Rise and fall of China’s Ocean Flower Island

Financial Times highlights that Hainan, a tropical island in southern China, has long been a dream destination for many, attracting visitors with its stunning beaches and inviting climate.

The tropical island of Hainan in southern China has long been a haven for dreamers, attracting many migrants with its pristine beaches, clean air, and pleasant climate. However, this paradise has also seen dreams turn to nightmares.

In 1993, Hainan experienced China's first modern property crisis following a construction boom aimed at accommodating the influx of new residents. Real estate prices plummeted, and 95 percent of developers in the capital, Haikou, went under after Beijing raised interest rates. While the current property crisis in China is not centered in Hainan, it reflects broader national trends and presents challenges for policymakers. Data from the Beike Research Institute, cited by Nomura, shows that home prices in 25 major cities across China have declined by 25 to 30 percent since their peak in July 2021. 

Additionally, there is a surplus of unfinished pre-sold homes, especially in lower-tier cities, where funding shortages have stalled completion. Nomura economists estimate there are around 20 million pre-sold units that have not been delivered on schedule, creating a funding gap of approximately 3 trillion yuan. Driving through Hainan vividly illustrates the current state of the island's economy. Scattered across the landscape are unfinished construction projects that were initiated during a time of seemingly unstoppable growth. One of the most striking examples is Ocean Flower Island, an artificial island designed in the shape of an orchid in Danzhou City, which was a flagship venture of the now-collapsed Evergrande property group.

This ambitious project was meant to include a theme park, shopping plaza, wedding venue, luxury villas, and a “fairytale world,” with an expected investment of 160 billion yuan ($22 billion). Today, the 800-hectare site remains far from completion, and when I visited, it attracted only a small number of visitors. The project epitomizes the excesses of China's past economic boom and serves as a cautionary tale as Beijing attempts to rejuvenate the property market through stimulus measures. During my visit to the resort last month, a recent typhoon had already caused significant damage in northern Hainan, but it was evident that even without the weather disruptions, the park struggled to draw visitors. The orchid-shaped wedding venue was covered in dust, the movie studio appeared dormant, and the fairytale world remained incomplete. Staff members in the empty shops seemed surprised when I arrived. 

Construction on the resort began in 2012, with Danzhou officials optimistic that it would transform the city into a tourist destination to rival Sanya in the south. They hastily approved plans that allowed sand dredged from the sea to be used in the project, violating environmental and building regulations. Signs promoting “consumer confidence in Hainan” still linger, a reminder of the initial optimism surrounding the venture. 

The project became entangled in a wider anti-corruption crackdown in China, leading to the conviction of senior Hainan politician Zhang Qi, who approved it, for corruption in 2020. Two years later, authorities ordered parts of the resort to be demolished. In March, regulators fined Evergrande's founder, Hui Ka Yan, and permanently banned him from the securities market after accusing him and the company of inflating revenues by nearly $80 billion during 2019 and 2020. 

Recently, reports indicated that he had been transferred to a special detention center in Shenzhen. While the theme park remains operational, much of the Ocean Flower Island project has been left to decay, including a series of luxury villas where workers abandoned their tasks so abruptly that hard hats, construction tools, and paint barrels were still strewn about. China today is a very different landscape from the one that enabled the creation of Ocean Flower Island. It seems unimaginable that one of the country's wealthiest individuals could undertake such a lavish project today, effortlessly navigating regulatory hurdles.

The current challenge is to restore confidence in the property market while reducing the economy's reliance on it. Hainan exemplifies both of these challenges. Last week, Beijing introduced a range of stimulus measures, with economists predicting further initiatives, potentially stepping in as a "builder of last resort" for unfinished developments. At the same time, Hainan is working to diversify its economy, promoting visa-free travel and positioning itself as a duty-free shopping destination and a hub for medical tourism. 

As China prepares to roll out stimulus measures aimed at boosting consumption and the property sector, Hainan will once again become a focal point—this time serving as a gauge for any potential recovery.

By Naila Huseynova