national average.

Like other local governments, Tianjin officials typically borrow money through shady financing companies to skirt borrowing regulations, making the city's balance sheets difficult to assess. Tianjin officials insist that their companies -- often called "local government financing vehicles" -- are on solid financial ground. Last September, Vice Mayor Cui Jindu said that the city's financing vehicles had paid off over 80 percent of their loan principle due in 2011. He added that Tianjin should be able to clear its debts, with one caveat: "If we end up not getting a single new loan, there could be problems," he said.

China's financial system might well weather an explosion of defaults, even as the country enters into its worst economic slowdown since 2008. Yet loads of bad debt could also result in inflation, a prolonged economic slump, or even a financial meltdown. "You don't know where debt risk is going to rear its head," said Patrick Chovanec, a professor of economics at Tsinghua University in Beijing. He mentioned Cui's remarks as possible evidence of pandemic check kiting, a type of fraud. "You basically keep the game going by writing more and more bad checks," he explained, "which disguises the fact that you have nothing in your bank account."

Binhai New Area officials say that the area is poised for success. After all, it's close to Beijing, it's home to a thriving seaport, and it has strong support from the central government. They envision its highways choked with cars, its hotels booked to capacity, its office towers generating strong returns. Yet the city's goals could be too big to achieve. The mammoth state-owned enterprise Tianjin Infrastructure Construction and Investment Group Co. recorded over $45 billion of debt in 2011, more than any other local government financing vehicle in China. Another local financing vehicle recently sold control of a $1 billion securities firm to a state-owned bank to help minimize its debts. If the area's investment pipelines dry up, Binhai could end up a ghost town, its half-built high-rises forever uninhabited.

Locals point to the thriving Tianjin Economic-Technological Development Area (TEDA), a special administrative zone within Binhai, as an indicator of the area's potential success. TEDA was established in 1984 with approval from then-paramount leader Deng Xiaoping. An impressive list of Fortune 500 companies has established offices there, including Nestlé, Motorola, and Airbus. A TEDA promotional booklet boasts that the area has attracted residents from over 30 "overseas regions" and countries. "You are welcome to get a taste of this melting pot of cultures, languages, customs, peace, and harmony," it says.

An exhibition hall in the TEDA government office is a testament to the strange aesthetics that arise from coupling stodgy officialdom with a sleek corporate ethos. One room is outfitted with a table-sized touch screen displaying animated butterflies in a grassy meadow. An exhibition hall staff member told me to rub one of the butterflies. When I did, it unfurled into a photograph of TEDA officials at a formal reception holding award certificates and placards. My tour ended in a small theater, where I put on 3-D glasses and watched a computer-animated movie about the area's long-term plans. It involved a 19th-century schooner floating above a skyscraper-filled metropolis. Its English-language soundtrack was incomprehensible.

Just down the road, the Yujiapu Financial District underscores Binhai's long-term risks. The district is a 1.5 square-mile, decade-long construction project that authorities say will someday be the largest financial center in the world -- a veritable replica of Manhattan, complete with an underground shopping mall, a three-tiered train station, and a homegrown Rockefeller Center. It's currently a forest of cranes. "For Tianjin to become a major financial center, that would imply that somebody else would move down the ranks, and I can't see that happening for Shenzhen or Shanghai or Beijing," said Fraser Howie, the managing director of CLSA Asia-Pacific Markets in Singapore and an expert on China's financial system. "The chances of bringing people there I think are going to be remote."

My last stop on the trip was the Binhai International Convention and Exhibition Center -- a pocket within TEDA comprised of the exhibition hall, a light-rail station, a shopping mall, and a stadium used by TEDA's own soccer team. A program director at the exhibition center, Guan Xu, walked me slowly through the cavernous, empty space, and he explained that government subsidies allow it to maintain a healthy cash flow. Analysts explained that recording a healthy cash flow makes the area appear fiscally sustainable; maintaining an appearance of fiscal sustainability could help the area attract additional investment. "As with any investment, there's an initial period where you're hungry for businesses, and you can't say you have a 100,000 square-foot exhibition hall and it's in ruins," Howie said.

