By Dominique Fong

CHONGQING -- On the day after Christmas, the MixC luxury shopping mall in this city's Jiulongpo district was packed with colorful trees and other holiday decorations but not many people.

With dozens of new shopping centers being added in Chongqing, the MixC's five-story Parkson department store was recently boarded up. Along the mall's grounds was a football field's length of empty shop space covered in red posters that read, "Coming soon."

Zou Ying, one of the few visitors, was there that day just for a stroll. The 27-year-old urban planner said she buys most things online -- shoes, clothes, even a new toilet lid -- making a purchase nearly every day and often through Taobao, an Amazon-like e-commerce giant.

"If the difference in price is huge, then I'll buy it online," she said.

Welcome to ground zero of the world's largest supply of new shopping centers. About 3.7 million square meters (39.8 million square feet) of shopping space was under construction in 2015 in Chongqing, according to real-estate broker CBRE Group Inc. That is almost 10 times the size of the pipeline in New York and more than anywhere else on the planet, CBRE said.

Chongqing's glut of shopping malls is a vivid sign of a big miscalculation now imperiling China's retail economy. For the past five years, developers have been churning out new supply at a record pace on the assumption that the growth of the country's middle class would greatly boost shopping and create enormous demand among retailers for store space.

But developers went overboard in areas like Chongqing, a city of some 30 million people, perched on the Yangtze River. Chongqing's shopping mall stock per urban consumer was more than 2 square meters in 2015, according to real-estate broker Jones Lang LaSalle. That compares with roughly 0.5 square meter for China's four so-called first-tier cities, which include Beijing and Shanghai.

Moreover, new demand hasn't been as strong as anticipated because many Chinese shoppers are leapfrogging stores and going directly online. China's online sales market eclipsed the U.S. about two years ago, and is expected to reach $899 billion in 2016, which would amount to almost half of the world's digital retail sales, according to a forecast by research firm eMarketer.

Online sales made up 12% to 13% of total retail spending in 2015 in China and were expected to hit 18.5% in 2016. If it hits that figure, China will have the largest percentage of internet shoppers in the world.

The result: throughout China the retail vacancy rate hasbeen rising in many cities while rents have stagnated. "The oversupply is a combination of new supply because of government-led zoning at the local level, and also e-commerce," said Kenneth Rhee, China chief representative at Urban Land Institute, a nonprofit research group.

Western-style malls and shopping malls began proliferating in China in the early 1990s when developers such as Hang Lung Properties, a Hong Kong developer, became active. Singapore developer CapitaLand also became a major player building shopping malls under the Raffles City brand in China. They chalked up huge profits while China's growth rate was expanding.

Now, they are acknowledging the risks starting to appear in the retail market. Hang Lung Properties, for instance, said that shopping centers in China "had a particularly difficult time," as rents slipped 2% for the six months ended in June.

Department stores have been one of the biggest losers. Pacific Department Store, a landmark in Shanghai's Xujiahui district for two decades, closed recently. Meanwhile, both Parkson Retail Group, the operator of the department store that had closed at MixC in Chongqing, and New World Department Store China reported sharp losses over the past year. New World said in its 2016 financial report that it was getting tougher to compete with online shopping amid a massive supply of shopping malls in coming years.

Signs of pain in the retail sector can be found throughout Chongqing, where the local economy has been powered by heavy industry and an expanding electronics sector.

In the heart of downtown Chongqing, Hong Kong developer Wharf Holdings delayed opening the high-rise International Finance Square partly due to leasing difficulties, said real-estate broker Savills. A Wharf spokeswoman said "leasing progress has been satisfactory" and the building is scheduled to open in September.

Chongqing's outskirts are particularly popular with developers who are betting that new business districts will become a refuge from the polluted city center.

For example, in October, a 120,000-square-meter shopping mall named Aegean Place opened on the northern edge of Liangjiang New District. With international brands such as Zara and Uniqlo, it attracts decent crowds for now.

But a few dozen steps away, yet another mall is under construction. Rose Walking Street, a 60,000-square-meter outdoor mall, is slated to open in March. At this point, there is little sign of much leasing except for a handful of mobile phone shops, a local bank branch and a couple restaurants.

Red Star Macalline Group Co., the Shanghai-based developer of both malls, decided to sell stores at Rose Walking Street instead of trying to lease them, according to Luo Xiaoqiao, a Red Star planning manager. The developer says it has sold 90% of the space.

"If we do not sell part of our property," Mr. Luo said, "we will not be able to have money to invest in other projects quickly."

Meanwhile, in other parts of Chongqing developers are trying to stay ahead of the competition by offering entertainment as well as shopping. Landmark Riverside Park, a joint venture of Hongkong Land and China Merchants Shekou Holdings, opened in September on Chongqing's waterfront and plans to open a Sea Life aquarium early next year.

In the city's northeastern suburb, about half of the new Jihua Park includes shops and restaurants. The other half, a sports hub with rock-climbing, ziplines and indoor surfing, has been open for about three months, but there were few visitors during a recent trip to Jihua Park.

Bulldozers recently were clearing the hill nearby for a future ski slope.

"I'm not worried," said Jihua Group President Li Xuecheng about oversupply concerns. "We built outlets, a sport center anda hotel for the customer to experience and relax in the suburbs. We're selling a service, not a product."

Write to Dominique Fong at Dominique.Fong@wsj.com

(END) Dow Jones Newswires

January 03, 2017 11:06 ET (16:06 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.