Rent, irrationality and beating the banks

Living in a fairly large Chinese city, I see my fair share of construction work going on. Fancy new apartment blocks, shiny new shopping malls. Nothing too strange about that, until you think about the the number of apartment blocks and shopping malls that are already lying empty. It seems logical to see something odd in the fact that people would waste an awful lot of time and money to erect a building that they arent going to make any money from.

There are a handful of such apartment blocks around the centre of the city in which I live, which appear to be completely vacant, or at most 10% occupied. I once enquired as to how much one of the apartments was, but it turned out to be rather beyond my price range. Being in China, I thought it might be worth my while haggling for a better price. After all, I argued, the apartments have been lying empty for months now, so surely accepting a lower rent from me was preferably to receiving no rent whatsoever? But it was not to be, and I gave up. Later, I was talking to some Chinese friends about this, and they told me that if I try again next month, the situation would be even worse, since the rental cost would probably be even higher than before. The argument for this is that the landlord would have to recoup the money that he'd lost on the previous months. So even though the rent was already too high for anyone to seriously consider, he'd keep rasing the price to cover his losses, thereby making the price even more outrageously high, ensuring that nobody would ever move in!

But I once read somewhere that the companies that build these things have little intention of actually selling them on and making money the conventional way. I forget the exact details of the method, but it goes something like this: The company applies for a bank loan of, for simplicity's sake, 2 million yuan to pay for the construction of a new building. They go ahead with this this 2-million-yuan building, but in fact they only spend 1 million on its construction, and the rest... disappears. When the building is complete but remains unsold/doesn't turn a profit, there is some kind of clause by which the company can default on the bank loan, and the bank simply takes back the building, which is supposedly worth 2 million yuan. The bank is reasonably happy - they've got an asset instead of their cash. But they won't be as happy as the building company owners - the fraudsters have just pocketed a cool 1 million yuan.