As we walked outside, Guan admitted that the area's emptiness could be overwhelming. "In Binhai, productivity is everything," he said. It was pouring rain, and the puddles reflected a colorless landscape of vast public plazas and unadorned concrete. I asked Guan how he occupies himself on the weekends. He pointed at a collection of white plastic chairs and bright red awnings outside the exhibition hall -- a beer garden. I asked whether it was any fun. "Nobody really goes there," Guan said, shaking his head. "Perhaps they haven't done enough advertising."

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The Syrian Rebels' Libyan Weapon

Meet the Irish-Libyan commander giving Bashar al-Assad nightmares.

IDLIB, Syria — In a dusty schoolyard somewhere in Idlib province, several hundred men form neat rows before standing to attention. "Who are we?" bellows one man at the front. "Liwa al-Ummah!" the men reply in unison, pumping their guns in the air. They look different from your average Syrian rebel fighter, typically dressed in a scruffy mismatch of military fatigues and civilian clothes. Most of these men are decked out in identical fatigues, boots, and khaki-colored T-shirts. A handful sport dazzling white T-shirts emblazoned with the Liwa al-Ummah crest: a raised fist set against the tri-starred green, white, and black flag adopted by the Syrian rebels. "Revolutionaries of Sham," it reads, using the Arabic term for historical greater Syria, above the name Liwa al-Ummah.

Sitting in an empty classroom flanked by several Syrian and Libyan fighters, a soft-spoken Libyan-born Irish citizen named Mahdi al-Harati explains how he came to be the leader of Liwa al-Ummah. The brigade emerged, he says, after several Syrians, aware of his experience as commander of the Tripoli Brigade during the Libyan revolution, approached him about founding a similar outfit in Syria.

The Tripoli Brigade was one of the first rebel units into the Libyan capital in August 2011. Its fighters, who included many Libyan expatriates, had received training from Qatari special forces in Nalut, a town in Libya's western mountains. After the fall of Tripoli, during which he participated in the battle for Muammar al-Qaddafi's Bab al-Aziziya compound, Harati was appointed deputy head of the Tripoli Military Council (TMC), serving under Abdel Hakim Belhaj, former leader of the now-defunct Libyan Islamic Fighting Group. Last autumn Harati stepped down as commander of the brigade and as TMC deputy. He made his first trip to Syria shortly afterward for what he says was initially humanitarian work in the country's northern borderlands. The idea for Liwa al-Ummah came this year.

"There was a sense of increasing frustration among the Syrian thuwar [revolutionaries] over their lack of coordination," he says. "They asked me if I could help them train and organize, and I agreed."

According to Harati, more than 6,000 men across Syria have joined Liwa al-Ummah since its establishment three months ago. Most are members of existing rebel battalions or groups who decided to come under the Liwa al-Ummah umbrella; others signed up as individuals.

He says the brigade is separate from the Free Syrian Army, the loosely organized grouping of military defectors and civilian volunteers whose nominal leadership is based just over the border in Turkey. Liwa al-Ummah is also in the process of developing a Syrian-led political wing, as are an increasing number of other brigades.

Recently posted YouTube videos show a number of Syrian rebel factions announcing they have joined Liwa al-Ummah. Harati stresses that Syrians make up over 90 percent of the brigade. The rest are Libyans, most of them former members of the Tripoli Brigade, along with a smattering of other Arabs. Almost all use the honorific title "Sheikh Mahdi" when referring to Harati.

"We're here to facilitate and train civilian rebels in Syria -- many of whom are doctors, engineers, and teachers -- using our experience during the Libyan revolution," Harati says. "We are a group of civilians brought together for a cause. When the Syrians have achieved their revolution, our job will be done."

