Cloud Computing turned into Real Estate Business

There have been several news reports this year that suggest cloud computing centers in China are turning into real estate development projects: local governments and financial investors used the concept to reclaim large pieces of land at low cost, obtain low-interest loans from banks and apply for government subsidy, before they have any plan for software or application. Even for a cynic like me, this sounds too bad to be true, but recently I happened to see some documents from the Chongqing government that aim to invite financial investors for its ambitious 10-square-kilometer Two River Cloud Computing Zone, and these documents appear to be invitation for financial speculation rather than technological innovation.

The first thing people should know about cloud computing in china is that it is again driven by state capitalism. Once the technocratic officials of China become aware of the concept of cloud computing, they immediately see the potential of applying their magic formula of “fixed asset investment+government subsidy+cheap loan” on it, because after all cloud computing does involve some large physical infrastructure. The story is quite similar to what happened to the concept of “Internet of Things”.

In April 2011, the government of Chongqing became the first to announce its plan to invest 40 billion yuan on a cloud computing center that will be the largest in Asia. The plan is called “Yun Duan” (Top of Cloud). Then Shanghai, Beijing, Shenzhen and Guangzhou all followed suit. Shanghai plans to build a “Asia Pacific Cloud Computing Center”,  its plan is called “Yun Hai” (Ocean of Cloud), Beijing has a plan called “Xiang Yun” (Cloud of Blessing), Shenzhen has a plan called “Kun Yun” (Cloud of Flying Fish), Guangzhou has a plan called “Tian Yun” (Cloud of Sky), Ningbo has “Xing Yun” (Galaxy Cloud), Wuxi has “Yun Gu” (Cloud Valley), Hangzhou has “Yun Chao Shi” (Cloud Supermarket) ……

According to a report from China High Tech Herald, even poor cities like Lanzhou and Langfang joined the “cloud making carnival”. Langfang, a third tier city in Hebei province  announced its plan for a cloud storage center that is at least two times the size of the largest existing cloud storage center in the world, which is in Chicago.

Since then, investigative journalists have found evidences that suggest these projects are often launched before the officials figure out what cloud computing is about, and many of the projects consist of a lot of commercial property and few element of technology research. For example, a report from Economic Observer says that an unnamed cloud computer center has so few customers that only the staff of the front desk are receiving their salary, and its technology team has to make a living somewhere else. But it does not prevent it from being an “Image Project” which local government officials showcase to visiting colleagues. No wonder Li Deyi, academian of China Academy of Engineers, recently angrily said, “Cloud computing is a green way of calculating, it’s not a competition of scale, equipment or warehouse. Development of cloud computing cannot be turned into a game for land and capital possession!”

But facing more and more critical views from experts and media upon large cloud computing zones with expensive infrastructure but little content, the government is putting more emphasis on making the cloud computing centers useful. Many technology companies were given priority and subsidy for entering the cloud computing zones. But even that is not enough for optimism, as many technology companies might use it as an opportunity to obtain cheap property and profit from property investment. Many technology companies in China are already doing real estate business, for example, Lenovo generated 60% of its profit in 2010 from real estate development. (please see my other article: Everyone is in the Real Estate Business)

Coming back to the Chongqing government documents I mentioned, what I got is that,  as long as you invest in projects in the Two River Cloud Computing Zone, it does not matter whether it has anything to do with technology, the local government will help you get around the central government’s control on hot money inflow and facilitate the foreign currency traffic involved.

This kind of local policies should not be a surprise to people familiar with how the development zones work in China. It is true that this mechanism of attracting foreign direct investment and the approach of “build-first-the-rest-will-come” worked wonder for China’s urbanization process, created an unprecedented property bubble, enriched the government and some interest groups, and most importantly, lifted GDP number, but it gave incentive to speculators rather than people who are truly interested in innovation.

In my usual pessimistic mood I tend to think most industries in China are just different sectors of real estate business, while the rest are in IPO business or shadow banking business. But after drinking several cups of coffee, I try to persuade myself that some of these preempted infrastructure might prove to be useful, and whatever corruption happened in the process can also be an incentive for the officials to develop things fast, but I just hope the resources in our poor country are spent more thoughtfully to produce true technological innovation and improve people’s living standard.