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China’s Ghost Cities. No Worry No Cry.

Posted in China Business

I have always thought China’s ghost cities were overrated in terms of their economic importance/significance.  The anti-China crowd loves to point at them as proof of China’s inefficiencies and evidence of an eventual and certain economic downfall.  Yes, they do evidence inefficiencies, but so what?  Go to even the most well functioning economy and you will see pockets of inefficiencies and abandonment.  I went to Toledo Ohio during economic boom times (was it 2006) and was shocked at its downtown, which felt at least half vacant.  Would it have been fair for me to use that as proof of America’s downfall?  Of course not.

Isolated instances of inefficiencies do not an economy make.  Yes, ghost cities make for good symbols, but unless you can quantify their numbers and their impacts, I just don’t care.

I now have even more reason for not caring.  The Wall Street Journal’s always excellent Real Time Report just came out with a story, entitled, Analyst: I Ain’t Afraid of No ‘Ghost Cities.’  The Real Time story is on an article [no link given nor found] by “economist and veteran China-watcher Jonathan Anderson” entitled “Hurray for China’s Ghost Cities.”  In that article, Anderson writes on how China’s investing in “’ghost cities’” to underpin growth, China saved itself from even more unwise overinvestment in areas that could have done lasting damage to the economy, such as manufacturing.”:

Even though China has been investing almost 50% of GDP for the past few years, Mr. Anderson doesn’t see much evidence that it’s resulted in widespread industrial overcapacity. He notes that industrial profits have been picking up along with sales, suggesting that manufacturers still have plenty of pricing power. And, in contrast to the situation a decade ago when the last credit bubble burst, China isn’t saddled with a massive glut of industrial commodities that it’s trying to dump on the rest of the world. Steel exports, for example, have increased only modestly this time around.

Mr. Anderson defines “ghost cities” as a relatively narrow slice of investment, conducted mainly by local governments, in urban infrastructure and certain types of construction, notably subsidized “social housing” units rather than commercial housing. They’ve certainly been a black hole, he says, but a hole that has emptied largely into the equally dark vaults of China’s state-owned banks, where bad debts can remain buried for a long time.

“Lesson learned: If you’re going to waste capital best to waste it completely, where it will do the least damage to everyone else,” writes Mr. Anderson.

Makes sense to me.

Is China heading for economic failure or success.  Me, I have no clue, but I am pretty confident that looking at ghost cities for the answer is looking at the wrong tea leaves.

What do you think?

  • http://www.facebook.com/steve.barru Steve Barru

    In China’s Urban Billion, Tom Miller argues that China has a massive housing shortage, especially a shortage of affordable housing for lower and middle income people – the very sort of housing that makes up a lot of “ghost city” construction according to the WSJ article. Miller’s says that policies promoting urbanization encourage rural people to move to cities and these people need affordable housing. Hukou reforms – and the question is not if they will happen, it is when – that do away with China’s dual-tiered social protections/benefits systems will make urban residency and home ownership even more attractive for rural Chinese. Miller believes that “ghost cities” today will be full of people tomorrow and that China needs more rather than less housing construction, at least at the low and mid ranges of the market.

  • China Newz

    There is a ghost city in Ordos, Mongolia. Looks like single dwelling and
    apartment complexes were built there amid the Chinese real estate
    bubble. It is supposed to be one of the richest cities in China per
    capita, close to Beijing and Shanghai. Guess the prices are too
    expensive for people to live there. Think that one of the property developers killed himself because he lost all his money there. Somebody will make money off it once the prices fall.

  • Genevieve Woodland

    Hind sight is 20/20. What comes first? Millions of people migrating from the countryside into cities or the housing for them? Do you build the housing then add infrastructure: hospitals, grocery stores, entertainment, outdoor gathering space? Urban planing is complex. You need to consider things such as transportation. But what about factors and trends you may have not projected? People get wealthier, they want cars, the roads are insufficient to handle to volume. Beijing is adding subway lines in completed urban areas. Governments want to see a new, shiny building to show show they spent their money. Solving problems such as adequate storm water drainage, soft surfaces that do not absorb water and heat island effect take loads of money. What do you have to show for those solutions? The USA is just starting to address that buildings consume 40% of the energy used there.

    If I had all the answers to these questions, I may be a much wealthier architect. Life is complicated. Sometimes cause and effect are not as straight forward as they appear.