With Harati are some of his closest confidants from Ireland and Libya. Back home in Dublin, where he lives with his Irish-born wife and four children, Harati teaches Arabic and is known as an activist who is heavily involved in the Palestinian cause. He took part in the 2010 Gaza-bound flotilla, which was intercepted by Israeli commandos, resulting in the deaths of nine people.

Those with him in Syria include his Irish-born brother-in-law Housam Najjair, a 33-year-old building contractor with a Libyan father and Irish mother. Najjair, who had never picked up a gun until the Libyan revolution, was also a prominent member of the Tripoli Brigade -- some of his fellow fighters labeled him "the Dublin sniper." He says he felt compelled to come to Syria after watching gruesome videos of some of the most violent episodes of the 17-month uprising against President Bashar al-Assad.

"The horror of what I saw was enough for me to decide something must be done," he says, sitting cross-legged on the floor of the safe house where Harati and his men sleep side by side on mattresses, their assault rifles within arm's reach. "We couldn't understand why the world was failing to respond to the plight of the Syrian people. When they didn't take a stand, we decided to act."

Najjair gestures toward the Syrians around him: "We feel as if we are their brothers." The Syrians smile and shout, "Allahu akbar."

Others here from Ireland include an engineer who is helping Liwa al-Ummah register its members in order to issue everyone laminated photo ID cards, as well as two men in their early 20s who are experiencing war for the first time.

One, a 22-year-old who wears glasses and whose father is a surgeon in Ireland, admits that his plan to come fight in Syria initially worried his family. "They respect and trust Sheikh Mahdi, so when they learned I was coming to join him here, they felt a little better," he says. He frames his reasons for coming to Syria in philosophical terms: "I see my life as being about three things: Searching for the truth, defending the weak against injustice and the oppressors, and helping to build peace in the world. The battle here in Syria combines all three."

The other, a bearded 21-year-old with a distinctive Dublin accent, says he joined the brigade out of a sense of duty. "It is impossible to just sit back and watch Assad killing innocent people," he says. "The slaughter of children in particular struck at my heart. I felt I just had to do something."

Liwa al-Ummah has an undeniably religious character, though some of those who have lived in Europe fret that this might be misconstrued. One insists that the brigade's name should be translated in English as "Banner [or Brigade] of the Nation," though I point out that the Arabic word ummah has a specifically religious meaning and is usually translated along the lines of "global community of Muslims."

Several members are sensitive about how Liwa al-Ummah may be perceived, given the foreigners within its ranks and the Syrian regime's narrative that it is under attack from external forces, including militant Islamists.

A number of Syrian rebel commanders I met in Idlib and Aleppo denied outright the presence of foreign fighters in the country. "We can defend ourselves. There is no need for foreigners here," said Abu Azzam, an army captain who defected a month ago and now heads a brigade in the town of al-Bab in Aleppo province. Ayman, a prominent opposition figure in Idlib who did not wish to have his full name published, was more positive. "We are all brothers in Islam, and brothers help brothers," he said. "We welcome foreigners if they are good people we can work with, like those in Liwa al-Ummah. The problem is there are good and bad people coming."

Najjair grumbles about the Assad regime's attempts to portray fighters of other nationalities like him as extremists linked to al Qaeda. "This is not an al Qaeda jihad," he says. "This is a people's revolution, and we want to help."

Syrians in Liwa al-Ummah say they were drawn to it because it is well organized and disciplined compared with many other brigades. Harati is selective about whom he allows to join. "Sheikh Mahdi knows what he is doing," says one man. "He has experience." Several mention what another man describes as the brigade's "Islamic frame of reference."

The Facebook page for Liwa al-Ummah is a mix of battle updates, photographs of training sessions, and grainy footage of operations (one of which was dubbed "the Libyan ambassador," a reference to the brigade's Libyan contingent). It also includes a video clip of the late Abdullah Azzam, a Palestinian religious scholar who provided the theological underpinning for the jihad against the Soviets in Afghanistan in the 1980s, outlining when jihad becomes fard ayn, meaning an individual duty. A message bylined by Harati contains an invitation to "join the jihad in the land of al-Sham."

The Facebook page also includes a mission statement of sorts, outlining the brigade's principles and goals. The goals include defending the ummah and liberating it from dictatorship and aggression; cooperating to establish Islamic governance (though no detail is given as to what this might entail); and working to unite the ummah and bring about its "renaissance" (the Arabic word they use is ennahda, the name of the Islamist ruling party in Tunisia).

It was these objectives that appealed to Mohammed al-Sukni, a 28-year-old engineer who serves as Liwa al-Ummah's commander in Homs, the restive city in central Syria. "I joined because I liked the central idea of the ummah and raising the banner of Islam," he says. "I would like to see Syria with a moderate Islamic government -- something like Tunisia or Turkey. Liwa al-Ummah is different from the other brigades in that it is not just fighting the regime, but it is also preparing for after the war. I think it will play a pivotal role now and in the future."

This is echoed by Hassan Barakat, who recently brought his group of 150 rebel fighters in Maaret al-Numan, a town on the Damascus-Aleppo highway, under the auspices of Liwa al-Ummah. "The idea of the ummah, of Muslims cooperating together, is uplifting," he says. "It gives us a sense of dignity."

One night after iftar, the meal that breaks the Ramadan fast, I am introduced to Abdelmajid al-Khatib, an unassuming pharmacist from the Jabal al-Zawiya area of Idlib province who acts as Liwa al-Ummah's political organizer.

"Our plan is to transform into a political party to accomplish the goals of Liwa al-Ummah," he says. "We want to be part of any transitional government. The end of the regime is close, so it is necessary for us to get organized politically to ensure that such a government is not created from the outside but from here inside Syria."

He says the group already has representatives in "most areas" of Syria. "We are opening offices in different parts of the country that are under the control of the thuwar. We are also refining our political ideology; we envisage a party that will accept all factions, religions, and sects in Syria including Alawites, but with an Islamic frame of reference," he says.

Khatib divides his time between Syria and Turkey, where he shuttles between Istanbul and Antakya, the city close to the border that has become a hub for the Syrian rebels, to coordinate with sympathizers. "We're putting the word out and gathering popular support for the political battle ahead," he says.

From its uniforms -- all purchased by Harati in Turkey -- to its arsenal, Liwa al-Ummah appears well funded compared with many other rebel brigades. The arms at its disposal include 12.5 mm and 14.5 mm anti-aircraft guns, rocket-propelled grenades, and rifles including PKCs and M16s. Harati says the brigade has access to "new and improved" weaponry now that rebel forces control several border posts along the frontier with Turkey. But as he is quick to point out, "It's still a very unbalanced war." Like other Syrian rebel factions, the brigade is also developing expertise to produce improvised explosive devices to target Assad's forces.

Harati says Liwa al-Ummah draws on a network of private donors in Syria and across the Middle East and North Africa for financing. Its Facebook page features several expressions of gratitude to named benefactors in Kuwait. "These are individual people who feel very strongly about the slaughter happening in Syria," says Harati. On one point, he is especially adamant: "We receive no money from any governments."

Last month, rumors claiming Harati had been killed fighting in Idlib swept media in Syria and Libya. The men of Liwa al-Ummah blame the Assad regime for circulating the bogus story. Harati shrugs it off. "We expect this kind of thing from the regime. It's another form of warfare."

The Libyans in the brigade often debate with their Syrian counterparts the differences between the Syrian uprising and the revolution in their own country. "In Libya our revolution was unified under the banner of the National Transitional Council and its head, Mustafa Abdel Jalil," says Harati. "Here there is no face that represents all the branches of the Syrian revolt." Najjair, his brother-in-law, agrees. "There are so many different factions, objectives, and ideologies." Harati nods before sighing: "The complexity of the situation here makes me feel like we were just playing games in Libya last year."

-/AFP/Getty Images